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The following is an archived video story. The text content of that video story is available below for reference. The original video has been deleted and is no longer available.

Fitch downgrades Beaumont ISD bonds

Fitch Ratings-Austin-03 March 2014: Fitch Ratings downgrades Beaumont Independent School District, Texas' (the district) outstanding unlimited tax (ULT) bonds as follows:

--$398 million outstanding ULT bonds to 'A' from 'AA'; Rating Watch Negative.

SECURITY

The bonds are secured by an unlimited property tax levied annually against all taxable property within the district. Additional security is provided by the Texas Permanent School Fund (PSF) guaranty, whose bond guaranty program is rated 'AAA' by Fitch Ratings.

KEY RATING DRIVERS

INVESTIGATION EXPOSES FINANCIAL MANAGEMENT ISSUES: The downgrade reflects significant gaps in internal control and financial management practices uncovered by the ongoing FBI embezzlement investigation into the former finance director and comptroller. The downgrade further reflects the district's projection for a weaker financial position in fiscal 2013 compared to previous estimates and Fitch's expectations.

NEGATIVE WATCH REFLECTS UNCERTAINTY: Fitch is concerned about the district's liquidity position given the lack of available disclosure on cash flows. Financial consultants currently managing district finances confirmed availability of sufficient revenue to cover expenditures but are piecing together details following the FBI's confiscation of documents. Fitch has confirmed with the bond trustee timely payment of principal and interest on February 15.

TEA ACCREDITATION ON HOLD: Fitch has learned that the district's accreditation status with the Texas Education Agency (TEA) is pending. The TEA recently assigned a special education monitor but Fitch has now discovered that the TEA investigation is broader including student attendance which could have negative financial impacts.

RATING SENSITIVITY

ADEQUATE DISCLOSURE: Fitch has requested documentation showing adequate funding of obligations for the current fiscal year to confirm district statements. Fitch will review available documents over the coming weeks. If the financial position proves materially worse than indicated and/or sufficient documentation is not available, the rating will be downgraded and/or withdrawn.

TEA INVESTIGATION IMPACTS: The rating is sensitive to consequences associated with the current TEA investigation, including but not limited to any material impact on the district's financial resources.

CREDIT PROFILE

HISTORICALLY STABLE FINANCES

The district's solid and stable reserves have historically been a credit strength. Unreserved/ unrestricted general fund balance had been no less than 20% of spending or $31 million over fiscals 2007-2011. Audited district fund balance remained healthy at fiscal 2012 year-end, totaling $30.9 million or 18.7% of spending in unrestricted reserves, down from 24% of spending in fiscal 2011. The net fund balance drawdown of $11.3 million that year was attributable to approved budget amendments for capital spending as well as one-off revenue losses from an increase in exempt foreign-trade zone properties.

UNEXPECTED DRAW IN FISCAL 2013

The fiscal 2013 balanced budget included no change in fund balance over fiscal 2012. However, fiscal 2013 results worsened first with the release of the adopted fiscal 2014 budget, estimating a $3.4 million operating deficit after transfers in fiscal 2013, and again with recent projections of $11 million in fiscal 2013 unencumbered reserves (or 7% of spending). Also, the estimated embezzled amount has risen to $4 million (2.5% of spending). The one year use of roughly $20 million in reserves is reportedly due to a combination of unbudgeted pay-go capital spending, embezzled funds, and higher than budgeted spending on personnel throughout the year.

It is uncertain when the external audit will be complete to confirm the district's year-end financial position. Extensive timing delays have occurred with financial consultants hired in the fall of 2013. They are tasked with reconstructing financial data after the FBI's confiscation of documents and correcting internal control and financial management issues present in day-to-day operations.

ADDITIONAL CHALLENGES IN FISCAL 2014

Fitch believes the district will be quite challenged to plug gaps in its $157.8 million fiscal 2014 budget. The initial $3 million operating deficit expected for the year has subsequently widened to a total of $7.2 million due a miscalculation of property taxes from one of the district's larger taxpayers reflecting previous changes to the state school funding formula. Management reports recent curtailment of spending and availability of reserves in other funds as solutions for gap closing.

NARROW LIQUIDITY ANTICIPATED

Fitch is concerned about the district's liquidity. Financial consultants report sufficient cash flow through the remainder of fiscal 2014 to narrowly meet its financial obligation. The district has received most of its property taxes through February and won't get additional state aid until August. Fitch spoke with the bond trustee who confirmed full and timely payment on the February 15 debt service date.

The financial consultants report some reserves available in other funds, namely bond funds that might be used for reimbursement of general fund capital spending. The Rating Watch Negative signals Fitch's concerns about the present lack of formal liquidity reporting. Fitch has requested monthly cash flows from the district to support the unaudited bank statements provided. The rating will be downgraded if further disclosure over the coming weeks shows additional deterioration. If the information provided is insufficient, the rating could also be withdrawn.


TEA ACCREDITATION INVESTIGATION

A press release dated February 28 on TEA's website describes the district's accreditation status as 'pending' while TEA investigations are underway. Fitch is concerned in the short-term over the fact that the district did not disclose the breadth of the TEA investigation during Fitch's discussion with management. Fitch is also concerned over longer-term impacts on district resources if student attendance records are found inaccurate. Fitch believes the process will likely play out over several months and may include broadening of TEA's participation in district operations. In the worst case, the district's accreditation could be revoked and the district dissolved. Fitch will monitor developments in the TEA investigation as they become available.

Contact:

Primary Analyst
Rebecca C. Moses
Director
1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX, 78701

Secondary Analyst
Blake Roberts
Associate Director
1-512-215-3741

Committee Chairperson
Managing Director
Jessalynn Moro
1-212-908-0608


Media Relations: Elizabeth Fogerty, New York, Tel: 1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Municipal Advisory Council of Texas, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria

Additional Disclosure
Solicitation Status


ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



 

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