Orangeburg County School District's bond rating has been downgraded.
Moody's Investors Service downgraded the district's general obligation bond debt issued by Orangeburg County Consolidated School District 5 to A2 from an A1 rating on the debt, according to a Moody's press release.
Moody's also affirmed the A2 ratings on the general obligation debt originally issued by OCCSD 3 and OCSD 4.
“The A2 issuer rating reflects the combined credit quality of Orangeburg County Consolidated School District 3, District 4 and District 5, which were consolidated into Orangeburg County School District on July 1, 2019,” Moody's said last month.
The district has approximately $32.5 million of Moody's-rated debt.
“The Consolidated School District’s rating is now the same as the previous two Districts (3 and 4),” OCSD Assistant Superintendent for Communications and Business and Community Partnerships Merry Glenne Piccolino said.
“Orangeburg 5 maintained a strong fund balance and was the primary reason for the difference when last reviewed,” she said.
South Carolina school districts issue general obligation bonds under an enhanced rating provided by the State Intercept Law which is AA.
“The individual ratings are important, and, in some cases, may have a reduction in the number of bidders if below the A rating,” Glenne Piccolino said. “Falling below an A rating would be more problematic than a drop from A1 to A2.”
Moody's said the outlook is negative for the district.
“The consolidation is a social consideration under Moody's Environmental, Social and Governance framework because it is largely attributable to uneven academic performance and salary structures across the three legacy (previous) districts,” Moody's stated. “The rating also considers a sizable operating deficit that was realized in fiscal 2020 and caused a significant drop in the district's reserves.”
“The deficit was largely attributable to an incorrect assumption of what the value of a mill would be when applied to the consolidated district's new tax base,” Moody's stated. “Also contributing to the deficit was growing personnel costs, which were the result of the district's equalization of pay across the three legacy districts' staff.”
The school district officials miscalculated the amount of a mill during the consolidation process, resulting in the $8.7 million deficit.
The district expected it would receive more money than it actually did.
Moody's says the A2 issuer rating also reflects the district's, “long-term trend of enrollment declines, resident income and wealth levels that are below similarly rated schools, moderate long-term liabilities and moderate fixed costs.”
“The negative outlook reflects sharp and ongoing enrollment declines that increase the risk of another operating deficit in fiscal 2021, further eroding the district's reserve position to a level no longer in line with the current rating category,” Moody's stated.
The credit-rating agency also said that factors leading to an upgrade of the ratings could include a “sustained trend of balanced operations and material improvement in fund balance and liquidity; stabilization of enrollment and improvement in resident income and wealth metrics.”
Factors that could lead to a downgrade include “additional decline in fund balance or liquidity; material increase in long-term liabilities ratio and/or fixed costs ratio.”
Glenne Piccolino says the district's financial advisers are concerned about the negative outlook and a reduced general fund balance.
“This lack of adequate funding from local tax millage will further erode the general fund balance until it is corrected,” Glenne Piccolino said. “This could lead to a further reduction of the district’s bond rating in the future.”
Glenne Piccolino said the current Senate Bill 515 allowing an increase in the district's operational millage to 219 mills would begin the process of correcting the deficiency.
“The Government Finance Officers Association recommends maintaining a general fund balance of 17% of annual general fund expenditures, which equates to two months of operating expenses,” Glenne Piccolino said. “State law requires the district to maintain a minimum of one month of operating expenses.”
Correcting the millage rate is also expected to improve the district's general fund balance, which in turn is expected to positively impact the bond ratings.
“It will take time to build back the fund balance to the desired level (GFOA),” Glenne Piccolino said.
The bond rating issuance is a part of Moody's two to three-year routine review of bonded debt.
Glenne Piccolino said the district is not planning to enter into the bond market at this time.
“The district is in the process of an independent review of all school buildings,” Glenne Piccolino said.
She also noted, “As a system, all areas of the organization have worked to reduce costs. We will continue to look for ways to create efficiencies.”