When the federal credit rating took a hit last week, it got knocked down to the Charleston County School District’s level — stable, but not ironclad. The State of South Carolina, meanwhile, maintained its pristine AAA rating, but with reservations.
For those of you still scratching your heads over the federal debt crisis, here’s a quick primer: When the government doesn’t have enough tax money to pay for something it wants to buy (say, Medicare, war, or a $600 gold hammer), it sells debt obligations. In a debt obligation, someone agrees to give the government money with the understanding that it will be paid back with interest by a set date. Usually, this is a foolproof investment, albeit with small returns. But if the government ever fails to pay back a debt obligation, or if the government finds itself on shaky financial footing, credit rating agencies like Standard & Poor’s take notice and downgrade the government’s credit rating on a scale of AAA to CC. Last week, Congress came dangerously close to defaulting on its debt, holding off until the last possible minute to raise the “ceiling,” or maximum amount of allowable debt.
For all the fuss over the downgrade, AA+ ain’t half bad. In S&P’s rating definitions, an entity with a AA rating “has very strong capacity to meet its financial commitments” and “differs from the highest-rated obligors only to a small degree.” In Charleston, the school district’s credit rating has been AA for as long as Chief Financial and Operations Officer Michael Bobby can remember, and he talks about it as a point of pride.
There is a remote possibility, though, that the federal downgrade could start a domino effect that would hurt the district’s credit rating, leading to higher interest rates on debt obligations, which would lead to a greater burden on the taxpayers for the same amount of school funding. Between the federal and county levels, the state of South Carolina narrowly escaped a downgrade from AAA to AA on Monday. S&P had threatened to knock the state out of the top tier if the federal government defaulted on its debt, citing as a weakness the state’s heavy reliance on Medicaid. When the federal government finally raised its debt ceiling to avoid defaulting on its debt, the state got a pass, but with a note that S&P had a negative outlook for the state’s future as a AAA debtor.
So what does any of this mean at the level of the classroom? Not much, at least in the short run. But in the long run, the district could have trouble funding capital improvements, like the 23 school renovation and construction projects that are planned for the next five years. The $800 million for these projects is coming partly from the one-cent sales tax that passed last year, but it’s also partly coming from those debt obligations. The district sold $10 million worth of obligations this spring and $17 million in a previous round.
But with the economy still slumping and consumers not spending like they used to, the penny sales tax is not raking in as much dough as Bobby had planned for. Already, after only three months of collections, revenues are $3.3 million short of the $19.4 million that the district had planned on getting by now. Bobby says this does not mean the district will immediately sell more debt obligations, but if the trend continues for 10 months or so, the district might have to rethink its financial game plan.
In coming years, the district will actually be unable to increase its debt obligations beyond pre-planned levels. The state sets a limit on the total amount of debt a school district can issue at 8 percent of the value of all its buildings and properties. Already, for the years 2014 and 2015, the district plans to issue the maximum allowable amount of debt.
Even in the midst of credit setbacks at the state and federal levels, Bobby remains optimistic that the school district can actually improve its credit rating to the coveted AAA level, which would mean lower interest rates and less of a burden on taxpayers. A key to that, he says, is maintaining a healthy fund balance, which is like the school district’s savings account. If the district is constantly drawing from that balance to keep the doors open and the Smartboards clicking, it looks bad to credit raters. But if S&P sees that the district is putting money away for the future, it could bode well for the rating. Some things are beyond the district’s control, though: If state government were to lower the 8-percent debt limit, for instance, the district would find itself in a tight spot and have to spend from the fund balance.
As for the potential domino effect from the federal to state to county level, Bobby is optimistic about that too.
“We don’t think it will happen,” Bobby says. “But it’s possible.”