Major Financial Developments

TRE Revenue Management & Corrective Action

In September 2015, the DeSoto ISD community passed the proposed Tax Ratification Election.  While the TRE produced $4.6 million more revenue for the General Operating Fund, only $1.6 million was available to spend. The remaining $3 million should have been allocated to the Debt Service Fund to pay the principal and interest due each year since 2016. However, previous district administrators did not properly manage district finances and this allocation never occurred.

When the August 2018 payment was due, previous members of district administration moved money to cover the debt payment. The former administrators used $8.4 million of the district’s General Operating Fund to make the debt payment since the monies were not available in the Debt Service Fund.

Later review by the new Interim CFO uncovered the shortfall in the General Operating Fund for November payroll. The General Operating Fund can transfer funds into the Debt Service Fund but, at no time, can any funds generated from tax collections from the I&S tax rate, and deposited into the Debt Service Fund, be transferred out and used for any purpose other than to pay bonded debt.*

*School district tax rates are comprised of two parts--(1) maintenance and operations (M&O) tax rates and (2) interest and sinking (I&S) tax rates. DeSoto ISD’s M&O tax rate is $1.17; the I&S tax rate is $0.32. These tax rates combined make up the total tax rate of $1.49.

The Debt Service Fund (I&S) revenue can only be used to pay the outstanding bonds the district issued throughout the years to build, renovate, and/or equip new buildings. These payments are made annually in February and August.

November Payroll / Tax Anticipation Note Debt Resolution Strategies and Financial Repositioning

At the November 12, 2018, DeSoto ISD board meeting, the district proposed a budget amendment to the General Operating Fund for two critical items that were not apart of the 2018-2019 Official Adopted Budget.

The amendments included a request to increase the Debt Service Fund to resolve repayment of the Notes Payable expenditure that funded the Energy Conservation Project for the district and an increase to the Other Uses budget from the General Operating Budget to cover costs of Bond projects that exceeded the allocated budget.

These two budget increases came out of the district's fund balance.

On November 20, 2018, DeSoto ISD borrowed $6 million to pay customary operational expenses, including salaries. This borrowing consisted of a Tax and Revenue Anticipation Note, Taxable Series 2018 (“Note”) which was sold to PNC Bank in a private placement transaction. The Note bears interest at 3.340% per annum and matures on May 15, 2019.  This loan was required to address prior management of TRE funding from 2016 to 2018, and was voluntarily disclosed to the Securities and Exchange Commission.

The interim chief financial officer estimated that the funds developed from this recommendation would reposition the district to be proactive in resolution of its operational needs for the foreseeable future.

As part of the strategy to address the district’s financial position, the interim chief financial officer  also recommended the following adjustments in DeSoto ISD:

-Active monitoring of purchasing and accounting procedures  and revisions where necessary to align with TEA compliance expectations and regulations

-Training and education of staff to improve budget management  and purchasing processes

-Staff restructuring and talent identification to support long-term staffing in finance and across the organization.

January Proposal

On January 14, 2019, district administration presented a plan to the Board of Trustees that was developed to proactively addresses the Debt Service Fund deficiency for the August 2019 principal and interest payment. The shortfall is estimated at $3.9 million and will be addressed with the approval of the proposal for debt restructure. Additionally, the I&S tax rate will likely increase to generate enough funds to cover current debt.

Restructuring the debt portfolio cost the district an estimated $1.8 million due to the interest incurred to push out a portion of the principal payment currently due in August 2019. As based on conservative assumptions, estimates and at the recommendation of our financial advisors, the debt service tax rate could increase.

General Operating Fund Update

The current General Operating Fund balance is insufficient to cover the $8.4 million paid to debt. We are working to resolve this issue with the anticipated February 2019 proposal for Board approval of sale of a three-year Maintenance Tax Note to be paid back in future years.

In addition the $8.4 million estimate, other unpaid debt that was not included in the structuring of the current year’s budget plan, have created a scenario in which the district will end the current school year in a budget deficit.

As a result of these findings, the Interest and Sinking tax rate will likely increase to a rate that will generate enough funds to cover current known debt for next year and future years.

District Credit Rating

In January of 2019, the district submitted a voluntary disclosure to the United States Securities and Exchange Commission.

Subsequent to the voluntary SEC disclosure, S&P Global Ratings lowered its underlying rating to ‘A’ from ‘A+’ on DeSoto Independent School District(ISD), Texas’ general obligation (GO) and limited-tax debt. At the same time, S&P Global Ratings has placed its ‘A’ underlying rating on CreditWatch with negative implications. The downgrade reflects their view of the district’s weakened liquidity position that has necessitated the issuance of tax and revenue anticipation notes (TRANs).  The CreditWatch placement reflects their view that there is at least a one-in-two chance that they could lower the rating within the next 90 days.

This month, the district was made aware that it would incur an additional credit rating downgrade pending the outcome a February 25, 2019 meeting with S&P and the evaluation of the district’s plan to resolve its financial concerns.