Years of dipping into reserves has hurt the financial position of FGSD, analysts say

The Forest Grove School District got an unwelcome bit of news on May 23: its credit rating was being downgraded.

Moody's, one of the three major credit ratings agencies, downgraded the district's credit rating from Aa3 to A1, moving down one step the overall investment grade assigned to the district's $31.8 million in bonded debt.

The news came as a shock to Mike Schofield, the district's business manager, who says he can't recall a situation when the district's credit rating has been downgraded before.

"This came out of the blue," Schofield said.

But the bad news that led Moody's to downgrade the district is well-known to Schofield. The district has spent down its reserve fund balance since 2007 in order to shore up a budget squeezed by declining enrollment and shrinking state funding.

That, Moody's analysts argued, has put the district in a tough position. The ending fund balance is a complicated term for what is essentially the district's savings account. Whatever money isn't spent each year to keep the lights on and teach students gets set aside for a rainy day.

But that rainy day came with the onset of the Great Recession and the district has been dipping into its savings in order to reduce the number of classroom cuts it had to make.

"It's a concern and something we as a district need to address," said Schofield. "We've spent down our reserves and we're not where we want to be yet in that regard."

Now, the district is trying to shore up its accounts.

Moody's analysts say the district's latest budget cuts $1.2 million from expenditures and increases the district's piggy bank to $2.6 million. That's good news, but not enough to avoid a downgrade, according to analysts.

The other big hurdle the district faces is that its primary revenue source - property and income taxes - are both on shaky ground, thanks to continued economic struggles in the Portland metropolitan area.

The real market value of property in the district continues to contract after the bust of a national housing valuation bubble. The district is somewhat insulated from the affects of that decline thanks to quirks in Oregon's property tax law, but the downward trend remains.

The district has also faced dwindling enrollment, which triggers reductions in state revenue since the district's budget is largely determined by how many students enroll.

Moody's analysts said in order for the rating to increase, the district would need to commit to higher reserve levels or see a significant improvement in the population and economic growth in the district. Dipping into reserves any more or a continued erosion of real market value could drop the rating further.

The city of Forest Grove refinanced its bonded debt in 2010 and obtained an Aa3 rating, the same one that the school district just lost.

Paul Downey, Forest Grove finance director, said he asked Moody's at the time of the refinancing what the city could do to improve the rating. The firm told Downey the city's reliance on property tax revenue from residential land kept the rating in place. If the city saw more commercial and industrial development, it could make a case for a rating increase.

While Moody's downgraded the district's rating, its bond rating with Standard and Poor's remains at AA+, essentially two notches ahead of the Moody's rating.

The other major rating agency, Fitch, doesn't seem to have rated the Forest Grove School District in recent years.

What the downgrade means for the district's finances isn't entirely clear. The bonds attached to the district's $65.3 million construction bond measure that passed in 2010 have already been sold. Schofield said the district isn't currently planning to issue any bonds.

Downey said a better rating can sometimes allow bond issuers like the city to sell bonds at a premium, which would reduce the cost to taxpayers.

"It might make your bonds more marketable to somebody," Downey said. "It may have a minor affect on the interest rate."

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