Moody's downgrades a Minnesota school district's GOs to junk

Citing a "materially eroding" financial position, Moody's Ratings downgraded a Minnesota school district to speculative grade and placed its bond ratings under review for possible further downgrade.

Moody's cut the Fridley Independent School District's issuer and underlying general obligation unlimited tax bond ratings to Ba3 from Baa3 Friday, affecting about $53 million of outstanding debt.

The rating agency pointed to the district's inability to make debt service payments without cash flow borrowing and its "sharp and unexpected decline in reserves during fiscal 2025, which is a material deviation from what was expected from May 2025."

In May 2025, the district was anticipating a $3 million deficit, but its December financial update indicated a deficit of $13 million by fiscal year's end in June, said Karen Liu, associate lead analyst at Moody's.

In May, the district had a plan to balance operations without liquidity borrowing, Liu said by email. "The district also reported the additional property tax levy and budget cuts would help to bring structural balance in 2026; however, the district reports additional expenditure growth in 2026," she said.

The district priced $11.5 million of general obligation aid anticipation certificates of indebtedness Monday, according to data posted on the Municipal Securities Rulemaking Board's EMMA disclosure website. Like the district's GO bonds, they are backed by the Minnesota School District Credit Enhancement Program, rated Aa1 by Moody's, one notch below its Aaa rating of the state government. D.A. Davidson was lead underwriter, according to LSEG's TM3.

The certificates will cover operating expenditures and debt service, including a debt payment due Feb. 1.

"The district's financial position will remain challenged at least through fiscal 2027," Moody's said in its Jan. 9 rating report. "Weak budget management and internal controls are currently contributing to uncertainty around fiscal 2025 financial results, and the district is now in the process of completing a short-term borrowing to support cash flow for operations and debt service."

Turnover in the finance office and record-keeping inconsistencies are delaying the fiscal 2025 audit, Moody's said.

Fridley's unaudited fiscal 2025 financials show the available fund balance ratio plunging to negative 20%, a significant gap from the negative 2% expected as of May.

Fridley Superintendent Brenda Lewis said the district is committed to restoring financial stability in a way that protects programs and services.

"We respect Moody's role in assessing district financial conditions," she said by email. "Fridley Public Schools has experienced structural financial challenges driven by factors outside our direct control, including rising mandated service costs, stagnant state aid relative to inflation, and a depressed local tax base that we have repeatedly lobbied legislators to address."

The community has yet to benefit from the equalization bills that have been introduced, "which would help districts like ours with lower tax capacity," she said.

The school district, which sits on Minneapolis' southwest border, has seen declining enrollment in recent years, with the exception of the current school year, when it saw a modest uptick, according to Moody's. About 2,700 students are enrolled.

Moody's said it expects the district's financial position to remain "challenged" for the next several years at least.

"The district previously planned to begin balancing operations in fiscal 2026 through additional revenue from a voter-approved operating levy increase, expenditure reductions and with state oversight to develop a fiscal recovery plan, the expectation is now continued deterioration of liquidity," the rating agency said. "Recent salary increases from negotiated union contracts will negate revenue gains from the additional levy, and a financial recovery plan is not yet in place."

The salary increases were 5% annual raises, Liu said.

Fridley has to "remain competitive in attracting and retaining high-quality educators and staff," Lewis said.

Lewis noted the district is "actively engaged" with state Department of Education oversight.

The school district is in statutory operating debt, which means it has an operating debt of more than 2.5% and it must submit a special operating plan to the Minnesota Department of Education to reduce its deficit, Anna Kurth, external communications strategist for the Minnesota Department of Education, said by email.

The rating agency's review for possible further downgrade will look at whether the district successfully executes the short-term borrowing and achieves greater clarity on its financial position, Moody's said.

An upgrade is unlikely in the immediate future, the rating agency said.

Moody's said the district could see further downgrades if it is unable to either secure cash flow borrowing or maintain a sufficient cash position to meet expenditures through fiscal 2026 and 2027.

Other factors that could lead to another downgrade include failure to develop and adhere to a fiscal recovery plan that lets Fridley stabilize its financial operations quickly, and an inability to improve financial oversight and internal controls.

The district still plans to issue $15.5 million of remaining referendum debt in fiscal 2027, Lewis said.

"These projects were identified as part of our referendum planning and are aligned to our long-term facilities plan, including maintaining safe and functional learning environments, technology infrastructure, and facility improvements that support modern educational programming," she said. "These plans remain subject to board action and community authorization."