Gmail - Bond ratings downgrade

https://mail.google.com/mail/u/0/?ui=2&ik=410cd11679&view=pt&q=k...

William Gavette <wmgavette@gmail.com>

Bond ratings downgrade

Karen Rowden <krowden@lapeerschools.org> To: William Gavette <wmgavette@gmail.com> Thu, Jul 5, 2012 at 3:42 PM

Bill, Here is a response to your ques on from Kevin Rose:

Matt and I have been working with Standard and Poor's during the last month or so to have input on their rating process and to provide input on the current facts associated with our District. Rating agencies typically operate almost 2 years behind the current financial situation due to the fact that they rate in June of the year and that they typically only use actual financial statement results. Thus, our analyst, Soman Desi, was primarily focused upon our past 3 years of reduction in Fund Balance (from a high of over 9 Million) and on student decline. These are the primary factors that S&P is currently using in rating Michigan schools. He also asked about the use of Fund Balance for 2011-12. Soman indicated that most school districts in Michigan would experience a rating decline this year as a result of State funding, use of Fund Balance to finance operations, and declining enrollment.

During our initial rating review with Soman, he indicated he was looking at a 2 level reduction in the rating and a "Negative" outlook. They are focusing on the reduction in State Aid last year and student decline, as well as how the District is dealing with those factors. Over the past 30 days, we demonstrated to him that the District was indeed dealing with BOTH the excess expenditures over our Revenues (declining Fund Balance) as well as addressing the declining enrollment. We highlighted the Strategic Plan initiatives which right-sized our district for declining enrollment as well as the Virtual Academy, which will attract new and previously un-served residents. We also discussed in great detail the 2012-13 balanced budget. After several sessions, the final rating was determined and a single level decline with no "negative" outlook was issued. This was due primarily to the Board's actions during the past year. He also indicated that if these 2012-13 objectives are met, that the rating would most likely return to it's previous high rating next year.

This should have no immediate impact on our current rating. The District obtains funds in 2 primary areas, Bond Issues and Operating/Cashflow loans. Our Bond issue rates are locked in for the 2007 bond issue for the duration of the remaining term (approx 24 years). In addition, our current method of utilizing the Michigan Municipal Bond Authority (MMBA) for our short-term (cashflow) borrowing, utilizes the State of Michigan's Bond rating to determine the interest rate. However this rating down-grade will affect future Bond Issues, alternate methods of short-term borrowing, as well as any installment borrowing (such as Energy Notes/Bonds). These will be at an increased cost.

In summary, I believe that most of the districts in Michigan with declining enrollment and a declining Fund Balance will experience a downgrade in rating from S&P this year. However, I believe that S&P has recognized the Board's actions toward effectively dealing with these difficult issues and is prepared to restore our rating next year based upon these anticipated actions.

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7/15/2012 3:53 PM

Gmail - Bond ratings downgrade

https://mail.google.com/mail/u/0/?ui=2&ik=410cd11679&view=pt&q=k...

Karen Rowden 810-538-1604 Secretary to the Board of Educa on and Administra ve Assistant to the Superintendent

From: William Gavette [mailto:wmgavette@gmail.com] Sent: Sunday, July 01, 2012 2:37 PM To: Karen Rowden; Matt Wandrie; Kevin Rose Subject: Bond ratings downgrade
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7/15/2012 3:53 PM