DALLAS — Both Moody’s Investors Service and Standard & Poor’s downgraded their underlying ratings on the Dallas Independent School District, as the beleaguered system gets set to bring a refunding issue to market.
Moody’s lowered its rating on DISD’s $1.7 billion of debt outstanding to A1 from Aa3, citing “ongoing concerns regarding the reduction in financial flexibility that is a product of structurally unbalanced budgets, as well as the district’s financial reporting shortcomings.”
The agency assigned the A1 rating to the upcoming sale and revised its outlook to stable at the lower rating from negative at the Aa3 rating. Moody’s analysts said the downgrade also reflects the district’s “substantial future borrowing plans.”
Voters approved a $1.35 billion bond package in May 2008 and officials have sold $400 million of that authorization so far with plans to issue the balance in annual sales over the next three years.
Standard & Poor’s pushed its rating down to A-plus with a negative outlook from AA-minus due to “the district’s continued financial deterioration.”
The lowered ratings also apply to DISD’s sale of $105.1 million of general obligation refunding bonds that may price as early as next week.
Fitch Ratings assigned a AA-minus rating to the refunding and said the financial profile of the second-largest school system in Texas “has deteriorated due to an unanticipated significant drawdown in reserves in fiscal 2008.”
After a $59.9 million drawdown, the district’s fiscal 2008 general fund balance stood at $60.2 million, or half the previous year’s $120.1 million. Officials expect a further drawdown this year, leaving the general fund balance at $30.7 million at the end of fiscal 2009, or significantly below the optimal fund balance of $147.4 million, according to Moody’s.
The declining fund balance is due to district’s “ongoing internal control and reporting problems, including an underestimation of payroll-related expenditures,” according to analysts.
DISD has been mired in financial woes the past few years, especially since the summer of 2006 when it was discovered that hundreds of employees were misusing district-issued debit cards.
Early last year, officials formally launched a strategy to transform financial operations and named Larry Throm executive chief financial officer. Steve Korby and Carolyn Jones were named co-chief financial officers and Tom Canby, a former managing director of financial audits for the Texas Education Agency, was added as a consultant. The team is tasked with transforming the district’s financial reporting by implementing strict controls and improving efficiencies while attempting to develop a comprehensive five-year plan.
After disclosing an $84 million budget shortfall last fall, DISD superintendent Michael Hinojosa said the problems ultimately fall at his feet.
“The lack of adequate systemic financial controls and the district’s inability to reconcile accounts, input budget data, and control staff allocations created this deficit. This is totally unacceptable,” he said then.
Merrill Lynch & Co. is senior manager for the upcoming sale of refunding bonds.
First Southwest Co. and Estrada Hinojosa & Co. are co-financial advisers to the district and Vinson & Elkins LLP and West & Associates LLP are co-bond counsel.
The bond package that was approved last year calls for 15 new schools, 12 additions, and about $500 million of renovations to more than 200 campuses. Many of the district’s 229 schools are more than 50 years old. DISD, which currently serves about 160,000 students, is the 12th-largest school district in the country.
