Moody's Downgrades Unit 5's Credit Rating

Apr 6, 2021

Ratings agency Moody’s Investors Service has downgraded Unit 5’s credit rating as part of a new grading system that is affecting hundreds of school districts across the country.

School district officials say the change will have no immediate impact.

Moody’s dropped Unit 5’s rating from Aa2 to Aa3. Moody’s described the district’s financial position as “solid,” but said the district receives “substantial support for its contributions to an underfunded teacher retirement system.”

Marty Hickman, Unit 5’s chief financial officer, noted Illinois lawmakers have discussed a cost shift to make school district’s responsible for paying a greater share of retirement costs.

“I don’t know what those would be, but I can tell you from our current finances, we don’t have the funds in the budget to be able to cover something like that,” Hickman said.

The school district approved an annual budget is September that has structural deficit of $12.5 million.

Moody’s also suggested a boost in enrollment could help the district’s credit rating. Hickman views the characterization as unfair. considering this year’s enrollment drop could be at least partly tied to the coronavirus pandemic, and the district’s finances aren’t tied to enrollment as closely as they once were. 

“That’s a negative mark for us, however, these days with evidence-based funding, enrollment is not as big a factor in the state funding as it used to be,” Hickman said.

Unit 5’s enrollment has dipped every year since 2017, but Hickman said the district projects enrollment to be steady in the coming years.

He said the revised rating won’t impact the district because it only impacts the district’s current debt, which stands at $81.2 million. The district plans to issue bonds next month for building projects, including a new roof at Normal Community High School and a new HVAC system at Chiddix Junior High, but Hickman noted those Life Health Safety bonds will be sold through private placement, so they won’t get a credit rating.

Moody’s also dinged Unit 5 for using the cash-based accounting method that counts revenue and expenses when the money changes hands.

Hickman said the district could explore a move to the accrual method that counts revenues and expenses when they occur, but added it would likely cost the district more to transition to a new accounting system.

He suggested most school districts use the cash accounting method, though the accrual method is considered among Generally Acceptable Accounting Principles (GAAP).

Hickman added the district isn’t currently discussing the possibility of a property tax referendum. The school board has weighed a referendum in recent years, but Hickman noted the school board will soon have three new members who may wish to explore a referendum, or other ways to address the district's deficit. 

Moody’s announced earlier this year it was changing its rating methodology for K-12 school districts to score them differently than how it rates local government debt.

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