Fitch criteria changes lead to downgrades for Denver Public Schools

Denver Public Schools (DPS), which is seeking voter approval for a record-$975 million of bonds this fall, received one-notch downgrades from Fitch Ratings based on local government rating criteria changes.

The district’s AA-plus underlying general obligation rating was lowered last week to AA and its AA certificate of participation rating was cut to AA-minus, both with stable outlooks, and removed from being under criteria observation.

Fitch Ratings said one-notch downgrades for Denver Public Schools’ debt resulted from the implementation of updated local government rating criteria it unveiled in April and also incorporate the school system’s “steady, but modest level of available general fund reserves” and strong demographic and economic trends.

DPS said the rating action reflects Fitch’s “migration to a bond rating algorithm that places a higher emphasis on fund balances,” and not school operations or financial performance.

“Accordingly, Fitch analysts have informed the district that the general obligation bond rating would have remained at AA-plus were the general fund balances at or above 10%, rather than the current level of approximately 8%,” DPS said in a statement.

Fitch released the updated criteria in April with an estimate that about 35% of its local government ratings “will be affected by the criteria change, most by one notch.”

As for DPS, Fitch said the lower GO rating incorporates a “steady, but modest level of available general fund reserves,” as well as strong demographic and economic trends.

Colorado’s largest public school system had $2.3 billion of GO bonds and $913 million of certificates of participation outstanding as of June 30, 2023, according to its fiscal 2023 annual comprehensive financial report.

The district last month placed on the Nov. 5 ballot its biggest-ever bond initiative, which would address some of its more than $2.2 billion in capital infrastructure needs — including air conditioning — without increasing property tax rates.

“If voters in Denver approve the proposed bond initiative of up to $975 million in new general obligation bonds in November 2024, DPS will likely be selling bonds within the calendar year,” the district’s statement said.

DPS, which serves 88,235 students in 207 schools, has a GO issuer rating of Aa2 with a stable outlook from Moody’s Ratings. A negative outlook on its AA-plus underlying GO and AA COPs ratings from S&P Global Ratings was revised to stable in March 2022.