DALLAS — The Lancaster Independent School District’s financial troubles continued yesterday, as Standard & Poor’s placed the suburban Dallas district’s BBB underlying rating on negative CreditWatch.

Analysts said they’ll be watching to see if the state-appointed conservator and school board are able to “adopt timely and meaningful measures to correct the district’s chronic budget deficits,” and the rating may be downgraded if the financial stress worsens in the short term.

The district has about $157 million of debt outstanding, and also carries an underlying rating of Baa3 from Moody’s Investors Service.

About $31.5 million of outstanding debt is backed by Texas’s triple-A rated Permanent School Fund, and Standard & Poor’s said the enhanced rating remains in place on that debt. The remaining debt outstanding is insured by Financial Security Assurance Inc., one of the only monoline insurers still rated triple-A.

In July, following a nine-month audit that found numerous financial-management deficiencies, the Texas Education Agency appointed James Damm as conservator to oversee the district’s finances.

The state’s audit came after the Lancaster ISD was late with its annual audit for fiscal 2006 and then needed a $6 million bridge loan to cover costs. Officials never accounted for repayment of the note, which led to a negative fund balance for fiscal 2008.

Damm said the Standard & Poor’s revision shouldn’t have any impact on the district, because by the time they revisit the bond market he expects the outlook will be positive.

The district, which is about 20 miles south of downtown Dallas, doesn’t have any authorized but unissued debt and voters rejected three separate bond referendums between May 2006 and May 2007, as some area residents complained about the misuse of funds.

“We’ve identified some needs that could be addressed with debt proceeds, but have decided they’re not real critical at the moment, so there won’t be another bond referendum for a while,” Damm said.

Last month, the school board voted 4-3 to suspend superintendent Larry Lewis and the contentiousness some directors have for Lewis and each other is palpable. Assistant superintendent Eugene Young is heading up school administration until an interim superintendent is found.

Prior to the suspension, Lewis, who is on paid leave, outlined his plans to trim a projected budget shortfall of $1.5 million through reductions in salaries across all district departments and schools.

Damm said the district has covered that shortfall through the salary revisions and a number of other reductions.

“Not only have we managed to get that $1.5 million back, but we’ve improved the bottom line more than anyone could’ve anticipated,” he said. “The school district has made significant progress, quickly addressing the necessary adjustments to the budget, and showing a willingness to do whatever needs to be done. That’s not to say we’re out of the woods just yet, but we’re on the path to developing next year’s budget that will show a pattern of sound financial management.” 

The budget gap also was due to not as many students as expected enrolling in the district. Officials budgeted for 6,255 students this year, but then refined that figure to 5,900 and still fell about 200 kids short, further reducing the level of state funding the district receives.

Ahead of the May 2007 bond election, officials were projecting total enrollment to continue to climb and reach 8,000 students by 2012. 


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