A major credit ratings agency has significantly downgraded the Clark County School District, giving it the lowest rating since the company began issuing them in 2001.
The district’s limited budgeting flexibility and modest funding reserves contributed to its bond rating slipping three positions, according to a Fitch Ratings report released Friday that downgraded the district from A+ to BBB+.
“The district has minimal budget flexibility due to its lack of ability to independently raise revenue and limited ability to cut spending,” the report says. “Modest reserves further contribute to limited gap closing capacity despite low historical revenue volatility. Further, long-term liabilities are expected to remain moderately high.”
The ratings agency revised its criteria last year and put a greater focus on financial resilience in economic downturns as well as revenue growth prospects and control.
“The district’s financial resilience given a moderate economic downturn is relatively poor despite expected limited revenue volatility, given low reserves and minimal budget flexibility,” the report’s authors noted.
To improve its bond rating, the authors of the report said the school district would need to show “a sustained increase in reserves to balance the district’s relatively low budget flexibility.”
What the rating downgrade means: The school district will face higher interest rates.
“By dropping the school district’s credit rating, it’s going to cost them more money to finance their operations going forward,” said Hugh Anderson, a managing director of HighTower Las Vegas, a Nevada-based investment firm.
Fitch also raised a red flag over the district’s debt: “The district's long-term liabilities are somewhat elevated at just over 20% of spending, most of which is overlapping debt. Amortization of existing district debt is relatively rapid with 88% of principal retired within 10 years.”
The rating outlook for the nation’s fifth-largest school district, which has $947.9 million of outstanding limited tax general obligation bonds, is labeled “stable,” though.
The district had planned to add $5.8 million this fiscal year to its fund balance — an effort to bring the unassigned balance back to 2 percent of spending. Instead, the district put that money toward cost increases for support employees, officials said.
The ratings agency also noted that the school district has about $8 billion worth of capital needs because of years of deferred maintenance and steady enrollment growth.
More than a decade ago, in 2006, the school district received a higher AA rating, said Shannon Groff, a primary analyst of the report. The district’s rating largely has decreased since then, in part because the agency has tweaked how it calculates the ratings, she said.
Even so, not all school districts received downgraded ratings after the most recent criteria change. Most California school district ratings remained the same this year, but of those that changed, downgrades outpaced upgrades, Groff said.
Fitch Ratings has not reviewed the Washoe County School District under the new criteria yet. The agency does not produce ratings for other Nevada school districts.
In the wake of its downgraded rating, the Clark County School District may need to revisit its $8 billion price tag for capital projects and see if there are ways to trim costs, Anderson said. Doing so could cast the district in a more favorable light to investors.
“Do they truly need $8 billion?” he said. “The answer is probably yes if they keep doing things the way they’ve always done them.”
School Trustee Deanna Wright stands behind the $8 billion figure for capital projects. She invites those who question the district’s financial calculations to speak with the bond oversight committee to better understand the needs.
“There’s a lot of balls in the air, and I just don’t think the general public really understands how much is going on at a daily basis at the school district,” she said.
Wright said she isn’t sure how the Board of Trustees will want to address the downgraded rating. She speculated that it perhaps could look at creating a new policy that would make it mandatory to have an unassigned ending fund balance of more than 2 percent. The report noted that the district added $5 million to the fund balance during fiscal year 2016, which brought the unassigned balance to 1.75 percent of spending.
Any route the district takes to fix its bond rating will involve some give and take, Wright said.
“You can’t just continue to do what you’ve always done and have your bond rating go back up,” she said.
-- 3:49 p.m.: This story has been updated to include a chart and more information from interviews.
Disclosure: Hugh Anderson is a partner at HighTower Las Vegas, a client of E Thompson Media, a communications consulting firm owned by the managing editor of The Nevada Independent, Elizabeth Thompson.
Caption: Clark County School District school buses line up to pick up special needs students at Variety School, 2800 E. Stewart Ave. on Thursday, Feb. 24, 2017. Photo by Jeff Scheid.