OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the Kentucky School Credit Enhancement Program. The Rating Outlook is Stable.

SECURITY

State aid intercept - the state department of education is obligated to intercept school aid payments to make debt service payments in a timely manner.

KEY RATING DRIVERS

STATE INTERCEPT WITH TIMELY MECHANISM: The rating is based on the state's obligation to intercept school district aid in a timely manner. Program mechanics allow sufficient time for state funds to be made available to pay debt service by the debt service payment date.

GENERAL CREDIT QUALITY OF KENTUCKY: Administrative, structural and legal protections provide credit enhancement for qualifying school district debt at a level on par with the commonwealth's appropriation-backed debt.

RATING SENSITIVITIES

The rating is sensitive to changes in the commonwealth's implied general obligation (GO) rating, to which this rating is linked.

CREDIT PROFILE
Fitch will assign an 'A+' rating, Stable Outlook, to Kentucky school district lease rental bonds qualifying for participation in the School Credit Enhancement Program. The rating is based on the state's obligation to intercept school district aid in a timely manner. School district bonds subject to the intercept may be issued either directly by a school district or through the Kentucky School Facilities Construction Commission (KSFCC).

The state Department of Education (DOE), which administers the intercept program and distributes state aid, maintains a high level of control of local school district financial operations. All school district bond issues, and related financial, educational, and construction plans, are subject to DOE approval prior to issuance. The DOE also receives and reviews local school district budgets and audits. A budget found to be financially unsound or failing to provide for sufficient payment of debt service or rental payments, per DOE policy, will be disapproved. If found to maintain unsound finances or operations, the district may be placed on a one-year warning, with the possibility of a second one-year warning if the practices continue. If a district remains in noncompliance for a third year, the DOE reserves the right to transfer control of school operations from the local school board to the state, a measure that has been implemented in the past.

The KSFCC operates as the financing corporation for eligible school districts. On those financings the KSFCC makes lease rental payments to the paying agent. The KSFCC reviews audited financial statements and supervises districts' financial operations.

TIMELY MECHANISM
Program mechanics as outlined in state law allow sufficient time for state funds to be made available to pay debt service by the debt service payment date. For financings pursued directly by local school districts, section 160.160 of the Kentucky Revised Statutes requires that debt service be remitted by the local school district to the paying agent 10 days prior to the debt service payment date. The paying agent must notify the DOE if moneys are not received three days before the payment date. The DOE must intercept any state funds due to the district to cover the required payment on the bonds and remit it to the paying agent.

Section 157.624 of the Kentucky Revised Statutes sets out the process for financings by the KSFCC, whereby the KSFCC must notify a participating school district 30 days prior to the debt service payment date that a payment is due. If a participating school board fails to pay debt service and administrative costs when due, the KSFCC will notify and request the DOE to withhold any state funds due to the district to cover the required payment on the bonds and remit it to the KSFCC for payment to the paying agent.

All school districts are covered by the intercept when they issue lease revenue bonds according to state statute. Fitch will apply the enhanced rating if there is 1.25x coverage of historical annual school aid to pro forma maximum annual debt service, and debt service payment dates are timed such that available appropriated school aid is expected to be sufficient to meet debt service payments.