DALLAS — A series of financial blows suffered over the past year by the Hallsville Independent School District in East Texas continued Monday as Moody’s Investors Service dropped its unenhanced debt rating to A3 from A1, with a negative outlook.

The downgrade covers $91.7 million of outstanding general obligation debt. The enhanced rating remains triple-A with coverage by the Texas Permanent School Fund.

Standard & Poor’s raised the district’s unenhanced rating to A-plus from A in March 2010, before the financial problems surfaced in July. Fitch Ratings does not rate the debt.

Moody’s analysis cited the ISD’s depleted financial reserves, a significant reduction in its assessed property tax base due to ongoing taxpayer lawsuits, and an above-average direct debt burden.

Officials were notified in July 2010 by the Texas Education Agency that the district had not made payments to the state totaling $8.5 million over two years. The ISD owed the so-called Chapter 41 payments because it is considered property rich and must rebate a portion of property tax collections for redistribution to property-poor schools.

The notice from the TEA said the district failed to make a $1.1 million recapture payment in the 2007-2008 school year and a $7.3 million payment in the 2008-2009 school year. The agency said the total amount owed was $8.494 million. However, the district also failed to report a $3.9 million overpayment from the state, which raised the total amount owed to $12.4 million.

The school system made a $5 million payment from its reserve fund when it was notified of the shortage, and took out a $7.3 million, 10-year loan from a local bank.

In a prepared statement, superintendent Greg Wright blamed the situation on a former assistant superintendent for finance who failed to make the recapture payments. “I cannot begin to describe my disbelief that a professional educator could betray a community and its children in the way that we have been betrayed,” he said.

Wright said the money was not misappropriated, but was spent on operating expenses, including teacher salary increases.

Proceeds from the $96 million of GO bonds authorized by voters in 2007 have been accounted for and construction projects will proceed, Wright said. The district issued $86 million of GO debt in 2010.

The ISD’s assessed property values rose 36% from 2005 to 2010, but fell by 17% in fiscal 2011 to $2.12 billion. Another 3% decline is expected in fiscal 2012.

Additional pressure was put on the district’s tax base when a plaintiff recently won the first of 21 separate lawsuits filed challenging the assessed valuation of natural gas stored in underground facilities. The district had to refund $4 million to the taxpayer due to what the court said were improperly high assessments from 2003 to 2009.

If the district also loses the other 20 lawsuits, it could be required to reimburse plaintiffs for $21.6 million of maintenance and operations tax payments and $4.6 million related to the debt service levy.

The Hallsville ISD is located in western Harrison County. It has 4,260 students.

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