Moody's Investors Service enhanced the ratings of 98 New York school districts to Aa3 from A1 with stable outlooks, following rating upgrades for the state's general obligation bonds.
The rating agency raised the state's GOs to Aa1 from Aa2 with a stable outlook citing the state's financial strength indicated by improved reserves and reductions in spending.
"We upgraded [the school district] ratings when New York State was upgraded," Rob Weber, vice president and senior analyst at Moody's said. "All of the New York school districts qualify for the enhancement program."
Moody's rates 463 out of 698 school districts in the state of New York.
The school district's rating enhancements were made possible by the New York State 99-B Post Default Enhancement Program, which authorizes the state to withhold appropriated aid in order to make bond payments in the event of a default.
"The 99-B program is the state intercept for school districts," Weber said. "In the event of a default the program would kick in. The key to the intercept is it's a post-default program."
It has been unclear to market participants as to why some issuers received an enhanced rating, while its existing debt, consisting of the same features, remains at an A1 rating.
Weber explained that the highest rating enhancement a school district can get is an Aa3 and that the rating cannot be higher than two notches away from the state's rating.
"Any school district with an A1 rating qualified for the Aa3 enhanced rating depending on state aid coverage of debt service," he said. "The maximum enhanced rating that a school district in New York can receive is either one notch above the underlying GO rating or the Aa3 rating, which is tied to the state's rating."
Some issuers with an underlying rating that is higher than the state's rating may not request the enhancement.
Issuers must also undergo an evaluation of satisfactory debt service coverage as well as meet the state rating cap, which limits the enhanced rating at two notches below New York State's GO rating.
"Whether the school district qualifies for the one-notch uplift on the enhanced rating is determined by available state aid revenue to make debt service payments," Weber said. "To qualify for the one-notch difference the school district must have 1.5 times the state aid to debt service coverage.
Any school district that did not meet those requirements, despite the school district's underlying rating of A2 and an enhanced rating of A1, did not move.
