CHICAGO – Moody’s Investors Service placed the rating of one Indiana school district on review for a possible upgrade after the state passed a law to strengthen its school credit enhancement program.

Moody’s is reviewing Lake Central Multi-District SBC’s rating on $153 million of debt from 2012 and 2013 deals. The district carries an underlying rating of A3 that is boosted by one level to A2 through participation in the state intercept program.

The enhanced rating is based on the security provided by the triple-A state government to ensure sufficient funds to meet debt service payments on debt, including lease payments on lease revenue bonds.

Eric Holcomb
Gov. Eric Holcomb signed legislation strengthening the state's school district credit enhancement program. Bloomberg

The legislation signed recently by Gov. Eric Holcomb “broadens the availability of interceptable funds and clearly defines the timing between the notification of a missed debt service payment and the payment of debt service by the state,” Moody’s said. “Our review will focus on whether these changes warrant uplift in the enhanced rating.”

Moody’s only rates two districts that use the program. It affirmed the Aa2 enhanced rating on $166 million of Indianapolis Public Schools debt. The underlying rating is Aa3.

“These changes do not warrant uplift in IPS's enhanced rating because our methodology caps the enhanced rating at two notches below the state's general obligation rating,” Moody’s said. The Aa2 rating is currently two notches below the state’s Aaa.

“The Aa2 enhanced rating is based on the security provided by the state of Indiana to ensure sufficient funds to meet debt service payments on debt, including lease payments on lease revenue bonds, and solid coverage provided by the district's state aid revenues,” Moody’s wrote.

The state is waiting to hear from S&P Global Ratings on whether the legislative changes address concerns that prompted S&P analysts to put the Indiana School Corp.’s AA-plus rating – notched one level off the state’s AAA credit – on CreditWatch with negative implications. Analysts cited uncertainty over whether the intercept program’s timeline for making school payments could effectively avert a default.

Any negative action would impact the ratings on bond obligations issued by 42 school corporations that benefit from the state program.

S&P took the action after learning in a routine portfolio review that the program’s administration, overseen by the state treasurer, worked differently from the way the agency had understood.

The program does not serve as a state guarantee of school bonds. Its strengths lie in the intercept mechanism that gives debt service a priority position above other costs which may be paid out of a school corporation's general fund.

The concerns stemmed from the reporting timeline between a district’s default on lease payments needed to cover debt service and how quickly the treasurer would act to avert an actual bond default. A second concern stemmed from the allocation of intercepted state aid funds and whether they could sufficiently cure a looming default.

With the goal of shoring up the program’s rating, Indiana Treasurer Kelly Mitchell’s office worked on the legislation with the assistance of its counsel Barnes & Thornburg LLP.

To meet S&P’s criteria, the legislation puts into statute the timeframe by which the treasurer will pay -- within five days upon being notified of a school corporation's failure to pay debt service obligations when due -- the unpaid debt service obligations from state funds. The legislation also expands the pools of funds that can be drawn from to fully cover an obligation to ensure that funds are sufficient to prevent a default.

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