Kentucky school deal features earlier call date in response to tax law shift

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With a boost from two rating upgrades, Kentucky’s Fayette County School District plans to issue bonds for the first time since 2015 to finance facility improvements for its growing student population.

The School District Finance Corp., based in Lexington, will issue $31 million of revenue bonds competitively Wednesday.

Bond proceeds will finance the construction of a new 750-student elementary school and improvements at an existing school for the relocation of the district’s growing Science, Technology, Engineering, Arts and Mathematics Academy.

The bonds will have serial maturities between 2019 and 2038.

The deal includes an eight-year call structure to give the district some flexibility to refinance in the future because advance refundings are no longer allowed, according to district financial advisor Chip Sutherland, a managing director with Hilliard Lyons.

Stoll Keenon Ogden PLLC is bond counsel.

Moody's Investors Service assigned an Aa3 rating to the revenue bonds, an upgrade from A1. Moody's also gave the district's issuer rating a one-notch upgrade, to Aa2. S&P Global Ratings rated the debt AA-minus, an upgrade from A-plus; it doesn't assign an issuer rating.

Analysts cited the district’s expanding economy and fund balance improvements.

“There are pockets of real credit strength in Kentucky, and Lexington is definitely one of them,” Sutherland said. “Management smartly took advantage of this and put a plan in place five years ago to meaningfully rebuild fund balances and both rating agencies rewarded them for it.”

The district board formally adopted fund balance policies to maintain sufficient reserves, he said. The policy targets a setting aside a minimum of 10% of general fund expenditures for reserves. If the balance falls below 10%, the district superintendent is required to restore the balance over a period of time.

“The district's financial position has materially improved after regaining structural balance, stabilizing operating performance and increasing fund balance levels,” said Moody’s analyst Evan W. Hess. “Enrollment growth continues to drive capital needs, resulting in a slightly above average debt burden, compared to the national medians for the Aa2 rating category.”

The district had $409.3 million of outstanding revenue bonds as of May 2, according to the preliminary official statement.

Fiscal 2017 ended with a total operating fund balance of $49.1 million or 10.6% of combined operating fund revenues, Moody’s said.

Although the 2017 fund balance is well below the national median for the Aa2 rating category of 26.5%, Moody’s said Fayette County’s balance is a “significant improvement” over the $26.7 million year-end result in 2014, which was 6.6% of revenues.

S&P analyst Helen Samuelson said the 2018 budget is balanced with no use of reserves, and officials expect at least break-even results.

“Given its growing economy, officials plan to issue additional debt to meet the needs of its growing enrollment,” she said. “One of its challenges is to continue to accommodate enrollment growth and ensure it provides even educational services to all of its service area.”

The capital improvement plan calls for issuing about $126 million of bonds through 2022.

The Fayette County School District is the second-largest K-12 district in the state with about 41,000 students. Its countywide boundaries match that of the combined Lexington-Fayette Urban County Government.

Sutherland said part of what drives the local economy is a highly educated workforce.

Lexington ranked as the 13th-best educated large city in the U.S., with 40.6% of its population over age 25 having at least a bachelor’s degree and 17% having a graduate or professional degree, according to 2014 data from the U.S. Census Bureau.

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Revenue bonds Ratings School bonds Primary bond market Kentucky