Fitch Ratings downgrades Beaumont Independent School District, Texas'
(the district) outstanding unlimited tax (ULT) bonds as follows:
--$398 million outstanding ULT bonds to 'A' from 'AA'; Rating Watch
The bonds are secured by an unlimited property tax levied annually
against all taxable property within the district. Additional security is
provided by the Texas Permanent School Fund (PSF) guaranty, whose bond
guaranty program is rated 'AAA' by Fitch Ratings.
KEY RATING DRIVERS
INVESTIGATION EXPOSES FINANCIAL MANAGEMENT ISSUES: The downgrade
reflects significant gaps in internal control and financial management
practices uncovered by the ongoing FBI embezzlement investigation into
the former finance director and comptroller. The downgrade further
reflects the district's projection for a weaker financial position in
fiscal 2013 compared to previous estimates and Fitch's expectations.
NEGATIVE WATCH REFLECTS UNCERTAINTY: Fitch is concerned about the
district's liquidity position given the lack of available disclosure on
cash flows. Financial consultants currently managing district finances
confirmed availability of sufficient revenue to cover expenditures but
are piecing together details following the FBI's confiscation of
documents. Fitch has confirmed with the bond trustee timely payment of
principal and interest on February 15.
TEA ACCREDITATION ON HOLD: Fitch has learned that the district's
accreditation status with the Texas Education Agency (TEA) is pending.
The TEA recently assigned a special education monitor but Fitch has now
discovered that the TEA investigation is broader including student
attendance which could have negative financial impacts.
ADEQUATE DISCLOSURE: Fitch has requested documentation showing adequate
funding of obligations for the current fiscal year to confirm district
statements. Fitch will review available documents over the coming weeks.
If the financial position proves materially worse than indicated and/or
sufficient documentation is not available, the rating will be downgraded
TEA INVESTIGATION IMPACTS: The rating is sensitive to consequences
associated with the current TEA investigation, including but not limited
to any material impact on the district's financial resources.
HISTORICALLY STABLE FINANCES
The district's solid and stable reserves have historically been a credit
strength. Unreserved/ unrestricted general fund balance had been no less
than 20% of spending or $31 million over fiscals 2007-2011. Audited
district fund balance remained healthy at fiscal 2012 year-end, totaling
$30.9 million or 18.7% of spending in unrestricted reserves, down from
24% of spending in fiscal 2011. The net fund balance drawdown of $11.3
million that year was attributable to approved budget amendments for
capital spending as well as one-off revenue losses from an increase in
exempt foreign-trade zone properties.
UNEXPECTED DRAW IN FISCAL 2013
The fiscal 2013 balanced budget included no change in fund balance over
fiscal 2012. However, fiscal 2013 results worsened first with the
release of the adopted fiscal 2014 budget, estimating a $3.4 million
operating deficit after transfers in fiscal 2013, and again with recent
projections of $11 million in fiscal 2013 unencumbered reserves (or 7%
of spending). Also, the estimated embezzled amount has risen to $4
million (2.5% of spending). The one year use of roughly $20 million in
reserves is reportedly due to a combination of unbudgeted pay-go capital
spending, embezzled funds, and higher than budgeted spending on
personnel throughout the year.
It is uncertain when the external audit will be complete to confirm the
district's year-end financial position. Extensive timing delays have
occurred with financial consultants hired in the fall of 2013. They are
tasked with reconstructing financial data after the FBI's confiscation
of documents and correcting internal control and financial management
issues present in day-to-day operations.
ADDITIONAL CHALLENGES IN FISCAL 2014
Fitch believes the district will be quite challenged to plug gaps in its
$157.8 million fiscal 2014 budget. The initial $3 million operating
deficit expected for the year has subsequently widened to a total of
$7.2 million due a miscalculation of property taxes from one of the
district's larger taxpayers reflecting previous changes to the state
school funding formula. Management reports recent curtailment of
spending and availability of reserves in other funds as solutions for
NARROW LIQUIDITY ANTICIPATED
Fitch is concerned about the district's liquidity. Financial consultants
report sufficient cash flow through the remainder of fiscal 2014 to
narrowly meet its financial obligation. The district has received most
of its property taxes through February and won't get additional state
aid until August. Fitch spoke with the bond trustee who confirmed full
and timely payment on the February 15 debt service date.
The financial consultants report some reserves available in other funds,
namely bond funds that might be used for reimbursement of general fund
capital spending. The Rating Watch Negative signals Fitch's concerns
about the present lack of formal liquidity reporting. Fitch has
requested monthly cash flows from the district to support the unaudited
bank statements provided. The rating will be downgraded if further
disclosure over the coming weeks shows additional deterioration. If the
information provided is insufficient, the rating could also be withdrawn.
TEA ACCREDITATION INVESTIGATION
A press release dated February 28 on TEA's website describes the
district's accreditation status as 'pending' while TEA investigations
are underway. Fitch is concerned in the short-term over the fact that
the district did not disclose the breadth of the TEA investigation
during Fitch's discussion with management. Fitch is also concerned over
longer-term impacts on district resources if student attendance records
are found inaccurate. Fitch believes the process will likely play out
over several months and may include broadening of TEA's participation in
district operations. In the worst case, the district's accreditation
could be revoked and the district dissolved. Fitch will monitor
developments in the TEA investigation as they become available.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, Municipal Advisory Council of Texas, IHS
Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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