Mercer Island School District under threat of credit downgrade

Mercer Island School District Superintendent Gary Plano said Friday that the district has been notified by Moody's Investment Services that it will undergo a credit review in the event of a downgrade of the U.S. government's credit rating.

David Jacobson, spokesperson with Moody's in New York City, said the credit rating firm placed King County District 400 (MISD) on review for a possible downgrade. He said Moody's deemed all Aaa-rated entities more vulnerable in the event the U.S. sovereign is downgraded.

"Because of this current debate, the U.S. was put on review in case of default on July 13," Jacobson said. "What we announced then was that we were going to review all Aaa-rated states, nonprofits, state housing entities and local governments, and Mercer Island was one that fell onto that list.

"This is not a downgrade, Plano said in a press release. "The Moody's notification (to us is because we are within a region) with 'high federal employment' and 'high economic dependence on federal activity,' which presumably includes the Puget Sound area because of its military facilities and regional federal headquarters," Plano said.

The underlying rating for MISD had been Aa1 from 2001 through 2009. On April 23, 2010, Moody’s upgraded the district credit rating to Aaa, the highest rating available to any borrower.

"When we were selling bonds, we were rated Aaa," Plano said. The last time the district sold any bonds was in 2008. MISD has $24 million in debt.

"Moody's indicated that it will evaluate each of the listed local governments separately," Plano said. "It appears there would not be automatic downgrades for the local governments and school districts. While a federal government downgrade and partial shutdown would be damaging to our economy, we believe the district would fare well in a thoughtful credit evaluation."

Plano said the district receives limited federal money and their tax base is much less affected by the spending of federal employees than is true of many other regions.

Plano emphasized the importance of Congress dealing with the debt ceiling issue immediately and in a manner that resolves the issue for a significant time period in light of the district’s forthcoming facilities plan to deal with student enrollment and educational program needs.

State entities that are on the watch list include the University of Washington, with $1.3 billion of debt affected. UW is the only Aaa-rated university that Moody's placed on review for a possible downgrade.

According to Moody's, "This action primarily reflects UW's unusually large share of revenues derived from federal research grants and Medicare and Medicaid reimbursements.

"Our review in the event of a U.S. government downgrade would focus on UW's ability to maintain balance sheet reserves and operating cash flow while reducing expenses or increasing revenues in response to potentially significant federal funding cuts," said John Nelson, managing director for health care, higher education and not-for-profits.

At press time there had still been no conclusive vote in Congress, but progress was being made. Jacobson said nothing should be assumed at this point as to whether or not MISD will be pulled from review.

"We don't assume here," he said.

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