ATLANTA - The Charleston County School District in South Carolina is issuing $63.4 million of tax anticipation notes tomorrow in a deal that carries the highest short-term rating offered by Moody's Investors Service - MIG-1.

While the district managed to receive that strong short term rating, Moody's yanked the positive outlook it had in place on the district's $223.9 million of general obligation bonds. They have an underlying rating of Aa3. There is no outlook in place now.

Neither Fitch Ratings nor Standard & Poor's rated the deal.

According to Moody's analyst Zeynep Altinordu, the short-term rating reflects the additional security for schools throughout state that is provided by the South Carolina School District Credit Enhancement Program.

"The program assures timely debt service payment through county and state government coordination and is backed by sizable annual state appropriations under the state's Education Finance Act," Altinordu wrote.

It works by allowing Charleston and other counties to perform property tax assessments, collect the district's debt service levies, hold sinking funds, and make debt service payments to the trustee, according to Altinordu. She added that the county treasurer is responsible for notifying the state treasurer if the district doesn't have enough funds to cover its debt service.

"Moody's believes this program provides sufficient bondholder protection to ensure timely repayment of the Charleston district's Tans at maturity," which is April 1, 2009, Altinordu wrote in the rating report.

If the enhancement program was not in place, it could be seen as a credit risk.

Altinordu also noted a concern that arose in 2006. Legislation was passed that cut off the use of most residential property tax revenues from use for funding school operating budgets. While state funding reductions did drop off after the legislation became law, the district's financial position began to improve beginning in fiscal 2004, she said. That was partly due to strengthened fiscal policies, newly-implemented fund balance targets, and conservative budgeting practices.

As far as the district's revenues are concerned, they have increased steadily since fiscal 2003, when they were about $222 million. At the end of fiscal year 2007, they totaled roughly $301 million.

In her report, Altinordu said that in light of the 2006 legislation, which significantly altered the revenue structure for school districts, Moody's assigned a negative outlook to the South Carolina school district sector.

"This global sector outlook does not impact the ratings of individual school districts," she said. "Moody's will continue to monitor the impact of this legislation on school district credit quality, particularly in light of our methodology for rating South Carolina school districts, which gives considerable weight to operating autonomy as a key element of financial flexibility."

School officials were not available as of press time to discuss the deal and other issues it faces.

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