Hillsborough schools’ credit rating takes a hit over spending

The Tampa Bay area’s largest school district has been slammed once again by a credit rating firm for unsound spending practices that have depleted its cash reserves.

In a recent notice, Moody’s Investors Service downgraded some of the bonds issued by the Hillsborough County School District and tagged the district with a negative outlook. According to a Moody’s guide, an outlook represents the company’s opinion on what direction an organization’s bond rating will take in the next few weeks or months.

Michael Kemp, the deputy superintendent charged with revamping the district’s finances, said Friday that leaders are bracing for similar actions by the other two primary bond rating firms, Fitch Ratings Inc. and Standard & Poor’s.

Credit ratings are important, as they affect the cost of borrowing money. In recent months, Kemp and district superintendent Addison Davis have taken steps to reduce the district’s employee head count, mostly through attrition and transfers.

The news coincided with other financial developments that are more encouraging.

Collections from the new half-cent sales tax to replace air conditioners and make other capital improvements did not fall as steeply as many had feared when the coronavirus pandemic shuttered area businesses last spring. Collections are about $4 million behind 2019 levels, and district operations chief Chris Farkas said that trend will likely hold.

The shortfall might even be lower than $4 million, he said Friday, addressing a committee charged with overseeing how the sales tax revenue is spent. To date, the tax has raised more than $227 million.

Farkas stressed that the money collected in the referendum is kept separate from other district money. He said projects including improvements to air conditioning systems and security will not be affected by the bond rating situation. Hillsborough voters, in a 2018 referendum, approved the tax to last 10 years, with hopes it will raise $1.3 billion.

There is also optimism about federal CARES Act funding to cover pandemic-related expenses. Officials say the money — more than $200 million for Hillsborough — can be used in a variety of ways, from reimbursing the district for high-end air filters in schools to academic programs addressing the learning losses that occurred when schools were closed.

The investment community, however, wants to see the district do a better job managing its regular operational spending.

In its Jan. 19 report, Moody’s noted that shrinking reserves have been a problem in the Hillsborough district for years.

The main reserve, which school districts call a “fund balance,” is on track to run of money out by summer if changes are not implemented. The authors wrote that “governance is a driver, as prior administrations have attempted and planned to correct structural imbalance, but ultimately failed.”

They noted that the district has new leaders, with Davis now at the helm as superintendent and the recent departure of longtime chief financial officer Gretchen Saunders.

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But, they wrote, “the negative outlook reflects the ongoing structural imbalance, which we expect will be difficult to remediate given the failure of prior attempts.”

Davis and Kemp have said the problem stems largely from Hillsborough’s reliance on grants to fund programs and initiatives. Jobs remain on the books long after the grant funding ends.

Critics of the district, and some School Board members, put the blame elsewhere. They have questioned executive hires and computer-based curriculum purchases that happened soon after Davis arrived last March.

In an email to School Board members, Davis said he anticipates more harsh reports from Moody’s because that firm is changing the way it formulates its ratings. As he explained, the reserve amount will be given a heavier weighting, which will likely hurt districts such as Hillsborough that are low on cash.