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Moody's news release on BISD
Moody's Investors Service
Moody's downgrades Beaumont ISD, TX's GO to A1 from Aa2; assigns negative outlook
Global Credit Research - 18 Feb 2014
$183.8M debt affected
New York, February 18, 2014 -- Moody's Investors Service has downgraded Beaumont Independent School District's (TX) general obligation (GO) rating to A1 from Aa2, affecting $183.8 million in parity debt obligations. The bonds are secured by a direct and continuing ad valorem tax, levied without limitation as to rate or amount against all taxable property within the district. The bonds are additionally secured by the Texas Permanent School Fund guarantee which carries Moody's Aaa rating. The PSF rating is not affected by this rating action.
At the same time, we have concluded the review of the district and assigned a negative outlook. The rating was placed under review for possible downgrade on November 19, 2013, pending the outcome of various investigations.
SUMMARY RATING RATIONALE
The downgrade to A1 reflects severe governance problems plaguing Beaumont Independent School District (BISD), including lack of internal controls, a divided board, as well as allegations of fraud and multiple pending investigations. The A1 rating also takes into consideration recent declines in reserves, the district's sizeable tax base concentrated in the petrochemical industry, below average wealth levels, and an elevated debt burden with no additional debt plans in the near term.
The negative outlook reflects Moody's expectation that the district will face additional challenges in the near- to mid-term given the ongoing special accreditation investigation by the Texas Education Agency, as well as separate federal investigations. Additionally, the outlook reflects uncertainty surrounding the extent of future state involvement in the district's operations, as well as projected narrowing liquidity resulting from budgeted draws on General Fund reserves in fiscal 2013 and 2014.
-Sizable tax base
-Increasing state funding
-Tax base concentration in petrochemicals
-Leveraged debt position
-Severe governance challenges
-Multiple pending investigations
The negative outlook reflects the uncertainty surrounding the outcome of pending state and federal investigations, the extent of future involvement of the state in district operations, as well as the projected declines in reserves in fiscal 2013 and 2014.
WHAT COULD MOVE THE RATING UP (Removal of the negative outlook)
-Implementation of strong internal controls and sustained trend of transparent operations
- Return to balanced General Fund operations and significantly improved reserve levels
-Significant moderation in debt burden and fixed costs
-Diversification of the tax base
-Significant improvement in the socioeconomic profile
WHAT COULD MOVE THE RATING DOWN
-Significant fiscal liability resulting from pending investigations
-Continued trend of lax internal controls
-Significant negative restatements to the district's audits
-Failure to balance operations resulting in further declines in reserves
-Substantial declines in the tax base
-Material increases in debt
The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.