Bond agencies give school bailout mixed grades

S&P affirms A-plus rating

Fitch likely to lower score

March 30, 2004|By Laura Vozzella | Laura Vozzella,SUN STAFF

One New York bond-rating agency says it has been reassured about Baltimore's decision to lend local schools $42 million, while another is still threatening to downgrade city bonds over the bailout.

Standard & Poor's affirmed the city's A-plus bond rating Friday after Baltimore officials outlined a preliminary plan to put the schools on firmer financial footing while still getting most of the loan paid back by August.

The plan includes establishing a new budgeting process, requiring monthly financial reports to city officials, cutting staff and creating a financial advisory committee, whose members were announced yesterday.

"It's pretty extensive," Baltazar Juarez, an analyst with Standard & Poor's, said yesterday. "They've already had some cost savings. As reported to us, year-to-date '04, 800 positions have been eliminated. That's pretty significant."

But officials at Fitch Ratings, who also were briefed on the plan, have kept the city on a "negative watch," meaning the agency is likely to lower the city's rating.

"We're reviewing the situation, and that's where we stand," said Joe Mason, a Fitch analyst.

Fitch issued the warning March 9, the day after city officials abruptly scrapped a proposed $42 million state loan and came up with a bailout of their own. The city loan, which was made last week, drained all but $14.2 million from Baltimore's $56.2 million rainy-day fund.

With schools about to run out of cash, the money will cover teachers' paychecks and keep classrooms open through the end of the academic year. But even after it weathers its $58 million cash-flow problem, the school system will have a separate $58 million deficit.

Most of the loan -- $34 million of it -- will have to be paid back by August, with the remaining $8 million due in June 2006.

Standard & Poor's, Fitch and a third agency, Moody's Investors Service, initially expressed concern that the city would have to extend more loans to keep the schools afloat.

If the agencies downgraded Baltimore's bonds, borrowing would become more expensive for the city, which has about $564 million in outstanding general obligation bonds.

While they do not welcome a downgrade, city officials have said the financial impact would not be great. If the bonds dropped one rating point, Baltimore would pay $44,000 more in annual interest on the $45 million in bonds to be issued in May, Steve Kearney, spokesman for Mayor Martin O'Malley, has said.

Lisa Cole, an analyst with Moody's, said yesterday that her agency is waiting for the schools to finalize a financial recovery plan before taking any action. The plan is due May 30, she said.

"We're waiting to see what the plan is," she said.

Kenneth Gear, a Standard & Poor's analyst in Washington who covers Baltimore, said he was reassured by the preliminary plan.

"Based on what was represented to us, this is not meant to be a revolving line of credit for the school system," he said. "The plan they presented to us seems workable and reasonable."

But Juarez noted that Standard & Poor's still plans to keep a close watch on the situation and might downgrade city bonds "if this does turn into a revolving loan" or the city's financial commitment to the schools increases.

"Should that happen, it would be more of a concern for us," Juarez said.

The recovery plan calls for creation of a Fiscal Operating Committee, an advisory panel that will make recommendations to the school board until the loan is repaid. The board will still have the final say.

O'Malley announced the committee members yesterday: city Finance Director Peggy J. Watson, CitiStat Director Matthew Gallagher and school board member Ralph Tyler.

Also named were two nonvoting members representing state Superintendent Nancy S. Grasmick and the City Council: Mary Clapsaddle, assistant state superintendent for business services; and Beatrice L. Tripps, chief of staff for council President Sheila Dixon.

City officials say they have not been waiting for formation of the advisory committee to start helping the school system sort out its finances and look for cost savings.

Watson has been working closely with Rose Piedmont, the school system's chief financial officer. And Michael R. Enright, first deputy mayor, goes to school headquarters at North Avenue regularly, along with analysts from CitiStat, the mayor's system for monitoring municipal performance.

They are looking at overtime, the number of employees who are absent or on light duty, and management of school system vehicles, among other areas, Enright said.

"We're seeing a lot of the same patterns of inefficiencies that we saw when we began CitiStat almost four years ago," Enright said. "They're obstacles but they're manageable."

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