School Bond Rating Upgrade

By Colette Irwin-Knott, Partner

When Standard & Poor's raised the state of Indiana's bond rating from "AA+" to "AAA" in July, the upgrade caused the Indiana State Aid Intercept Program's rating to increase from "AA" to "AA+", leading to an upgrade of many school corporations' bond ratings.

Most school corporations in Indiana request a bond rating before issuing debt. The bond rating demonstrates the issuer's credit quality.

In Indiana, most bond ratings are not based upon the credit quality of the individual school corporation. Instead, they are based on the rating of the Indiana State Aid Intercept Program (the "Program"), because Indiana Code (Title 20, Article 48, Chapter 1, Section 11) requires the state treasurer to withhold state aid to make debt service payments on outstanding debt if a school corporation is unable to pay.

Because schools look to the state to make debt service payments when local property taxes fall short, the rating given to the Program by Standard & Poor's is directly related to the state's credit rating.

Standard & Poor's July report on the state's credit rating upgrade reflects:

• A stable and diversifying economic base despite continued manufacturing concentration;
• A biennium budget that will add to the fund balance by the end of the biennium and reimburse all of the payment delays outstanding to local units of government;
• Property tax reform that has clarified the state's financial responsibilities; and
• Low overall debt levels.

The good news for school corporations is that interest rates are typically lower with higher bond ratings, because the bonds are considered less risky. Lower interest rates result in lower borrowing costs for the issuer.

School corporations qualifying for the Program rating must receive state aid at least two times greater than the maximum annual debt service on all outstanding and proposed bonds, and the legal documents must meet other technical requirements. School corporations that currently have outstanding bonds with a Program rating of "AA" will receive a rating upgrade to "AA+". Moving forward, as long as the state's rating remains "AAA", school corporations qualifying for the Program will receive an "AA+" rating.

For continuing disclosure purposes, this rating upgrade is considered a "material event." If you would like clarification of what an improved bond rating means for your school district, please contact us at footnotes@umbaugh.com.