Facing a $45 million budget shortfall, Indianapolis Public Schools took a two-notch rating hit from S&P Global Ratings. Through a negative outlook, the agency warned more negative actions could come if the district is unable to structurally balance its books.

The downgrade underscores the district's need to win voter approval for a referendum that would bolster the district's financial position.

S&P dropped IPS to A-plus from AA and revised the outlook to negative. The school district has $57 million in debt outstanding.

Christian Park School Indianapolis Public Schools
Indianapolis Public Schools' Christian Park School. The district is facing a $45 million budget gap.

"The downgrade is based on a structural imbalance that has developed in recent years, which has significantly reduced the district's reserve position and is anticipated to lead to further deterioration in reserves in the current and next fiscal years," said S&P Global Ratings credit analyst Kathryn Clayton. "The diminished reserve position leaves the district with constrained financial flexibility, in our view, especially with limited revenue-raising flexibility and mounting capital pressures.”

Although the A-plus rating is considered strong among Indiana school districts, S&P warned that the district could be in line for future downgrades if it is unable to get its finances in order within a year.

"The negative outlook reflects our view that we may lower the rating further within one year, potentially by multiple notches, if the district is unable to return the budget to a structurally balanced position that is sustainable," Clayton said. "It also reflects our view that the district's significant budgetary pressures will be challenging to cure."

IPS ended fiscal 2017 with total available reserves of $53.56 million.

Additionally, cash reserves in the district's main property tax-reliant funds have deteriorated by 10% since fiscal year 2015 to $29.48 million at fiscal year-end 2017, down from $32.80 million.

The district has a proposed bond and operating referendum on the November ballot. The plan as approved in December by the school board seeks voter approval for $200 million in borrowing for capital and a $525 million operating referendum to pay for teacher raises, increased transportation services, building and equipment maintenance and more.

“With the depletion in IPS’ reserves, the district will be forced to make some very hard decisions about staffing, compensation and transportation,” IPS Superintendent Dr. Lewis D. Ferebee said in a statement. “We are optimistic about the passage of the referendum in November to support IPS’ funding plan.”

Ferebee said that if the operating or capital referendums are not approved by voters in November, IPS will need to take additional action to reduce its operational costs to avoid additional downgrades.

The district has proposed to cut $22.4 million form the fiscal 2018-19 budget that would include staff reduction and district-wide salary freeze.

In September the Indianapolis Board of Commissioners voted to close three high schools and one middle school after the 2017-2018 school year to save an estimated $7 million annually in operational and maintenance costs. The savings are expected to be realized across several funds beginning in fiscal year 2019.

S&P said that the district faces the unique challenge of providing transportation for students under the district’s “school of their choice” policy as opposed to assigning schools by the location of residence. The district projects it will spend nearly $50 million of its $485 million fiscal 2018-19 budget on transportation-related costs — $38 million on transportation services and another $11 million on bus replacement.

“If the district chose not to offer students a choice of which school they wanted to attend, and instead went to a "neighborhood" structure, it would likely save significantly on transportation costs, but the district could face significant loss of enrollment,” said S&P.

IPS passed a $278 million referendum in November 2008. Moody's Investors Service rates the district's lease revenue bonds A1.

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