Fitch Ratings has affirmed the 'AA-' rating on the Kentucky School Aid Intercept Program.
The Rating Outlook is revised to Negative from Stable to reflect the Negative Outlook on Kentucky's appropriation backed debt, to which this rating is linked.
SECURITY
State aid intercept - state department of education is obligated to intercept school aid payments to make debt service payments in a timely manner.
KEY RATING DRIVERS
STATE INTERCEPT: The rating is based on the state's obligation to intercept school district aid in a timely manner.
LINKED TO APPROPRIATION: Administrative, structural and legal protections provide credit enhancement for qualifying school district debt at a level on par with the commonwealth's appropriation-backed debt.
TIMELY MECHANISM: Program mechanics allow sufficient time for state funds to be made available to pay debt service by the debt service payment date.
CREDIT PROFILE
Fitch will assign an 'AA-' rating, Negative Outlook, to Kentucky school district lease rental bonds qualifying for participation in the School Credit Enhancement Program. The rating is based on the state's obligation to intercept school district aid in a timely manner. School district bonds subject to the intercept may be issued directly by a school district or through the Kentucky School Facilities Construction Commission.
The state department of education (DOE), which administers the intercept program and distributes state aid, maintains a high level of control of local school district financial operations. All school district bond issues, and related financial, educational, and construction plans, are subject to DOE approval prior to issuance. The DOE also receives and reviews local school district budgets and audits. A budget found to be financially unsound or failing to provide for sufficient payment of debt service or rental payments, per DOE policy, will be disapproved. If found to maintain unsound finances or operations, the district may be placed on a one-year warning, with the possibility of a second one-year warning if the practices continue. If a district remains in noncompliance for a third year, the DOE reserves the right to transfer control of school operations from the local school board to the state, a measure that has been implemented in the past. Kentucky School Facilities Construction Commission (KSFCC) operates as the financing corporation for eligible school districts. On those financings the KSFCC makes lease rental payments to the paying agent. The KSFCC reviews audited financial statements and supervises districts' financial operations.
Program mechanics allow sufficient time for state funds to be made available to pay debt service by the debt service payment date. Moneys for debt service are to be remitted by the local school district to the paying agent 10 days prior to the debt service payment date. The paying agent must notify the DOE if moneys are not received three days before the payment date. The DOE must intercept any state funds due to the district to cover the required payment on the bonds and remit it to the paying agent. In the case of financings by the KSFCC, the KSFCC must notify a participating school district 30 days prior to the debt service payment date. If a participating school board fails to pay debt service and administrative costs when due, the KSFCC will notify and request the DOE to withhold any state funds due to the district to cover the required payment on the bonds and remit it to the KSFCC for payment to the paying agent.
All school districts are covered by the intercept when they issue lease revenue bonds according to state statute. The enhanced rating can be applied if there is 1.25 times (x) coverage of historical annual school aid to pro forma maximum annual debt service and debt service payment dates are set such that available school aid is expected to be sufficient to meet debt service payments.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'Rating Guidelines for State Credit Enhancement Programs', dated June 19, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681239
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