Moody's: Clark County School District reorg presents uncertainty, possible credit risk

Here's the report from the credit rating service, Moody's, in reaction to the Cark County schools deconsolidation bill signing:

Local Government Clark County School District, NV Reorganization Poses Uncertainty, a Credit Negative

Last Thursday, Nevada (Aa2 stable) Governor Brian Sandoval signed legislation that requires a reorganization of the Clark County School District (A1 stable) into smaller entities by July 1, 2018. The law calls for advisory and technical committees to develop a plan for the reorganization and to study the impact on the district’s financing. Because the details of the reorganization and its implementation have yet to be developed, we are uncertain how it would impact the credit quality of the district’s outstanding debt, and future borrowings post-reorganization. This uncertainty is a credit negative.

The law allows for the creation of “local school precincts” within the boundaries of the Clark County School District. The number and boundaries of these precincts are not specified, nor are the specific duties of the precincts or the residual duties of the district; the district appears likely to provide certain unspecified centralized services and functions. Among the issues identified in the law before the advisory and technical committees are the issuance of bonds and their repayment. Based on our understanding, actions by the state cannot impair the contract between an issuer and bondholders. Therefore, we expect that currently outstanding bonds will be paid from taxes generated from the current tax base of the Clark County School District, as well as other pledged revenues (which include real estate transfer taxes and hotel room taxes).

However, the structure by which revenues will flow to pay debt service is uncertain. Additionally, other aspects of credit quality, including financial operations, management, and governance could be affected by the reorganization. It is unclear what impact, if any, the new legislation will have on the district’s near-term capital and financing plans. In early March, Governor Sandoval approved legislation allowing Nevada school districts to issue debt without voter approval over a 10-year period, provided debt service requirements can be met under existing tax rates. At that time, Clark County School District officials conservatively estimated they could generate $4 billion in bond proceeds over the next decade and initially replace two elementary schools, build 12 additional schools, and add capacity to 40 existing schools by 2018. The district currently has $2.5 billion in general obligation limited tax bonds (GOLT) outstanding. Final maturity for the district’s existing bonds is in fiscal year 2028.