CHICAGO -Moody's investors Service socked a struggling Illinois school district with a four-notch downgrade, putting it on the lowest investment grade rung and warning that a drop to junk may be ahead.

Big Hollow School District #38's general obligation bonds were lowered to Baa3 from A2 and a negative outlook assigned by Moody's on April 7. The action impacted $7.3 million of GO debt.

"The Baa3 GO rating reflects the district's structurally imbalanced operations which have led to a diminished liquidity position in the general fund," Moody's wrote. The rating also reflects the district's modest tax base experiencing depreciation, increased reliance on tax anticipation warrants to support general operations, and an elevated debt burden with rapid principal amortization.

"The negative outlook reflects our expectation that the district's financial operations will remain pressured in the near term absent school board approval for substantial expenditure cuts," Moody's added.

Further credit deterioration awaits the district if it sees continued deterioration of its general fund and operating fund reserves and increases its reliance on TAWs to support general operations. Other factors that could contribute to a downgrade include a pension cost shift from the state to the district that results in further budgetary pressures and a further leveraging of the district's already high debt burden.

The district is located north of Chicago in Lake County and primarily serves unincorporated Grant Township and the village of Ingleside and Fox Lake. The district operates two school buildings on one campus with enrollment of 1,795.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.