DALLAS - The Dallas Independent School District received downgrades from Fitch Ratings and Standard & Poor's last week as officials prepare to issue the first slice of a $1.35 billion authorization passed in May.

Both agencies lowered the underlying rating to AA-minus from AA as the district plans to offer $400 million of unlimited-tax school building bonds next week. The bonds come to market with the triple-A credit enhancement of the Texas Permanent School Fund.

Fitch also revised its outlook on the second-largest school system in the Lone Star State to negative from stable and assigned the lower rating to $1.4 billion of debt outstanding.

The downgrade reflects "a weakening financial profile at the district, as well as recent exposure of systemic problems regarding financial controls and oversight," according to Fitch.

Standard & Poor's, which also has a negative outlook on DISD, said the "drastic and unanticipated" reduction in the district's general fund reserve led to the downgrade.

The fiscal 2008 general fund balance of $62.4 million is roughly half the previous year's $120.1 million and officials expect a further decline to about $38 million next year. The drop is due to DISD's "ongoing internal control and reporting problems, including an underestimation of payroll-related expenditures," according to analysts.

"Not surprisingly, staffing changes have accompanied the deteriorating financial position of the district," Fitch analysts said.

The district recently named Larry Throm executive chief financial officer overseeing the financial services, information technology, and human development divisions. Earlier this year, the district fired the former CFO and budget director while it "formally launched a strategy to transform its financial operations."

A four-person team led by chief operating officer Eric Anderson has been tasked with transforming DISD's financial reporting by implementing strict controls and improving efficiencies while attempting to develop a comprehensive five-year plan.

More recently, several trustees have called for a no-confidence vote on superintendent Michael Hinojosa, who has said he has no plans to resign.

Hinojosa and the board previously have set a goal of being recognized as "the best urban school district in the United States" by 2010.

RBC Capital Markets, Citi, and Siebert Brandford Shank & Co. lead the underwriting syndicate for this week's negotiated sale.

First Southwest Co. and Estrada Hinojosa & Co. are co-financial adviser to the district and Vinson & Elkins LLP and West & Associates LLP are co-bond counsel.

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