Hillsborough schools credit rating takes a hit on spending

The largest school district in the Tampa Bay area has come under fire again by a credit rating company for unhealthy spending practices that have depleted its cash reserves.

In a recent advisory, Moody’s Investors Service downgraded certain bonds issued by the Hillsborough County School District and marked the district with a negative outlook. According to a Moody’s guide, a perspective represents a company’s view of the direction an organization’s bond rating will take in the coming weeks or months.

Michael Kemp, the deputy superintendent responsible for reorganizing the district’s finances, said on Friday executives were preparing for similar actions from the other two major bond rating firms, Fitch Ratings Inc. and Standard & Poor’s.

Credit scores are important because they affect the cost of borrowing. Over the past several months, Kemp and District Superintendent Addison Davis have taken steps to reduce the number of employees in the district, primarily through attrition and transfers.

Related: Read Moody’s announcement here.

The news coincided with other more encouraging financial developments.

Collections of the new half-cent sales tax to replace air conditioners and make other capital improvements did not drop as sharply as many feared when the coronavirus pandemic shut down businesses in the region last spring. Collections are about $ 4 million below 2019 levels, and district operations chief Chris Farkas said this trend is likely to continue.

The shortfall could even be less than $ 4 million, he said on Friday, speaking to a committee tasked with monitoring how sales tax revenues are spent. To date, the tax has raised more than $ 227 million.

Farkas stressed that the money collected in the referendum is segregated from other funds in the district. He said projects including improvements to air conditioning systems and security will not be affected by the bond rating situation. Hillsborough voters, in a 2018 referendum, approved the tax for 10 years, hoping it will bring in $ 1.3 billion.

There is also optimism about federal funding for the CARES Act to cover expenses related to the pandemic. Officials say the money – more than $ 200 million for Hillsborough – can be used in a variety of ways, from reimbursement to the district for high-end air filters in schools to academic programs aimed at remedying losses learning that occurred when schools were closed.

The investment community, however, wants the district to better manage its regular operational expenses.

In its Jan. 19 report, Moody’s noted that declining reserves have been a problem in the Hillsborough district for years.

The main reserve, which school districts call a “fund balance,” is on track to run out of money by the summer if the changes are not implemented. The authors wrote that “governance is a driving force, as previous administrations attempted and planned to correct the structural imbalance, but ultimately failed.”

They noted the district has new leadership, with Davis now at the helm as superintendent and the recent departure of longtime CFO Gretchen Saunders.

But, they write, “the negative outlook reflects the current structural imbalance, which we hope will be difficult to correct given the failure of previous attempts.”

Davis and Kemp said much of the problem stems from Hillsborough’s reliance on grants to fund programs and initiatives. Jobs stay on the books long after grant funding ends.

Critics from the district and some school board members blame it elsewhere. They questioned executive hires and computer-based curriculum purchases that occurred shortly after Davis arrived in March.

In an email to school board members, Davis said he anticipated tougher reports from Moody’s because the company was changing the way it formulates its grades. As he explained, the amount of the reserve will be given a higher weight, which will likely hurt districts like Hillsborough that are strapped for cash.

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