BRADENTON, Fla. - Libraries face legal challenges in Kentucky that could result in more than a dozen rating downgrades, according to Moody's Investors Service.

A class action suit pending before the Kentucky Court of Appeals seeks a ruling requiring library districts to rollback tax rates to 1979 collection levels and refund what plaintiffs say are improperly collected taxes.

An unfavorable ruling could jeopardize the ratings of 13 public library districts rated by Moody's. It would also impact 79 of 111 such districts throughout the state, analysts said in a special comment Wednesday.

The rated districts have a total of $72.2 million in outstanding general obligation debt.

"We would likely place the GO ratings of most districts on review for downgrade if the tax rate rollback is upheld by the Kentucky Court of Appeals because of the significant impact to libraries' finances," Moody's wrote.

Property taxes are the primary revenue source for the districts so a tax rate rollback would substantially reduce annual operating revenue and pressure operating budgets and reserves, they said. A rollback would negatively affect a large number of library districts because few sought recent voter approval to adjust their tax rates.

Public library districts are single-purpose governmental entities authorized by state law to levy a property tax to pay for establishing, equipping, maintaining and administering libraries up to $2.00 per $1,000 of full value.

In 1979, the legislature amended the law by which cities, counties, and taxing districts establish their property tax rates, and allowed them to make annual tax rate adjustments without voter approval by increasing the levy up to 4% each year.

The Kentucky Department of Libraries and Archives considered libraries to be taxing districts, and instructed them to set tax rates as allowed in the new law, Moody's said.

Two separate circuit courts decided that the 1979 statute did not apply to library districts because they were not defined as a taxing district. They found that only library districts created since 1984, when lawmakers consolidated the ways a taxing district could be formed, could establish a tax rate without voter approval.

Prior to 1984, districts were created by petition, and gathering voters' signatures.

If the appellate court ruling is unfavorable, 13 districts rated by Moody's would be forced to roll back their tax rate. They would also be required to get 51% of voter's signatures on petitions within 90 days in order to raise taxes.

Most of the districts could face "multi-notch rating changes" unless voters approve maintaining current tax rates, and few of them have the flexibility to absorb a rollback without materially reducing operations and reserves, analysts said.

Lawsuits in five counties, most brought by the Northern Kentucky Tea Party, are in various stages of litigation. The issue has received national media attention.

The Kenton County Library District, whose suit is one of two on appeal, had $14.9 million of outstanding GO bonds rated Aa1 by Moody's. The district has not issued material event notices about the pending suit, though it is disclosed as a contingency in financial statements.

Moody's said library district's GO bonds are secured by the full faith and credit of the district, and annual debt service is supported by an unlimited property tax pledge.

"If the appellate court upholds the circuit court rulings, we believe library districts with outstanding GO bonds would remain legally authorized to levy a tax rate sufficient to pay annual debt service, regardless whether such a tax rate exceeds the court-ordered rollback rate," analysts said.

They also noted that Kentucky municipalities can seek bankruptcy protection and, as in many states, their GO bonds are not secured by a statutory lien and may not be treated as secured claims.

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