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Bonding agents: administrators have more input on district bond ratings than they realize.



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 Colorado Springs, city (1990 pop. 281,140), seat of El Paso co., central Colo., on Monument and Fountain creeks, at the foot of Pikes Peak; inc. 1886. It is a year-round resort and a booming military, technological, and commercial city. , 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 Looking for

In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with.
 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 AAA: see American Automobile Association.


(Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied.
. Then comes AA, A, BBB BBB

A medium grade assigned to a debt obligation by a rating agency to indicate an adequate ability to pay interest and repay principal. However, adverse developments are more likely to impair this ability than would be the case for bonds rated A and above.
, 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 cred·it·wor·thy  
adj.
Having an acceptable credit rating.



credit·wor
 the district is.

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 Refinancing

An extension and/or increase in amount of existing debt.
 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 Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
  • Hypothesis
  • Hypothetical
  • Hypothetical (album)
 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 The median household income is commonly used to provide data about geographic areas and divides households into two equal segments with the first half of households earning less than the median household income and the other half earning more. , enrollment patterns. However, district officials do have power over other parts of the ratings formula and can even mitigate mit·i·gate
v.
To moderate in force or intensity.



miti·gation n.
 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."

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 Saun´ders

n. 1. See Sandress.
, the district's chief business officer, gives most of the credit to the district's ten-year campaign to build an embargoed Embargoed is a UK based human rights organisation campaigning to bring an immediate and unconditional end to all embargoes against the people of Northern Cyprus. Embargoed does not proscribe any political remedy, but considers the embargoes on the people of Northern Cyprus to be  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 CIRCUMSTANCES, evidence. The particulars which accompany a fact.
     2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or
. 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.

Plan Ahead

Even if you can't imagine having the resources to put millions away, your district can have a big impact on its bond rating through the budgeting and planning processes. Your team's foresight (graphics, tool) Foresight - A software product from Nu Thena providing graphical modelling tools for high level system design and simulation. , organization and level of responsibility are being judged, and policies that help reduce the likelihood of credit deterioration de·te·ri·o·ra·tion
n.
The process or condition of becoming worse.
 get high marks.

"If you can make movement to deal with a problem like a high debt load, that's so important," says John Musso, the executive director of Association of School Business Officials International and a veteran of managing two dozen bond issues at the district level over the years. To lower its debt, a district can raise taxes, outsource work, fire teachers, cut administration costs--anything that pares PARES. A man's equals; his peers. (q.v.) 3 Bl. Com. 349.  away at how much it owes.

"Sometimes it's as simple as having a board policy to do things right, or showing that you reacted in a timely manner to a budget issue," Musso says. "Use multiyear financial forecasting to show that you're thinking clearly about the future." The benefits of something like multiyear financials--which project the income and expenses of a district for several years to come--go beyond just getting a better bond rating. They can be a valuable tool to ensure the district is financially sound.

Put Your Problems in Context

If your district is facing declining enrollment, if local residents generally don't make much money or if voters have been unwilling to pay for schools, the rating agencies know it. Don't try to hide your district's weak points; get in front of them instead. "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," Musso says. "If you identify that, yes, there's a problem, but we have strategic steps to overcome it--that can be the difference between a full rating or a plus or a minus."

Be prepared to show the town's economic development plan, for example, or describe in detail how a new housing development is going to impact enrollment.

And no detail is too small, even for a district where things are going well or that is among the larger districts nationwide. Saunders says that her district, the nation's eighth largest, had an explanation for why one school had three classes that didn't meet minimum standards for class size. It's the level of detail that will make a difference. "If there's an issue," she says, "have a solution."

Make a Good Impression

Once the paperwork is in order, district officials present their case to the bond-rating agency, typically in New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
. Don't assume that the paperwork you've compiled will speak for itself-the presentation matters.

You don't need a dog-and-pony show dog-and-po·ny show  
n. Slang
An elaborate presentation orchestrated to gain approval, as for a policy or product.



[From the razzle-dazzle of trained animal acts at circuses.]
, but be sure to point out clearly the factors that you think are relevant but might be missed. And be ready to answer the hard questions. "If there's an issue, it looks better when we don't have to ask about it, and [it looks better for the district] when there's a detailed plan," says John Kenward, a credit analyst with Standard & Poor's.

One option is to ask the ratings team to come to your town for the presentation. "The local economy is very important from our point of view. So actually seeing the situation on the ground, if it's in flux flux

In metallurgy, any substance introduced in the smelting of ores to promote fluidity and to remove objectionable impurities in the form of slag. Limestone is commonly used for this purpose in smelting iron ores.
 but elements are growing or recovering, that can be helpful," Kenward says.

Another option: Widen your presentation team to include local chamber of commerce members, staff from the mayor's office, school board members--anyone who can speak authoritatively about the community's status. Doing this brings more depth of knowledge to the table and also shows that the district has support and is working hand-in-hand with many local decision makers.

Negotiate

Once the presentation is over, you'll receive a call with the contingent rating. If it's less than what you had expected, the game is not over. "That's when you can negotiate," Musso says. "You absolutely can say, 'We were hoping for an AA rating. What were our deficiencies?' Once you hear what they focused on, be willing to say, 'I must not have been clear enough about those issues,' and reiterate re·it·er·ate  
tr.v. re·it·er·at·ed, re·it·er·at·ing, re·it·er·ates
To say or do again or repeatedly. See Synonyms at repeat.



re·it
 whatever you can to make your case."

There is a good chance that several team members assigned to rate your district were not present at the presentation, so it's reasonable and expected that you provide a polite and comprehensive explanation of how you're handling the problems they identify.

Rating Insurance

Rating insurance is another area of possible savings. Several firms specialize spe·cial·ize
v.
1. To limit one's profession to a particular specialty or subject area for study, research, or treatment.

2. To adapt to a particular function or environment.
 in providing the policies, which will provide the lender full compensation if the district can't make the bond payments. By shifting the risk of default to the insurer, the district essentially is guaranteed an AAA rating, but the policy cost may not be worth it.

"It all comes down to a cost-benefit analysis cost-benefit analysis

In governmental planning and budgeting, the attempt to measure the social benefits of a proposed project in monetary terms and compare them with its costs.
. What matters to the district is the difference between how many basis points will the interest rate drop and the cost of the insurance," says Mary Harris, an assistant professor at Cabrini College Cabrini College is a coeducational Roman Catholic residential college in the Philadelphia metropolitan area of Radnor Township, Pennsylvania, founded by the Missionary Sisters of the Sacred Heart of Jesus in 1957.  in Radnor, Pa. who coauthored a study of the bond rating process of nearly 150 school districts.

The insurance market fluctuates, just like the interest rate environment does, so don't assume you will or won't get insurance until you've run all the numbers. "If I can move up one rating, what does that do to my cost?" Smith says. "I've seen periods where it was foolish not to buy insurance, because it was so cheap."

In the end, such pragmatism pragmatism (prăg`mətĭzəm), method of philosophy in which the truth of a proposition is measured by its correspondence with experimental results and by its practical outcome.  is your greatest ally when entering the bond market. Balance the costs and benefits; even paring down your district's debt can be a misstep if that debt is necessary now. If you can make the bond rating process work for you, instead of you working for it, you'll be in great shape.

Work Around the Rating

One way to save money may be by not being rated at all.

It's not required for a district to have a bond rating--the rating is simply a tool that investors use to feel more comfortable about buying the bond, according to according to
prep.
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

3.
 Mary Harris, assistant professor, Cabrini College, Radnor, Pa.

Forgoing for·go also fore·go  
tr.v. for·went , for·gone , for·go·ing, for·goes
To abstain from; relinquish: unwilling to forgo dessert.
 a rating is usually only an option for a small, rural district that can market the bond locally to investors who are familiar with the school district's history and creditworthiness Creditworthiness

The condition in which the risk of default on a debt obligation by that entity is deemed low.


Creditworthiness

Eligibility of an individual or firm to borrow money.
, unlike in more urban areas.

Approach a few of the most obvious local investors and see if they need to see a bond rating, Harris suggests. Explain that if you present them with the information directly, the schools can save tens of thousands of dollars in rating fees.

Carl Vogel is a freelance writer based in Chicago.
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Title Annotation:ADMINISTRATIVE SOFTWARE
Author:Vogel, Carl
Publication:District Administration
Date:Apr 1, 2007
Words:1944
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