DeSoto Independent School District, TX Debt Rating Lowered To 'A' On Weaker Liquidity; On Watch Negative

DALLAS (S&P Global Ratings) Feb. 5, 2019--S&P Global Ratings lowered its 
underlying rating to 'A' from 'A+' on DeSoto Independent School District 
(ISD), Texas' general obligation (GO) and limited-tax debt. At the same time, 
S&P Global Ratings has placed its 'A' underlying rating on CreditWatch with 
negative implications.

"The downgrade reflects our view of the district's weakened liquidity position 
that has necessitated the issuance of tax and revenue anticipation notes 
(TRANs) in November 2018 to pay for operational expenses, including salaries," 
said S&P Global Ratings credit analyst Stephen Doyle. These cash-flow 
pressures have largely resulted from prior tax rate mismanagement that led to 
a cash shortfall in the general fund. To ensure timely debt service payments, 
the district transferred cash to the debt service fund from the general fund 
in August 2017 and 2018. This resulted in the general fund's weakened cash 
position. We understand the district will need to borrow additional funds in 
April of this year to fund operational costs for the same reason. 
Additionally, the district will likely need to restructure its current debt 
obligations to provide near-term relief, particularly regarding its Aug. 15, 
2019 debt service payment.

"The CreditWatch placement reflects our view that there is at least a 
one-in-two chance that we could lower the rating within the next 90 days," 
said Mr. Doyle. Within the next 90 days, we anticipate learning more regarding 
the district's plans to address the current financial situation. We could 
lower the rating further if the district is unable to address its liquidity 
pressures and continues to rely on cash-flow borrowing to fund operations. 
Additionally, if fund balance is projected to materially decline and remain at 
levels weaker than what we view as strong as a result of the cash-flow 
pressures, to a level that we believe is no longer commensurate with the 
current rating, we could lower the rating. 

Unlimited-tax revenue from a levy on all taxable property in the district 
secures the GO debt. 

DeSoto ISD is a suburban school district roughly 15 miles south of downtown 
Dallas. The district benefits from its location near Dallas, with increasing 
enrollment and a growing tax base. It relies on state funding as its largest 
revenue source given its property wealth, however. Financially, the district 
has maintained reserves that we view as strong or very strong in recent years, 
but we believe that recent fiscal mismanagement may lead to a decline in 
reserves during the next two fiscal years. The district's debt burden remains 
high to moderately high.
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