A re-established credit rating should strengthen Harrisburg School District’s ability to borrow money at lower interest rates and to refinance existing debts.
It’s a financial development that Acting Assistant Superintendent Chris Celmer called “great news for the district,” but it also came with a caveat — Standard & Poor’s lowered the district’s credit rating from A to A-minus earlier this month.
“This is great news for the district, but we still have a very long way to go to right the ship,” Celmer said in a statement.
In June, officials at S&P placed the district on a credit watch with negative implications, meaning analysts were paying special attention to Harrisburg’s credit rating with the idea that it could be lowered.
The watch was announced June 13, shortly after officials at the state Department of Education filed a petition in the Dauphin County Court of Common Pleas, asking that the district be placed into receivership in an effort to turn around decades of academic and financial underperformance.
“We could lower the rating if we believe that the district’s credit quality is no longer commensurate with the rating,” S&P analysts warned at that time.
Four days later, a Dauphin County judge granted the petition for receivership, ruling that Harrisburg School District would be under a period of state control for at least three years. Janet Samuels was appointed receiver, tasked with overseeing the state takeover and the hopeful recovery of Harrisburg schools.
In her first weeks on the job, Samuels fired existing district leaders and appointed a new team of administrators, many of whom had pulled off a similar financial recovery years earlier in Berks County’s Reading School District.
In their report, S&P officials pointed out that former leaders’ mismanagement had an impact on the district’s current, poor financial standing.
The addition of a new leadership team with “a track record of turning around distressed schools” was applauded by S&P analysts in their report, but they also highlighted ongoing financial struggles, specifically a $2.6 million budget deficit projected for this school year.
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It’s a deficit that could be made worse by charter school costs, high pension obligations, health care costs and debt payments, they said.
That’s why S&P analysts lowered the district’s long-term and underlying credit ratings form A to A-minus. The highest rating is AAA, and the lowest is D. More information about the rating scale can be found at this link.
That reduction came with a warning that there is a one-in-three chance that the rating could be lowered further some time in the next two years “if any budgetary pressure leads to deficits in fiscal 2021 or beyond, or if reserves weaken beyond projected levels despite management’s efforts.”
“In our opinion, although changes were made the district continues to face significant challenges associated with growing fixed costs coupled with implementation risks that could hinder its ability to restore structural balance,” S&P officials said.
“On the other hand, if management is successful in restoring structurally balanced operations by fiscal 2021 despite budgetary challenges, we could revise the outlook to stable,” they continued.
The current outlook is negative, which means the rating is more likely to be lowered, S&P analysts reported earlier this month.
It’s important to stave off a further rating reduction because the bond ratings “are essentially an organization’s credit score, impacting a school district’s ability to borrow money,” district officials said.
A better rating means lower interest rates, which will become important as officials look at refinancing existing debt, district officials have said.
“The news is positive as S&P has restored Harrisburg School District’s credit rating. Under the previous administration, the credit rating had been pulled,” Celmer said. “It is a negative outlook because there is still uncertainty as the new administration continues to work through stabilizing the long term financial state of the district.”
The district’s new leadership was credited with cutting about $2 million in unnecessary expenses from the 2019-20 budget, but it’s clear that more must be done to bring the district back to financial success, officials said.
“While the district’s fund balance is strong, it will need to use its reserves to help balance the budget over the next few years,” district officials said. “The district will need to allocate some of its fund balance for repairs to buildings, and to create a healthcare fund to help pay for higher healthcare claims. In addition, Harrisburg must negotiate contracts with all three of its employee unions.”
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