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School credit ratings a problem for several in Western Pennsylvania

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Michael Pirollo | For the Penn Hills Progress
The credit ratings of several school districts in Western Pennsylvania, including Penn Hills, are considered junk in the eyes of Moody’s credit rating agency, underscoring systemic problems in the way the state funds public schools, say school leaders and government officials.

The credit ratings of several school districts in Western Pennsylvania are considered junk in the eyes of Moody’s credit rating agency, underscoring systemic problems in the way the state funds public schools, say school leaders and government officials.

Moody’s Investors Service highlighted six area districts in a report last week as struggling financially amid growing pension obligations and a weak tax base.

Credit ratings for three Allegheny County districts — McKeesport Area, East Allegheny and Penn Hills — were downgraded to junk bond category since March, making it more difficult for them to borrow money. West Mifflin Area School District was downgraded to the lowest investor rating, one step away from junk, according to Moody’s. Trinity Area in Washington County and Frazier in Fayette County also were downgraded to junk status.

“It really should be a wake-up call to all of Pennsylvania that this is happening,” state Auditor General Eugene DePasquale said Tuesday. “…There will either be less service for more money or more money for less service.”

A tarnished credit rating makes it more expensive for districts to borrow money, increasing the cost to build or upgrade facilities. Districts could be prohibited from borrowing money and have difficulty refinancing debt.

“Being in the debt junk bond status will just continue to perpetuate itself, because there’s no way they can find enough money to get themselves out of it,” DePasquale said.

He and Moody’s cite growing, unpredictable pension payments and the rise in charter schools that siphon students from public schools as drivers of fiscal hardships. And the ratings are poised to decline further, said David Jacobson, a spokesman for the agency.

Moody’s considers the surrounding economy of a district and its tax base, along with trends in finances and how it’s been managed, Jacobson said. It compares a district’s performance to that of peers, he said.

Pennsylvania school districts now make up 20 percent of the agency’s junk bond ratings. Eight districts statewide were downgraded by an average five notches since March.Districts need to cut waste, and many have taken steps, but it will take a structural overhaul of the state’s school funding formula, its charter school law and its pension system to fix the problems, DePasquale said.

The formula for filtering tax money into local districts hasn’t changed since 1991 and doesn’t take into account shifts in population, demographics or poverty.

“How we direct that money is clearly a problem,” he said.

Mounting pension obligations are expected to continue through 2023, according to Moody’s. The amount of money districts owe to employee pension funds has soared 60 percent since 2013-14, from $1.8 billion to $2.9 billion. Pension payments paired with charter school tuition payments can be debilitating, officials say.

“Charter school tuition payments are extremely costly to our districts, particularly those that are already financially stressed. Charter school funding reform is desperately needed,” said Sarah McCluan, a spokeswoman for the Allegheny Intermediate Unit, based in Homestead.

Penn Hills nearly defaulted on its debt in April, according to Moody’s. It ran a $9 million deficit in fiscal 2014, causing it to nearly miss a debt payment. The state stepped in to cover the payment, but the district cannot afford its charter school costs with lagging tax revenue. This year it tried to borrow $18 million to make debt payments but could obtain only $12 million because of its credit rating. It has another debt payment due in October.

District officials declined to comment on the latest credit downgrade.

McKeesport Area School District said it has maintained a positive fund balance for 17 years, but the size has dwindled to $2.5 million from a high of about $6 million.

“We strongly disagree with the rating that they just assigned to us for our bonds. We do not feel it was an appropriate rating,” said David Seropian, business manager for the district. “ … We‘re not even headed in the wrong direction.”

East Allegheny tried to cut costs by consolidating three schools into two. It is embroiled in a teacher contract dispute.

West Mifflin Area School District cut staff, restructured debt and adjusted its millage rate, said Superintendent Daniel Castagna.

“The current environment for school districts has been extremely challenging,” he said.

State law limits yearly increases on taxes for school districts but makes allowances to fund pensions. Despite the allowance, districts are hesitant to raise taxes.

The downgraded districts either raised property taxes slightly or lowered them for the 2015-16 school year. Penn Hills and McKeesport Area raised their rates, West Mifflin kept taxes steady and East Allegheny cut its rate.

Staff writer Patrick Cloonan contributed. Katelyn Ferral is a Trib Total Media staff writer. Reach her at 412-380-5627 or [email protected].

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