Updated: Mercer Island School District Credit Rating Under Review

(Ed. Note, 3:45 p.m.: This story is appended with a press release from the Mercer Island School District and a Moody's-issued correction of the history of the MISD's credit rating.)

Credit-rating agency Moody's is considering a downgrade for 's top-notch reputation for repaying debt, citing uncertainty in Washington D.C.'s as the culprit.

The school district joins several other Aaa-rated public agencies in King County under credit-rating review by Moody's — made public in a July 28 press release — as Congress tries to raise the U.S. debt limit in order to repay obligations. While no downgrade has yet occurred, Moody's spokesman David Jacobson warned that could change if the U.S. defaults on it's obligations. 

"We need to see what is going to happen on the sovereign level," he said. "If Aug. 2 — that's "D-Day" — passes and if there is a default we will determine if a change is needed ... That's a lot of ifs, but it could happen."

Moody's is one of a handful of credit-rating agencies relied on by investors that are important to public agencies like the MISD and King County, because they could affect interest rates it must pay to lenders, increasing the cost of borrowing. A "Aaa" Moody's rating is the highest given by the company, meaning there is virtually no risk of default by the borrower.

The MISD carries very little long-term debt in bonds — $24 million — and is scheduled to retire that debt in about 4 years. A possible downgrade, however, could increase costs on any future borrowing for large scale projects — by the district.

While debt is a factor in credit review, Jacobson said Moodys reviews several other variables: A local government's reliance on markets, sensitivity to macro economic cycles and dependence on federal revenues and available financial resources to offset these risks.

When questioned about a possible credit downgrade by Moody's before a July 27 School Board meeting, MISD Executive Director Dean Mack said little.

"We'll see," he said.

Along with the MISD, the Bellevue, Issaquah, Seattle and Lake Washington school districts, the University of Washington, King County and the cities of Seattle and Bellevue are also under review. 

Mercer Island's underlying credit rating was listed as a "Aa1" rating from 2001 to 2009 until Moody's raised it in April 2010 to the highest "Aaa" rating.

In response to the credit review, MISD Superintendent Gary Plano issued the following statement:

"Today on July 29, 2011 the Mercer Island School District was notified by Moody's Investment Services that it will undergo, as will many other highly-rated governments, acredit review. This is not a downgrade. The Moody's notification refers to regions with "high federal employment" and "high economic dependence on federal activity," which presumably includes the Puget Sound area because of its military facilities and regional federal headquarters.

The underlying rating for the Mercer Island has been Aa1 from 2001 through 2009. On April 23, 2010, Moody’s Investment Services upgraded the district credit rating to Aaa-the highest rating available to any borrower.

Moody's indicates that it will evaluate each of the listed local governments separately inthe event of a downgrade of the U.S. government. It appears there would not be automatic downgrades for the local governments and school districts. While a federal government downgrade and partial shutdown would be damaging to our economy, we believe the District would fare well in a thoughtful credit evaluation. The District receives limited federal money and our tax base is much less affected by spending of federalemployees than is true of many other regions.

Superintendent Dr. Gary Plano emphasizes the importance of Congress dealing with thedebt ceiling issue immediately and in a manner that resolves the issue for a significant time period in light of the District’s forthcoming facilities plan to deal with studentenrollment and 21st Century educational program needs."

— Chart figures provided by Moody's Investor Services