New Jersey school district's fund balance woes bring downgrade

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A New Jersey school district is at the lowest rung of investment grade after a Moody's Investors Service downgrade driven by reserve levels that have been in the red the past two years.

Moody’s lowered the East Orange School District’s long-term rating to Baa3 from Baa2 on Jan. 29 citing the 9,790-student public school system’s negative fund balance and weak liquidity. The outlook for the lowered rating was revised to stable from negative.

“East Orange School District's finances will remain highly pressured in the near to medium term due to a historical inability to match rising expenditures with revenues and high reliance on state aid,” Moody’s analyst Susanne Siebel wrote in a Jan. 29 report. “Despite an effort to realign revenues and expenditures over the past two fiscal years, the district's available operating fund balance has remained negative, albeit improving.”

Siebel noted that East Orange’s ending 2019 fiscal year available operating fund balance improved to negative $4.6 million, or 2% of revenues. The district has been working on measures to control expenditures because its limited ability to adjust revenues including a plan to keep special education students within the school system instead of sending them out at an elevated cost, according to Siebel.

East Orange could face another downgrade should the district experience a continued decline in reserves, material increase in debt or a substantial dip in its tax base. Resident wealth and income are below-average with an equalized value per capita of $50,372 and a median family income equal to 74.4% of the national or 55.9% of the state level, according to Moody’s.

“The stable outlook reflects the expectation that the district's reserves will remain challenged, but level in the near-term,” Siebel said.

The district, which is 14 miles west of New York City, doesn’t have any general obligation debt, but has$58.4 million in leases. There are only modest future debt plans since many of the district’s capital needs such as a new school building scheduled to open later this year are funded by the state, according to Moody’s. Its fixed costs which include debt service and pension contributions were $9.1 million or 4% of revenues last year.

New Jersey school districts like East Orange are limited in revenue-raising abilities because of state law holding property tax increases at 2% that can be overridden only with voter approval. Gov. Phil Murphy recently vetoed legislation that would have permitted some districts to raise property taxes by more than 2% without voter approval, a move Moody’s called a credit negative for New Jersey public schools since it constrains their ability to balance operations amid declines in state aid. There are some exceptions to the tax cap for items like debt service, pensions and qualified healthcare costs.

“A greater ability to increase property tax revenues would have allowed districts to balance operations without draining their reserves,” Siebel said.

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