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Rating Action:

Moody's upgrades Duluth Independent School District 709, MN's Issuer & GOULT to Baa2; outlook positive

12 Apr 2022

New York, April 12, 2022 -- Moody's Investors Service has upgraded Duluth Independent School District 709, MN's Issuer Rating to Baa2 from Ba1. Concurrently, Moody's has upgraded the rating on the district's outstanding general obligation unlimited tax debt and the rating on the district's full-term certificates of participation (COPs) (non-contingent lease backed by GOULT pledge) to Baa2 from Ba1, and the rating on the district's annual appropriation certificates of participation (lease: appropriation) to Baa3 from Ba2. The outlook remains positive. The issuer rating reflects the district's ability to repay debt and debt-like obligations without consideration of any pledge, security, or structural features. At the close of fiscal 2021, the district had direct debt outstanding of about $184 million.

RATINGS RATIONALE

The upgrade to Baa2 reflects the district's improving financial position following voter approval of an operating levy and an influx of federal aid. The rating also considers the district's history of volatile financial operations, a long-term trend of declining enrollment and the need to make budget adjustments when federal aid is depleted. The economic base is solid with Duluth serving as a regional hub, resident income is average and leverage is somewhat elevated though capital needs are limited. Governance was a key driver of the credit rating action considering the district's historic management strategy that led to difficulty adhering to budgets leading to a long period with narrow reserves. The district has made management improvements, which coupled with voter support for an increased operating levy and federal aid, has driven improved finances.

The Baa2 rating on the district's general obligation unlimited tax (GOULT) bonds is equivalent to the Baa2 issuer rating given the district's full faith and credit pledge with authority to raise ad valorem property taxes unlimited as to rate or amount.

The rating on the district's outstanding non-contingent lease back by a GOULT pledge (full-term COPs) obligations are rated the same as the district's issuer rating because debt service is not subject to annual appropriation.

The Baa3 rating on the district's lease appropriation (appropriation COPs) obligations is one notch below the district's issuer rating due to the risk of non-appropriation and the more essential nature of the pledged assets (school facilities).

RATING OUTLOOK

The positive outlook is based on the expectation that the rating will move further upward if the district can maintain balanced operations and satisfactory reserves as federal aid is depleted.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Stable financial performance that leads to maintenance or growing of fund balance and liquidity

- Improved enrollment trend

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Deterioration of the financial position or acceleration of enrollment losses

- Substantial growth in leverage

LEGAL SECURITY

The GOULT bonds are backed by the district's pledge to levy a dedicated property tax unlimited as to rate and amount. The GOULT Bonds are additionally secured by statute and supported by the State of Minnesota's School District Credit Enhancement Program which provides for an unlimited advance from the state's General Fund should the district be unable to meet debt service requirements.

The full-term COPs do not carry the district's full faith and credit pledge but are supported by a separate, dedicated levy. The obligation of the district to make rental payments is absolute and unconditional and it is not subject to annual appropriation. The full-term COPs are also additionally supported by the State of Minnesota's School District Credit Enhancement Program.

The annual appropriation COPs are supported by lease payments which are subject to annual appropriation. The pledged assets are school facilities, which we deem to be a more essential asset.

PROFILE

Duluth ISD 709 is located along the Lake Superior shoreline about 150 miles north of the Twin Cities (Minneapolis, Aa1 stable; St. Paul, Aa1 stable) metropolitan area and has a resident population of just under 100,000. The district provides prekindergarten through twelfth

grade education to residents of the City of Duluth as well as all or portions of five surrounding townships. Duluth ISD 709 operates nine elementary schools, two middle schools and two high schools with an enrollment of over 8,000.

METHODOLOGY

The principal methodology used in these 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. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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_1288235.

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.

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