Analysts sounded alarms months ago on Hillsborough school finances

Now the investment community is paying attention as the district tries to balance its budget.
Romaneir Johnson, chief financial officer for the Hillsborough County School District, addresses the School Board about its financial picture on April 27.
Romaneir Johnson, chief financial officer for the Hillsborough County School District, addresses the School Board about its financial picture on April 27. [ DIRK SHADD | Times ]
Published May 3, 2021

As Hillsborough County school leaders scramble this week to get the district’s finances in order before a May 12 state deadline, they’ll be addressing issues that outside experts have been warning about for months.

Three recent reports from bond rating firms confirm what district administrators have been saying since last summer: The system must find more solid financial footing by spending less.

In addition to the threat of a financial takeover by the state, Hillsborough could find itself at a disadvantage when it needs to borrow money. Already, the three firms — Moody’s, Fitch and Standard & Poor’s — have lowered ratings on the district’s outstanding debt. That means the bonds investors buy as a way of lending the district money are no longer as attractive, which raises borrowing costs.

Ratings have been lowered for “certificates of participation,” instruments that serve collectively as a giant mortgage on the district’s newer schools.

All three reports acknowledge the challenges posed by COVID-19. But they also express uncertainty about the district’s ability to lower its spending long-term. The writers noted that, for the first time, the district took out a short-term bridge loan of $75 million this past year to ensure it could make payroll as it waited for property tax payments from the state.

That bridge loan was repaid. But the action troubled the analysts anyway, and Standard & Poor’s considered it “a negative credit factor.”

The district and School Board hope to have a recovery plan in hand that they can approve on Thursday. State Commissioner of Education Richard Corcoran has given Hillsborough the May 12 deadline, warning that if there is no resolution by then, the district might be placed in a financial receivership. That means the state would order a forensic audit and appoint a financial advisory board to oversee spending.

The three most recent reports are linked below, along with key passages.

Fitch: a ‘structural budget imbalance’

“The negative rating watch reflects Fitch’s concern with the progress of the formulation of a financial recovery plan to correct the current and future years’ structural budget imbalance,” the authors wrote on April 29.

The removal of the negative rating watch “is dependent on the presentation of a board-approved financial plan for at least the current and following fiscal year that outlines expenditure saving measures as well as potential recurring new revenue sources that, in aggregate, Fitch considers credible to ensure maintenance of at least a 3 percent general fund balance,” meaning the reserve.

While $400 million in federal COVID-19 relief aid could solve an immediate problem, “these moneys are non-recurring and Fitch does not believe they should be relied upon to eradicate existing structural budget gaps.”

Without policy action, “Fitch expects the natural pace of spending to exceed revenues,” which will prolong the crisis and lead to more downgrades.

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Standard and Poor’s: a history of overspending

“The outlook is negative,” the authors wrote on April 13.

By S&P’s calculation, reserves dropped to 4 percent of expenditures in the year that ended in summer 2020. That’s down from a range of 6 percent to 7 percent between 2015 and 2019. There is “at least a one-in-three chance we could further lower the rating if there are additional declines in reserves” to a level below the state-mandated 3 percent.

The district’s new leadership team is “focused on restoring structural budget balance... through a series of cost-cutting measures that aims to realign recurring revenues with recurring expenses.”

But the district has a long history of overspending, even after efficiency measures — including a revised bell schedule — that took effect under former superintendent Jeff Eakins.

The authors note that struggles persist even though Hillsborough has two new sources of revenue for its construction and capital needs: A half-cent sales surtax that voters approved in 2018 and the county’s higher impact fees, which housing developers pay toward the cost of schools to accommodate new residents.

They blame the past year’s $32.3 million deficit on “salary and benefit increases, unanticipated costs related to COVID-19, and revenue reductions resulting from COVID-19 for fee-based programs such as after-school care and athletics.” They credit the district for taking positive action in cutting overtime and travel.

They believe it is “unlikely” that the state government will declare a financial emergency. But if that does happen, “we would view that as a negative credit factor that could potentially lower the rating by multiple notches.”

Moody’s: a narrow cash position

The firm downgraded Hillsborough’s issuer rating on the certificates of participation from A2 to A1 on Jan. 21.

Credit strengths, the Moody’s team wrote, include Hillsborough County’s very large and diverse tax base, low debt burden and fixed costs.

Its challenges, they continued, include a “very narrow general fund cash position,” the expected continuation of a “structural imbalance” in its operating budget, and wealth levels in Hillsborough that are below the national median.

Like those at the other two firms, the analysts at Moody’s cautioned against relying too heavily on federal COVID-19 relief funds, as these are “one-time revenues and will not eliminate the ongoing structural imbalance.”