Wilkinsburg Borough School District, PA GO Debt Rating Raised To 'BBB+' On Improved, Stronger Finances; Outlook Positive

BOSTON (S&P Global Ratings) May 17, 2019--S&P Global Ratings raised its underlying rating (SPUR) on Wilkinsburg Borough School District, Pa.'s general obligation (GO) debt one notch to 'BBB+' from 'BBB'. The outlook is positive.
At the same time, S&P Global Ratings assigned its 'BBB+' long-term rating and positive outlook to the district's series 2019A and 2019B GO bonds.
The rating action reflects S&P Global Ratings' opinion of the steps the district has taken to improve financial operations, including closing two schools and reducing staff; the district achieved this by entering into an agreement with the commonwealth for additional aid and a partnership with Pittsburgh Public Schools. Subsequently, the district has produced two consecutive surpluses and grown total reserves to $178,000 from a negative $2.4 million in fiscal 2018.
The positive outlook reflects S&P Global Ratings' opinion reserves will likely continue to improve due to an expected $2.5 million surplus in fiscal 2019. The rating service understands the district intends to grow reserves to, at least, 8% of expenditures.
"We believe there is a one-in-three chance we could raise the rating further if management were to continue to restore and maintain reserves at levels we consider commensurate with higher-rated peers," said S&P Global Ratings credit analyst Steven Waldeck. "If fund balance were to increase, with management maintaining those higher levels, we could raise the rating further. If management cannot improve budgetary flexibility or balance the fiscal 2020 budget, however, we could revise the outlook to stable."
In S&P Global Ratings' opinion, due to actions taken to rectify structural imbalance, it expects the district will likely experience substantial fund-balance improvements. Management is currently projecting another sizable surplus in fiscal 2019 that will continue to grow reserves. The positive outlook reflects the district's ongoing revenue and expense monitoring to ensure operational balance during out-years.
The district's full-faith-and-credit GO pledge secures the GO bonds, subject to Act 1 Index limitations. The Act 1 Index under Pennsylvania commonwealth statute restricts a district's ability to raise the tax levy above a certain level, which the Pennsylvania Department of Education determines. Despite these limitations, S&P Global Ratings did not make a rating distinction for the limited-tax GO pledge for several reasons, including the district's ability to raise its tax levy above the annual Act 1 Index limit by requesting its exception, from the commonwealth, from higher pension contributions and special-education costs. In addition, the limitation is on levy increases rather than a hard millage cap.
S&P Global Ratings understands officials intend to use series 2019A bond proceeds to refund series 2012 GO bonds for interest savings with no maturity extensions and 2019B bond proceeds to finance various school building capital projects.
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