Rating pressure eases on San Jose-area school district

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A northern California school district that is the subject of investigations by multiple agencies had its ratings taken off S&P Global Ratings' CreditWatch, but retains a negative outlook.

S&P cut Alum Rock Union Elementary School District’s general obligation bond ratings to BBB-plus from AA-minus in October after it received confirmation from district officials about an investigation by the Santa Clara district attorney’s office.

S&P also lowered its long-term rating and underlying rating to BBB from A-plus on the district’s certificates of participation at that time.

The ratings agency affirmed the school district’s ratings at the lower level in Monday and said the negative outlook reflects a “one-in-three chance” it could lower the ratings during their two-year outlook.

The downgrade impacted $74 million in rated debt.

"The rating affirmations reflect our view that the county's escalating oversight of the district, which now includes appointment of a fiscal expert and the potential appointment of a fiscal adviser that will have veto authority over board decision-making, has eased our concerns regarding the possibility for additional, unexpected fiscal pressures that might arise as a result of the district's multiple governance and control problems," said Benjamin Geare, an S&P analyst.

S&P first placed the school district’s ratings on credit watch in July after the state’s Fiscal Crisis and Management Assistance Team alleged in an audit that fiscal mismanagement had occurred.

“There is sufficient evidence to demonstrate that fraud, misappropriation of funds and/or assets, or other illegal activities may have occurred in the specific areas reviewed,” FCMAT said in the extraordinary audit it released on June 9.

FCMAT also said it had reservations about the district’s ability to repay the COPs without affecting the unrestricted general fund and that debt service payments pose a serious threat to the districts ongoing fiscal solvency.

No disclosure reports have been posted on the Municipal Securities Rulemaking Board’s EMMA website that would indicate the district missed its Dec. 1 debt payment on the COPs.

Persistent risks stemming from the district's ongoing difficulties reconciling its cash position in a timely manner, the recent history of inadequate internal controls, and the potential for further liabilities that could surface as a result of the multiple investigations into the district were cited by S&P for the negative outlook.

“We note that the risks highlighted in the FCMAT report and the ongoing investigations persist, but to a large extent are already reflected in the current rating level,” S&P analysts wrote.

Mary Ann Dewan, who was named the Santa Clara County Board of Education’s permanent superintendent in February, announced on March 16 that she was appointing a fiscal advisor to Alum Rock Elementary who will have the power to stay or rescind board decisions. That move is typically reserved for school districts that are on the verge of insolvency.

The district has appealed to State Superintendent Tom Torlakson to reverse the decision to appoint a fiscal advisor. A “fiscal expert” comprised of McGuire & Associates was named in January to work with the district on financial matters.

S&P analysts said in the report they expect Torlakson to support the county school board’s decision.

The county approved the district’s 2018 budget on Nov. 8, but the district missed the Dec. 31 deadline to complete its audit of the fiscal 2017 financial statements and was expected to complete those by March 31. The district expects to end fiscal 2018 with a $1.4 million deficit, according to S&P.

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