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Rating Action:

Moody's downgrades Bethlehem-Center School District, PA's Issuer & GOLT to B1; Affirms A2 enhanced rating; outlook remains negative

19 May 2021

New York, May 19, 2021 -- Moody's Investors Service has downgraded Bethlehem-Center School District, PA's issuer and general obligation limited tax (GOLT) ratings to B1 from Ba1 and affirmed its outstanding enhanced state aid intercept (fiscal agent) rating at A2. The district has $16.3 million of net direct debt outstanding. The outlook is negative.

RATINGS RATIONALE

The issuer rating was downgraded to B1 because the district incurred its fourth straight year of deficit operations, leading to deeply negative fund balance and a depleted cash position. The district will have difficulty balancing its operations and replenishing reserves over the next several years, even with substantial federal stimulus incoming. The local economy is severely challenged due to the complete departure of coal mining operations on which it once depended. Governance is a key driver of the downgrade because of the district's failure to prepare accurate budgets. The recent deficits were driven by increasing instructional costs that were routinely over budget. Moreover, rising special education costs now account for 20% of district revenue, which limits financial flexibility. The district is also highly reliant on annual short-term cash flow borrowing, which has grown incrementally as its deficit position has worsened. The cash flow notes are secured by a first lien on the district's tax and revenue receipts and the district's non-general funds are held with the lender institution, First National Bank of Pennsylvania (P-2 short-term counterparty risk). Overall leverage is low.

The rating assigned to the district's underlying general obligation limited tax (GOLT) bonds was downgraded to B1, equivalent to the issuer rating. The absence of a distinction between the issuer and GOLT ratings reflects Pennsylvania school districts' ability to apply for exceptions to the cap on property tax increases in order to cover debt service, the Commonwealth's history of granting such exceptions, and the district's full faith and credit pledge supporting all general obligation debt.

The A2 enhanced rating reflects our current assessment of the Pennsylvania School District Intercept Program, which provides that state aid will be allocated to bondholders in the event the school district cannot meet its scheduled debt service payments. The A2 enhanced rating reflects the presence of language in the bond documents that requires the paying agent to trigger the state aid intercept prior to default. As of audited 2020 financial statements, Bethlehem-Center School District's state aid revenue provides more than sum-sufficient debt service coverage.

RATING OUTLOOK

The negative outlook for the issuer and GOLT ratings reflects the district's continued structural imbalance. The outlook also reflects uncertainty regarding the district's budgeted projections of lower instructional expenditures-its largest cost-because all three of its labor agreements are expiring at fiscal 2021 year-end and could result in higher costs.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Structural financial balance and the elimination of cash flow borrowing (issuer & GOLT)

- Upgrade of the Pennsylvania School District State Aid Intercept (fiscal agent) program (enhanced)

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Continued operating deficits (issuer & GOLT)

- Incremental increase in the amount of cash flow borrowing (issuer & GOLT)

- Downgrade of the Pennsylvania School District State Aid Intercept (fiscal agent) program (enhanced)

- Failure of state aid to provide sum-sufficient debt service coverage (enhanced)

LEGAL SECURITY

The issuer rating reflects the district's ability to repay debt and debt-like obligations without consideration of any pledge, security, or structural features. The district's Series 2018 and 2019 bonds are backed by the district's full faith and credit pledge to levy ad valorem taxes subject to the limits of Pennsylvania Act 1, the "Taxpayer Relief Act." The enhanced (fiscal agent) state aid intercept rating is secured by the district's receipts of aid from the Commonwealth of Pennsylvania (Aa3 stable).

The district's tax and revenue anticipation note borrowing (not rated) is secured by a first lien on the district's tax and revenue receipts.

PROFILE

Bethlehem-Center School District is located in the southeast corner of Washington County, PA (Aa2), approximately 28 miles southeast of the City of Pittsburgh, PA (A1 stable). The district covers an area of approximately 55 square miles which includes the boroughs of Beallsville, Centerville, Deemston and Marianna and the Townships of East Bethlehem and West Bethlehem. The district operates one elementary school, one middle school and one high school and has an enrollment of approximately 1,128 students.

METHODOLOGY

The principal methodology used in the underlying ratings was US K-12 Public School Districts Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1202421. The principal methodology used in the enhancedd ratings was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeffrey Garofano
Lead Analyst
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David Strungis
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