Moody's methodology change may have widespread impact on K-12 school districts

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We are rating any school district that is a standalone entity that can issue its own debt,” said Rachel Cortez, associate managing director at Moody’s Investors Service.

Up to 600 school districts could face rating changes from Moody’s Investors Service under a new methodology the service is considering.

Municipal advisers who work with school districts, investors and others have until Aug. 5 to send Moody's their comments.

The changes could affect up to 20% of the 3,000 districts that Moody’s rates by one notch, with the changes roughly split between downgrades and upgrades.

“We are rating any school district that is a standalone entity that can issue its own debt,” said Rachel Cortez, associate managing director at Moody’s.

The 13,500 school districts in the United States typically rely on a combination of property taxes and state aid for their revenue.

The new system Moody’s is contemplating would include a clearer way of factoring enrollment in a district’s scorecard because of the role it plays in state funding.

Some large districts are not rated because they are dependent on city or county governments for their financing. That’s particularly the case in states such as Maryland, Virginia, North Carolina and Alaska. Hawaiian schools are financed at the state level.

“The big message to drive home on why we are doing this basically is better focus on the factors that drive credit quality for school districts,” said Cortez.

The second reason, she said, is to be more transparent in illustrating the relationship between issuer credit fundamentals and the security features on their debt.

Moody’s said the methodology would:

Distinguish K-12 issuers from other governmental entities due to their unique credit drivers;

Introduce updated analytic factors applicable to the K-12 universe;

Introduce assignment of an issuer rating for each K-12 school district, reflecting its intrinsic credit strength absent the benefit of legal structure and pledged security; and

Assign ratings for all GO and lease debt instruments in relation to the issuer rating.

Cortez said Moody’s has not decided when the new methodology will be implemented and may choose to amend it.

“We review all of our methodologies regularly,” she said. “This is just something we think makes sense analytically. It wasn’t driven by any specific complaints or anything like that.”

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