Erie City School District, PA 'BBB-' GO Rating Outlook Revised To Stable From Negative On Improved Finances

CHICAGO (S&P Global Ratings) March 22, 2019--S&P Global Ratings revised its 
outlook on Erie City School District, Pa.'s general obligation (GO) bonds 
outstanding to stable from negative, due to the district's improved financial 
performance in fiscal 2018, which has helped stabilize the district's 
financial position in the near term. 

At the same time, we assigned our 'BBB-' rating and stable outlook to the 
district's series 2019A, 2019B, and 2019C general obligation bonds. 

We also affirmed our 'BBB-' rating on the GO debt outstanding and our 'A/A-1' 
rating and 'BBB-' underlying rating (SPUR) on Butler County General 
Authority's series 2011 variable-rate demand revenue bonds, issued for the 
district. 

The district has a long history of weak financial performance and structural 
imbalances, ultimately resulting in its placement on Financial Watch Status 
(FWS) by the state in 2016. Over the past several years, the district has 
taken substantial steps to structurally balance the budget, including 
eliminating 350 positions and closing six schools. Despite this, the district 
continued to experience operating deficits and lose students to charter 
schools, which placed an additional financial strain on the district. A weak 
economy also played a large role in the district's inability to generate 
enough revenue to keep pace with rising expenditures.  

However, since the district was placed on Financial Watch Status it has 
adopted new debt management, investment, and fund balance policies and drafted 
comprehensive long-term financial and capital plans to help return the 
district to long-term financial stability. It also received an additional $14 
million in state aid in fiscal 2018, which will be added to its base funding 
going forward, providing much needed revenue for the district. This additional 
state aid, coupled with savings from school consolidations, helped the 
district experience a $22.5 million surplus in fiscal 2018 and improve its 
general fund balance to $8.1 million, or 4.3% of general fund expenditures. 
The district was also able to transfer $15 million to its capital projects 
fund to begin saving for upgrades to district facilities. While we believe 
these changes have helped stabilize the district's finances in the near term, 
in our view, the district continues to face significant uncertainty regarding 
its ability to stabilize charter school enrollment and maintain structural 
balance over the long-term. 

Proceeds from the 2019A bonds will be used to finance improvements to various 
district facilities. The 2019B proceeds will be used to current refund the 
district's series 2009 bonds and fund termination payments for the district's 
fixed payer swaps. While 2019C proceeds will be used to current refund the 
district's series 2011 variable-rate demand revenue bonds. 

The district's limited-tax bonds are secured by the full faith and credit 
pledge of the school district. The Act 1 Index under Pennsylvania commonwealth 
statute restricts a district's ability to raise the tax levy higher than a 
certain index, which the Pennsylvania Department of Education determines. 
Despite these limitations, we rate the limited-tax bonds on par with the 
district's general creditworthiness, as reflected in the GO rating, with no 
notching because we believe that the district's resources are fungible and 
that its ability to repay the debt has close ties to its general operations. 
The district's unlimited-tax bonds are not subject to Act 1 limitations. 

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