Outlook changed to negative
Forest Lake School District 831 will keep its Aa3 bond rating, placing the district near the top in credit worthiness.
Rating agency Moody’s listed as the School District’s strengths a sizeable tax base within the Twin Cities metropolitan area, a manageable debt burden and improved liquidity, now that the Minnesota Legislature has voted to repay delayed state aid.
Credit ratings are opinions of future credit risk. They weigh the chance that the borrower may default on its financial obligations.
Moody’s assigns only three bond credit ratings higher than Aa3 and 17 lower ones. Ratings of Aa3 and above mean the borrower has a very strong capacity to pay the money back.
But buying the Forest Lake Area Athletic Association Sports Center will affect the School District’s credit outlook.
Because of the additional risk the district is taking on in purchasing and operating the ice arena and field house, Moody’s has changed its outlook from stable to negative.
The School Board voted to issue general obligation bonds to buy the sports center, secured by the district’s ability to tax. The purchase is contingent on getting a positive review and comment from the Minnesota Department of Education.
At the Aug. 1 School Board meeting, awarding the sale of tax abatement bonds to buy the ice arena was on the agenda. But the Department of Education needed more information and had not yet given the final go-ahead, so the board took no action.
If approval is given, the bonds will be guaranteed by the state through the School District Credit Enhancement Program. Minnesota has a Moody’s credit rating of Aa2, one notch higher than the District 831 rating.
In addition to taking on debt to purchase the ice arena, other financial challenges the district faces, according to the Moody’s report, are substantial recent declines in property values, declining enrollment, general fund operating deficits in the next two years, sizeable reliance on state aid (77 percent of general fund revenues) and “tepid voter support, which has limited the district’s ability to balance operations and address its sizeable deferred capital maintenance needs.”
Adding the $3.4 million for the ice arena would bring the district’s total outstanding general obligation debt to $30.1 million.
Larry Martini, director of business services for the district, was pleased with Moody’s affirmation of the Aa3 rating. The change in outlook was not unexpected and, in his view, is not of great concern.
“The way I look at outlook,” he said, “it’s the plus or minus on a letter grade.”
David Jacobson, communications strategist at Moody’s Investors Service, said while the outlook does not change the rating, it does indicate some downward pressure.
“This means there is a chance of a downgrade, but no rating change at this time,” he explained. Jacobson said the outlook will be reviewed in a year to two years.
When Moody’s next looks at the Forest Lake situation, the outlook could go up if the district maintains a healthy general fund balance, the ice arena brings in more money than it takes out and the trend of tax base declines is reversed.
Martini said his projections predict positive arena operations beginning in the first year, and the tax value of property in the district is increasing.
The budgets for the next two years do reduce the general fund balance, he said, and in the long term, there will be budget cuts.