DALLAS – Indiana is looking for solutions to concerns S&P Global Ratings raised over its school bond intercept program's ability to effectively avert a default in a timely manner.
S&P on Thursday placed on CreditWatch negative the AA-plus ratings assigned to Indiana school debt issued under the program, citing concerns about how fast the state intervention would kick in if needed.
"As part of a routine portfolio review, we learned that the Office of the Treasurer of State would administer the intercept of state aid …differently than we had understood," said S&P. "On that basis … we believe there is uncertainty that intercept payments will always be made available to ensure timely payment of debt service in full on this 'AA+' rated debt."
In other words, the rating agency is concerned over whether the intercept would kick in fast enough to fully protect bondholders from default.
"If we are going to rate it on par with the state appropriation rating we want to see the program provide a full and timely debt payment as was our previous understanding and our current understanding is that it may not," said S&P analyst John Sauter.
"We are looking at possible solutions to address S&P's newfound concerns," said Indiana Office of Management and Budget Director Micah Vincent. "It is our goal to ensure that S&P removes the Indiana State Aid Intercept rating from CreditWatch and affirms the intercept program's excellent credit rating, which supports Indiana's schools and taxpayers."
The ratings action impacts bond obligations issued by 42 school corporations that are secured by the state intercept.
S&P said it could affirm the rating if the state revises current procedures making clear that the intercept of state aid provides for a timely payment of debt service in full. If revisions are not made, S&P will likely lower the rating by as much as several notches.
The intercept program is run by the state treasurer in a process outlined in legislation, which requires that the treasurer withhold an amount sufficient to pay debt service from its general fund distributions to a school corporation when that school corporation does not make a required payment.
It does not serve as state guarantee of Indiana school bonds or guarantee timely payment. Instead it is a mechanism to give debt service payments a priority position above other costs which may be paid out of a school corporation's general fund.
Schools must also follow certain procedures for the intercept to kick in.
In January 2015, the school Town of Munster failed to follow the protocol that would have triggered the state intercept and defaulted on bond payments.
In the Munster situation, the trustee disregarded the requirements of the legal documents and did not notify the state treasurer or make a request for an intercept of the school's funds.
The Munster school district cured its default within a week.
S&P said it expects to resolve the CreditWatch within approximately 90 days.