Moody's Investor's Service last week lowered Whitefish Bay School District one notch to Aa3 and assigned a stable outlook following the district board's decision to renege on its moral obligation pledge to repay asset-backed notes issued by its non-pension retiree health care trust.

Whitefish is the fourth district to be downgraded by Moody's after its board decided not to appropriate repayment of the notes in its preliminary 2011 budget. Final budgets will be approved this fall.

A total of five Wisconsin school districts issued a combined $165 million of asset notes to fund their investment in collateralized debt obligations that involved credit default swaps. The districts have filed a lawsuit against the firms that put together the investment scheme.

The Whitefish Bay downgrade affects $8 million of general obligation promissory notes the district plans to sell this week to finance renovations. Voters last September authorized the issuance of $22.6 million for the projects.

The Aa3 rating is based on the district's mature tax base. It takes into consideration above-average resident wealth levels; healthy financial operations, with potential risks associated with the district's involvement in a high-risk investment vehicle; and modest debt levels with no additional borrowing plans. The rating also factors in the board's decision not to include repayment of its $9.7 million of notes in the next budget.

"The stable outlook takes into account the potential multi-year timeline for the resolution of the lawsuit and also that the magnitude of the district's moral obligation could be reasonably afforded by the district through appropriation of available resources and/or the issuance of debt," Moody's wrote.

The rating agency previously downgraded the Kenosha Unified School District, the Kimberly School District, and the Waukesha School District. No action has been taken yet on West Allis/West Milwaukee School District.

The districts put their moral obligation pledge behind the notes issued by their individual trusts and purchased by Depfa Bank PLC. As the investment faltered, the value of the trusts' collateral sank, triggering a default in late 2007 that the districts were required by the loan agreements to cure. Depfa demanded repayment in March after they failed to do so.

The schools want to wait until their litigation — alleging fraud against the firms that put together the now-worthless investment in 2006 — is resolved before repaying Depfa as the bank has demanded under its loan agreements.

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