L.A. Schools Selling $1.8B of GOs, Part Tax-Exempt and Part BABs

SAN FRANCISCO — The Los Angeles Unified School District plans to sell $1.8 billion of general obligation bonds next week, forging ahead with one of the nation’s most ambitious school building plans as it cuts hundreds of millions of dollars from its operating budget.

The nation’s second-largest school district will sell the bonds in two offerings, with about a third as tax-exempt debt and about two-thirds taxable Build America Bonds, according to rating reports. The exact proportions will be set as the bonds price Feb. 17 and 18.

“We don’t have a split yet between BABs and tax-exempt,” said Jean Marie Buckley, president of Tamalpais Advisors Inc., the district’s financial adviser. “The decision will be driven by the yield curve.”

The early maturities will be tax-exempt bonds and the later maturities will be BABs, she said. BABs are taxable bonds that carry a 35% interest rate subsidy from the Treasury Department instead of the indirect subsidy of tax exemption. BABs were authorized under the American Recovery and Reinvestment Act of 2009 in an effort to expand the market for municipal bonds.

The three major rating agencies reaffirmed Los Angeles Unified’s ratings ahead of the deal, despite continued uncertainty about state education funding. Fitch Ratings and Standard & Poor’s rate the district AA-minus, while Moody’s Investors Service rates it Aa3.

The LAUSD board late last year approved layoffs for more than 5,000 teachers and support staffers, as it moved to close a projected $470 million deficit for the upcoming school year.

But California Gov. Arnold Schwarzenegger last month proposed closing a $20 billion state budget deficit with a budget that school officials estimate would require them to make another $200 million in cuts if it is approved.

The district has been able to continue its aggressive rebuilding program in the face of declines in operating support from the state because local property taxpayers pay for the building program.

“The GO debt ratings reflect our view of the district’s pledge of its unlimited ad valorem property taxes that are levied, collected and deposited directly with the county,” Standard & Poor’s analyst Gabe Petek said in a report affirming the agency’s ratings on $9.7 billion of outstanding general obligation bonds and $425 million of lease-backed debt.

The lease-backed debt carries a rating one notch lower than the GOs at A-plus.

“We think the district has realistic expectations regarding state funding and that it is poised to remain a strong credit even as the timing and absolute level of its overall funding remain uncertain,” Petek said.

His report said the district’s board has shown a willingness to cut spending to “solidify financial solvency in the face of state funding reductions” and its “maintenance of a good fund balance position despite recurring budgetary challenges.”

Citi is the senior underwriter on next week’s tax-exempt issue. Citi, Goldman, Sachs & Co., Morgan Stanley, and Barclays Capital are senior underwriters on the BABs.

The district is likely to be back in the market in the spring with about $400 million of qualified school construction bonds, according to Buckley. The size of that deal will depend on 2010 QSBC allocations for large school districts, which will be made by the secretary of education. QSCBs are taxable tax-credit bonds authorized under the 2009 ARRA stimulus package.

For reprint and licensing requests for this article, click here.
California
MORE FROM BOND BUYER