Indiana School Credit Ratings At Risk, May Cost Districts Millions

Feb 14, 2017

Millions of dollars are on the line for Indiana school districts, as a national credit agency threatens to downgrade Indiana school debt “by as much as several notches.”

The credit rating agency Standard & Poor’s says that it has placed a 90-day watch on loans to Indiana districts due to uncertainty that districts can pay off their debt in a timely manner. The warning was triggered by a new interpretation of Indiana law, as originally reported by Chalkbeat Indiana.

When districts borrow money – if they can’t pay off their loans, the state is obligated by law to pay in their place. It keeps districts with good credit ratings, and therefore low interest. But that technique has raised concerns.

“We believe there is uncertainty that intercept payments will always be made available to ensure timely payment of debt service in full on this ‘AA+’ rated debt,” S&P said in a statement.

A drop in credit rating could mean big bucks for local school districts. It would affect interest rates for all 261 public school districts in the state.

“If they change rating that a bond would yield, that’s going to make it less safe and therefore the interest charged would be higher,” says Robert Boyd, interim superintendent for Argos Community Schools.

Argos Community Schools, a small district in the heart of rural, is getting ready to look for a first mortgage bond. He says schools will feel any increase in interest rates.

“Pretty soon you’re talking about a lot of money,” Boyd says.

Indiana bonds are backed by the government, so under current law, the state may make debt payments if districts cannot, then collect money from districts later. By ensuring creditors are paid, the law allows districts to maintain high credit ratings – and lower rates.

“Indiana bonds have always been extremely safe because of the legal provision that if a district for some reason cannot repay their debt, for one reason or another, the state has a legal responsibility to make that payment,” Boyd says.

But it’s this same provision that’s drawing concerns from the credit agency – saying they’re uncertain about the timeline for available state aid payments.

Wayne Township officials told Chalkbeat the changes from S&P could cost the district more than $1 million in additional interest on bonds it plans to issue in the coming months.

“There is a possibility that Indiana could revise current procedures resulting in an intercept of state aid that provides for timely payment of debt service in full … In the event such revisions are made in a timely manner, the rating could be affirmed,” S&P said in the statement. “If revisions are not made, we would likely lower the rating.”