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St. Charles I.S.D. 858, MN -- Moody's assigns UND A1 and ENH Aa2 ratings to St. Charles ISD 858, MNs GO Bonds and A3 to COPs

·14 min read

Rating Action: Moody's assigns UND A1 and ENH Aa2 ratings to St. Charles ISD 858, MNs GO Bonds and A3 to COPs

Global Credit Research - 07 Jan 2021

New York, January 07, 2021 -- Moody's Investors Service has assigned an A1 underlying and Aa2 enhanced rating to St. Charles Independent School District 858, MN's $3.4 million General Obligation Capital Facilities and Facilities Maintenance Bonds, Series 2021A. We have also assigned an A3 rating to the district's $1 million Certificates of Participation, Series 2021B. Concurrently, we have affirmed the A1 rating on the district's outstanding general obligation unlimited tax (GOULT) bonds. Post-sale, the district will have $28.9 million in rated GOULT debt and $1 million in rated certificates of participation (COPs) outstanding.

RATINGS RATIONALE

The A1 general obligation rating reflects the district's moderately-sized tax base located near Rochester, MN (Aaa Stable) and above average resident income and wealth. The rating also reflects narrowed fund balances that we expect to improve due to solid operational performance and the completion of planned draws on reserves for capital expenditures. We expect that the district's debt burden will remain above average due to a below average amortization of outstanding principal. The rating also factors in the district's unfunded pension liability, which will remain elevated.

The A3 rating on the certificates is notched two off the general obligation rating because of the risk of annual non-appropriation and the less essential nature of the pledged asset (undeveloped land).

The enhanced rating on the current bonds reflects the additional security provided by the State of Minnesota's School District Credit Enhancement Program. The Aa2 enhanced programmatic rating is notched once from the State of Minnesota's Aa1 general obligation unlimited tax (GOULT) rating, and the enhancement program carries a stable outlook, reflecting the stable outlook on the State of Minnesota. The enhanced rating reflects sound program mechanics and the State of Minnesota's pledge of an unlimited appropriation from its General Fund should the district be unable to meet debt service requirements. The program's mechanics include a provision for third party notification of pending deficiency. If the school district does not transfer funds necessary to pay debt to the paying agent at least three days prior to the payment due date, the state will appropriate the payment to the paying agent directly. Moody's has received a copy of the signed program applications.

We regard the coronavirus outbreak as a social risk under our ESG framework. We do not see any material immediate credit risks for the district at this time from the coronavirus pandemic given related expenditure savings and CARES and state relief funding.

RATING OUTLOOK

Outlooks are not typically assigned to local government with this amount of debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-Material expansion and diversification of tax base

-Significant moderation of debt burden

-Upward movement in the state's GO rating (enhanced)

-Upward movement in the district's GO rating (certificates of participation)

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-Enrollment declines

-Failure to improve fund balances

-Increase in debt burden

-Weakening of MSDCE program mechanics (enhanced)

-Downward movement in the state's GO rating (enhanced)

-Downward movement in the district's GO rating (certificates of participation)

LEGAL SECURITY

The district's GOULT bonds are secured by the district's full faith and credit and pledge to levy a dedicated property tax unlimited as to rate and amount. Minnesota local governments' general obligation bonds are secured by statute, under state law. The Series 2021A bonds are additionally secured by the State of Minnesota's School District Credit Enhancement Program, which provides for an unlimited advance from the state's General Fund should the district be unable to meet debt service requirements.

The Series 2021B certificates of participation are secured by lease payments, subject to annual appropriation.

USE OF PROCEEDS

Proceeds from the 2021A GOULT bonds will finance the acquisition and betterment of school sites including an artificial turf soccer field, parking lot improvements and deferred maintenance projects included in the district's ten-year facility plan.

Proceeds from the 2021B COPs will finance the acquisition of undeveloped land adjacent to a school within the district.

PROFILE

The district serves St. Charles, a predominantly residential community located 25 miles east of Rochester (Aaa stable) in southeastern Minnesota. The district employs a staff of 183 and provides kindergarten through twelfth grade education for about 1,004 students. The district's population totals approximately 6,100 residents, a figure that has been gradually growing for the last three decades.

METHODOLOGY

The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. The principal methdology used in the enhanced rating was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maxwell Brekke Lead Analyst Regional PFG Chicago Moody's Investors Service, Inc. 100 N Riverside Plaza Suite 2220 Chicago 60606 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Helen Cregger Additional Contact Regional PFG West JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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