Moody's Investors Service has downgraded the Kenosha Unified School District's general obligation rating by one notch to A1 and warned of further action by assigning a negative outlook due to the Wisconsin district's fiscal strains.
The action affects $133 million of outstanding debt. The school district's challenged financial operations have led to "material declines in reserve levels," Moody's analysts wrote.
The rating also takes into account the unresolved status of the district's lawsuit along with four other Wisconsin school districts against the financial firms that crafted and sold them risky and ultimately failed investments to help fund their retiree health care liabilities.
"The negative outlook reflects the district's limited budgetary flexibility for fiscal 2012 and fiscal 2013 with the potential for further declines to operating reserves," analysts wrote.
The school's credit benefits from a sizeable tax base and management's focus on efforts to balance operations. Its challenges include tax-base valuation declines in 2010 and 2011, consecutive operating deficits and state aid cuts.
A favorable resolution of the lawsuit could help the Kenosha USD's rating. The five districts put their moral obligation behind $162.7 million of notes issued by the trusts set up to fund their other post-employment benefits.
The notes funded the investment in synthetic collateralized debt obligations.
A lawsuit filed by the Securities and Exchange Commission this year against one of the financial firms, Stifel Nicolaus & Co., is pending.
Another firm, RBC Capital Markets LLC, agreed to pay $30.4 million to settle charges. The SEC said the school district was mislead over the safety of the investments.