Moody’s Investor Service upgraded the bond rating for Kent School District to Aa3 from A1. The rating outlook was moved up to stable from positive.
The Aa3 issuer rating, which reflects the district’s general credit quality and ability to repay debt and debt-like obligations, incorporates a solid financial position stemming from extraordinarily strong management that has generated substantial surpluses in 2019 and 2020, according to Moody’s Feb. 12 report.
A rating of Aaa1 is the highest followed by Aa, A, Baa, Ba, B, Caa, Ca and C. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
As do the majority of Washington districts, the district has what Moody’s considers weak financial reporting that does not disclose other post-employment benefit liabilities, capital asset values or depreciation because the district follows the ‘Regulatory Basis of Accounting’ as directed by the Office of Superintendent of Public Instruction (OSPI) and allowed by Washington state law.
The rating also incorporates the district’s participation in the Puget Sound economy, which is supportive of above average resident income and high full value per capita. Although enrollment is declining with a significant drop in fiscal 2021 due to the coronavirus pandemic, management has demonstrated its ability to address challenging financial situations and deliver strong results. Long-term liabilities are manageable and fixed costs overall are low.
The rating assigned to the district’s general obligation bonds was upgraded one notch because it is equivalent to the Aa3 issuer rating, based on the district’s general obligation full faith and credit pledge as well as an unlimited property tax that is dedicated to debt service.
A bond rating is much like a personal credit rating.
Bond ratings are a simple concept. School districts constructing schools are essentially no different from most residents who want to build a home – they need to apply for a loan from a bank. And anybody applying for a loan will soon learn that credit history matters.
In a school district review, a rating agency will establish an underlying credit rating (like your personal credit score) and also assign an outlook based on whether they perceive financial conditions to be getting better or worse.
A higher rating enables the district to have a stable outlook.
Although the district is on firm financial footing, the effects of COVID-19 and its costs are still largely unknown. This stable financial outlook will help the district face those challenges.
The stable outlook is reflective of a strong management team that is expected to continue to deliver long-term structural balance and maintain manageable levels of long-term balance sheet leverage, according to Moody’s.
Factors that could lead to an upgrade:
• Improved enrollment trend
• Strengthening of the full value per capita, or resident income levels
• Increase in fund balance and cash
• Improved financial reporting
Factors that could lead to a downgrade:
• Substantial increase in long-term liabilities, fixed costs or erosion of capital assets
• Material decline in fund balance or cash
• Significant deterioration of district’s or region’s economy