CHICAGO - Standard & Poor's Corp. officials said yesterday they will assign an AA rating to Minnesota school district general obligation bonds and an SP-1 plus rating to school district short-term notes eligible for the state's newly created credit enhancement program.
The state's GO rating from Standard & Poor's is AA-plus.
The School District Credit Program, approved by the Minnesota Legislature earlier this year, is designed to correct potential school district defaults. It is especially attractive to school districts whose ratings are below that of the program rating, Standard & Poor's said in a press release.
"It's an attractive way of raising low-cost capital," said Joe O'Keefe, a director at Standard & Poor's. He said the vast majority of the participants win likely be unrated issuers or issuers with ratings below AA.
O'Keefe said Standard & Poor's is currently reviewing several school district bond issues that will participate in the program. The added security will figure into the agency's ratings, he said.
All 398 school districts in the state are eligible for the program. State finance commissioner John Gunyou said he thought all districts will participate. "It will make a difference for every district," Gunyou said. "It's a state pledge to step in and make bond payments if there's an expected default. It's not a GO pledge per se, but it's a form of insurance."
Kathleen A. Quail, an associate director at Standard & Poor's, said Minnesota's credit enhancement program stands out among the 18 other similar state programs the company rates because it is backed by a standing appropriation from Minnesota's general fund.
By contrast, credit enhancement programs in many states, including Pennsylvania and Indiana, are funded by withholding state aid to participating school districts.
Quail said Minnesota officials consulted with Standard & Poor's as the state drafted the program over the last year.
Stephen Sandberg, education finance specialist for the state Department of Education, said the program will result in major savings for school districts, which are expected to issue about 400 million of bonds in fiscal 1994.
Sandberg said school districts may save up to 50 basis points on bond deals through participation in the program. To participate, a school district must file a school board resolution with the state commissioner of education.
One of the key requirements of the program is that a school district must deposit its debt service payments with its paying agent three days before the payments are due, Sandberg said.
The school district is required to notify the education commissioner of a potential default three days before debt service payments are due. The state commissioner of finance would then authorize the education commissioner to make the payments. Sandberg said no school district in the state has ever defaulted on its debt service payments.
Once a school district elects to enter the program, it cannot drop out if any debt obligations assumed under the program are outstanding.