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It might feel as if getting a bond rating for your district is a sign about how good or bad your teachers and schools are, but at the heart of it, those letters are just a measure to investors of how risky it is to lend a district money. Get beyond the voodoo of it all, and with some hard work, you can have a great impact on how bond-rating firms see your financial health.
"The bottom line for your rating is: What is your ability to repay?" says Don Smith, the building fund director for Academy School District 20 in Colorado Springs, Colo., with 30 years of experience in the field. "Every bond issue is a unique experience, but any time you can make a small step in your rating, you can save a considerable amount of money."
Anyone willing to lend your district millions of dollars over 15, 20, 30 years (typically banks, insurance firms, pension funds-any institution looking for a steady, secure return on it's investment) wants to ensure the district won't default on the loan. To provide independent confirmation of how much risk is involved, school districts turn to one or more of three big firms-Moody's Investors Service, Standard & Poor's, and Fitch Ratings-to provide a rating.
Each firm has its own rating methodology. Standard & Poor's best rating, for example, held by just a handful of districts nationwide, is AAA. Then comes AA, A, BBB, BB, and so on, with each possibly amended with a plus or minus. Moody's highest rank is Aaa, then Aa, A, Baa, Ba, B, and so on, with its letters possibly amended with a 1, 2 or 3. Regardless of the type of letters, the idea is the same underneath: Each firm does research on the economic strength of the district, including a review by a rating committee, and provides its best guess as to how creditworthy the district is.
Pay down existing debt. "Make sure there are no surprises-no unfunded liabilities that will come due during the life of the bond." -Don Smith, building fund director, Academy School District 20, Colorado Springs, Colo.
When it comes time to sell a bond, lenders are willing to get a lower rate of return for a more desirable loan. The rate your district gets for its bonds is connected not only to your rating but how much you want to borrow, for how long, the interest rate environment and other factors.
Whether your school district has just passed a new bond referendum or is considering refinancing a current bond, there is no hard-and-fast rule about how much you can save by improving your bond rating. But a quick hypothetical example helps show why the rating matters. Let's say your district wants to sell $50 million worth of bonds amortized over 20 years. If the district has an A rating-a solid investment grade-perhaps you can borrow at 5 percent, and the debt service would be $4 million a year. If you can get your rating up to AA, you probably would be able to save at least 15 basis points (100 basis points equal one percentage point), making the rate 4.85 percent. It would save roughly $900,000 over the life of the bond.
Many factors that bond rating firms use to rate a district are essentially outside an administrator's control: the diversity of the local tax base, the employment rate, median household income, enrollment patterns. However, district officials do have power over other parts of the ratings formula and can even mitigate the impact of the demographic and economic factors.
Get Fiscally Healthy
Personal credit ratings are based on how much a person owes, how much that person earns and how he or she has treated creditors in the past. To a large degree, your district's bond rating is no different. "You have to have sound financials," Smith maintains.
Pay down existing debt, he adds, such as any debt to vendors or if there is a gap between how much was brought in last year versus how much was spent. "Make sure there are no surprises-no unfunded liabilities like pension obligations that will come due during the life of the bond."
"There are a lot of outside factors that are difficult for us to control, but if we're knowledgeable about it and show that we understand the total community, that matters." -John Musso, executive director, Association of School Business Officials International
The School District of Hillsborough in South Florida recently raised its bond rating one level to Aa2, making it one of only two districts in the state to have Moody's highest rating. Gretchen Saunders, the district's chief business officer, gives most of the credit to the district's ten-year campaign to build an embargoed contingency fund balance of $79 million. By saving a little each year, including large one-time payments such as from Pepsi for the right to sell soda at the schools, the district has created a rainy-day fund that can only be touched during an emergency or for unforeseen circumstances. There is no law preventing districts from using contingency funds for anything it wants, but that's not financially sound. Not only did the financial stability impress Moody's, but it also is comforting for a district to have a reserve. "We're the largest employer in the county; a lot of people rely on us to be able to make payroll every month," Saunders says.
