Hurricanes Katrina and Rita have wreaked highly visible havoc on schools in the Gulf Coast region, but their impact in a more esoteric realm鈥攕chool districts鈥� bonded debt鈥攊s just becoming clear. The picture that emerges could say a lot about those districts鈥� prospects for recovery.
Though other states were affected, Louisiana and Mississippi have received the bulk of attention from bond-rating firms trying to gauge the increased financial risk to investors who have purchased school district and other local government bonds. In those two states, the analysts cautioned that some districts that were previously considered financially sound face the small but real possibility of default.
鈥淭his is an unprecedented incident in the municipal-bond market鈥攈aving a major disruption due to a natural event that鈥檚 not really caused by financial problems of the borrower,鈥� meaning the school district, said Jay H. Abrams, the chief municipal-credit analyst for FMS Bonds Inc., an investment firm that specializes in municipal bonds.
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The hurricane-affected parts of Louisiana and Mississippi are home to government entities that have more than $9 billion in outstanding municipal debt, according to Moody鈥檚 Investors Service. A sizable chunk of that debt has been issued by school districts, although the states could not provide a breakdown. The consequences of a default would be serious for the debtors, say public-finance experts.
鈥淚t would severely impact your bond rating for future debt, which you would need sooner or later,鈥� said Todd Ivy, the director of school financial services for the Mississippi Department of Education.
Mr. Abrams, who is based in Boca Raton, Fla., said investors may approach general-obligation bonds, which are backed by property taxes, with new caution after this lesson in the mass destruction of property values from catastrophic hurricanes.
Sales-tax collections, which are used to back some other bonds issued by districts, also plunged after Hurricane Katrina hit on Aug. 29 and Rita on Sept. 24. Some battered school districts in Louisiana and Mississippi are expected to recover financially relatively quickly, because they are seeing a return of their population and of economic activity, which has accelerated because of recovery efforts. Other districts, where schools and the local housing stock were wiped out and most people have left, may not rebound for a long time.
For storm-ravaged districts on the Gulf Coast, 鈥渋t will be a minimum of two to three years before things will begin to return to somewhat normal鈥� in matters of muncipal finance, Mr. Ivy said.
Technical Default
For the most heavily affected large school district on the Gulf Coast鈥擭ew Orleans鈥攃oncern over bonded debt is one more hurricane-related headache.
On Sept. 1, the New Orleans district missed payments totaling nearly $9 million on some of its outstanding debt, a technical default that sent a shudder through the municipal-bond market when it became public in October. The bonds were insured, as is common for school bonds, and the insurers covered the payments. Still, the district took 45 days to repay the insurers鈥攖he practice with bond insurance鈥攁 delay that bond investors found worrisome.
Even a technical default is a serious event, because it reveals the state of the bond issuer鈥檚 finances, said Steve Murray, the director of public finance for Fitch Ratings, one of three major U.S. firms that rate municipal debt.
Mr. Murray, who has been studying the financial impact of the disaster in Louisiana, said the New Orleans district鈥檚 problem doesn鈥檛 necessarily portend a wider debt crisis in the region.
鈥淭he Orleans Parish school district is a case unto itself, because they had such a history of trouble financially,鈥� he said.
Whitman J. Kling Jr., the director of the Louisiana Bond Commission, which oversees bonds issued by local governments in the state, said New Orleans school district officials have since the default 鈥渃ategorically stated they would make all their payments for this year and next.鈥�
The district鈥檚 finances are 鈥渘ot the best picture in the world, but they have $317 million in cash in hand,鈥� compared with $373 million in outstanding long-term debt, Mr. Kling said. He noted that, although the state of Louisiana has officially assumed control over a majority of the district鈥檚 schools, the district itself remains responsible for its debt obligations.
Aside from the case of New Orleans, Louisiana and Mississippi state officials said that no districts have defaulted on any bonded debt since the storms, but said that such an event was not out of the question.
Moody鈥檚, which on Sept. 8 placed 51 government agencies, including school districts, on watch for a 鈥減ossible downgrade,鈥� is preparing a new ratings report, which it may issue this week, said John Cline, a spokesman for the New York City-based firm. A lower rating, which means a higher risk of default, tends to lower the resale value of the bonds on the secondary market.
Fitch Ratings has school districts on its 鈥渞ating watch negative鈥� list, but has downgraded only one since the hurricanes, the 32,000-student St. Tammany Parish district. Fitch lowered the district鈥檚 bond rating from A+ to A, still in the investment-grade category.
Standard & Poor鈥檚, the third major bond-rating firm, also based in New York City, does not have Gulf Coast-area school districts on its credit watch and has not lowered any district ratings, though it has lowered ratings of other government agencies in the region.
鈥淲e try to reflect what we know, and there are a lot of things that are unknown, including what states and the federal government might do,鈥� said Alex Fraser, a Dallas-based analyst with Standard & Poor鈥檚.
Loss of Assessed Value
Louisiana state Treasurer John Neely Kennedy was worried enough about the municipal-bond situation to write a letter last week to the members of the legislature warning that 鈥渢he risk of default at the local level is a serious problem.鈥�
Local governments in the 鈥渉urricane-impacted areas have approximately $8 billion in bonded indebtedness, only about $4.1 billion of which is credit enhanced with bond insurance,鈥� Mr. Kennedy said in the Nov. 28 letter.
Mississippi officials are also worried about the outlook for bonded debt.
鈥淭here is potential for [financial] disaster, especially those districts such as Pass Christian, Bay St. Louis, and Long Beach,鈥� Mr. Ivy of the Mississippi education department said. The destruction to real property in those districts will lessen the amount of tax revenues available to service their debts.
鈥淎ll their schools are basically destroyed. When all of a sudden you lose 50 percent of your assessed value, it鈥檚 huge,鈥� he said.
Mississippi law requires reassessment of a property鈥檚 taxable value within two months of a fire or storm, but assessors haven鈥檛 been able to meet that timetable, given the widespread destruction, Mr. Ivy said.
When a district has issued general-obligation bonds, which are widely used to pay for school construction, lowered property assessments force school boards to increase their tax rates to maintain the same level of revenue.
Federal Aid?
Mr. Ivy said Mississippi has limited resources to help the affected districts. 鈥淭hat鈥檚 why we鈥檙e lobbying hard at the federal level for money to replace that lost revenue, so they can pay debt service, so they won鈥檛 go into default,鈥� he said.
Katrina-relief bills passed separately in the House and Senate before Thanksgiving would help issuers of municipal bonds in the hurricane-affected areas of Louisiana, Mississippi, and Alabama restructure their debt payments.
The House version and a similar Senate bill would allow what鈥檚 known as 鈥渁n additional advance refunding,鈥� essentially allowing school districts and other agencies to restructure their existing bond debt.
鈥淲hatever anybody can give us, we appreciate,鈥� Mr. Kling, Louisiana鈥檚 bond commissioner, said of the two bills.
