CHICAGO -- Moody's Investors Service said yesterday it will assign at least an A1 long-term rating to any Minnesota school district that participates in the state's new credit enhancement program.

The rating agency also said that short-term notes eligible for the program would receive a MIG-1 rating, its highest short-term assessment.

Dina W. Kennedy, vice president and manager of the central region at Moody's, said the enhancement program is unique because the state is willing to advance its general fund revenues to help school districts avert potential defaults.

Minnesota's policy differs from credit enhancement programs in several other states, which withhold sufficient state aid to meet debt service payments.

Standard & Poor's Corp. last week said it would assign an AA rating to Minnesota school district general obligation bonds and an SP-1-plus rating to short-term notes eligible for the program.

The state's general obligation debt is rated Aa by Moody's and AA-plus by Standard & Poor's.

Officials from both rating agencies provided assistance to the state as it drafted the program.

Kennedy said that Moody's recognition of the program is dependent on an open appropriation from the state's general fund to avert any anticipated school district defaults, advance notification by the paying agent of a potential default, and the state's continued commitment to overseeing school districts.

She said that sound fiscal principles at the state and district levels are "critical" to the program.

In a press release, Moody's said it will assign a minimum rating of A1 to school district bonds only after a "comprehensive review of the issuing district's financial, economic, administrative and debt factors." If a district already has a rating higher than A1, the higher rating would apply, Moody's said.

Moody's currently has outstanding ratings on bonds for about 200 Minnesota school districts, Kennedy said. She said that 90.4% of the ratings are A or lower, indicating that the program could assist many school districts.

To participate in the program, a school district must file a school board resolution with the Minnesota commissioner of education.

Under the program, a school district must deposit its debt service payment with its paying agent three days before the payment is due, Kennedy said.

In addition, a school district is required to notify the state 15 days before a potential default, Kennedy said. If the school district fails to notify the state, the paying agent will contact state officials and request the amount needed to avoid a default. The state would then forward funds directly to the paying agent.

The state commissioner of finance would then authorize the education commissioner to make the payment directly to the paying agent. The school district is then required to pay back the state either through a reduction of state aid or from a required special levy outside of the districts' normal levy.

Stephen Sandberg, education finance specialist for the state Department of Education, said recently that the program will result in major savings for school districts. The districts are expected to issue about $400 million of bonds in fiscal 1994, which began July 1.

Sandberg said that, in many cases, a school district may save up to 50 basis points on bond sales through participation in the program. No school district in the state has ever defaulted on its debt service payments, he said.

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