CHICAGO – A Will County, Illinois school district took a five-notch rating downgrade as it turns to short-term borrowing to deal with fallout from the improper accounting of past bond proceeds.

Moody's Investors Service on Friday lowered Will County Community High School District 210, Lincolnway, to Baa3 from A1 and assigned a negative outlook. The district has $259 million of debt.

"The downgrade to Baa3 reflects the weakened financial position of the district, which has necessitated the issuance of tax anticipation warrants to support operations," Moody's said. "The rating also considers the recent discovery of misappropriation of bond proceeds and restricted funds, the resolution of which will exacerbate the district's budget pressures."

The district is struggling with an elevated debt burden additionally pressured by interest owed on capital appreciation bonds which will drive debt service costs up substantially in 2021. In addition to cuts, the district is seeking to close of one of four high schools to cut costs but faces public opposition and a legal challenge.

"The negative outlook reflects the likelihood that the district's financial position will continue to narrow in fiscal 2016 and beyond," Moody's said. The district has an enrollment of more than 7,000 students from six suburbs far southwest of Chicago.

Last November the district hired Crowe Horwath to conduct a sweeping review of the district's accounting practices and use of proceeds from sales in 2006, 2007, and 2009 that helped finance the construction of two new high schools. Voters approved up to $225 million in borrowing in a 2006 referendum.

The report offered a stinging assessment of the management of bond proceeds. While it found that no bond proceeds were missing, it revealed some bond proceeds and interest earnings were improperly transferred among differing funds and in turn spent on non-capital expenses.

"The result of these previous accounting discrepancies mitigated the deficit spending that was part of the district's true financial picture from fiscal year 2008 to fiscal year 2013," the district' interim business manager Steven Langert said in a statement last month. The board at its meeting in mid-April accepted the report's finding and recommendations and approved corrective actions including the transfer of money to correct funds.

The Illinois Board of Education put the district on a financial watch list last year so it remains under pressure to shore up its balance sheet or face additional state intervention. Of the 32 districts on watch status, 18 received the same designation last year, including Lincolnway and Chicago Public Schools. It is one of six districts that the state board has requested additional information from to determine whether it meets the criteria of being under "financial difficulty."

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