LOS ANGELES — Alum Rock Union Elementary School District's general obligation bonds and certificates of participation were placed on credit watch negative with negative implications by S&P Global Ratings.
S&P will review the school district's AA-minus, GO rating, and A-minus COP rating and come back with its assessment -- which could result in a downgrade within 90 days.
Friday’s S&P report comes a month after allegations of fiscal mismanagement surfaced in an audit conducted by the state’s Fiscal Crisis and Management Assistance Team.
“The report’s findings have called into question our prior assessment of the district’s management and fiscal position, as well as our determination of the reliability of the information provided by the district,” S&P Global Ratings credit analyst Ben Geare and Li Yang wrote.
FCMAT’s "extraordinary audit" concluded that “there was sufficient evidence that fraud, misappropriation of funds and/or assets, or other illegal activities may have occurred in the specific areas reviewed," according to S&P.
The audit team also wrote that it had "serious reservations about the district's ability to repay the COPs without affecting the unrestricted general fund and that the debt service payments could threaten the district's ongoing solvency."
S&P rates $74 million of GO debt and one $25 million COP that remains outstanding as of fiscal 2016, Geare said. Voters have approved $444 million in bond authorizations since 2008.
The Santa Clara County District Attorney’s office would neither confirm nor deny if it is investigating allegations of fraud in the district, which serves 11,000 students in some of San Jose’s poorest neighborhoods.
The district’s superintendent, Hilaria Bauer, failed to return phone calls seeking comment.
The ratings move means that the rating agency may lower or withdraw its rating within the next 90 days, Geare said. The rating agency plans to evaluate the audit findings and other relevant information before making a decision.
Revenue from unlimited ad valorem taxes levied on taxable property within the district secures the GO bonds. The Santa Clara County Board of Supervisors has the power and obligation to levy these taxes at the district's request for the bonds' repayment.
The county is required to deposit such taxes, when collected, into the bonds' debt service fund. The COPs represent an interest in lease payments made by the district, as lessee, to the Public Property Financing Corp. of California, as lessor, for the use and possession of the leased asset.
Allegations of fraud could be a factor in the ratings, Geare said.
One of the issues that S&P uses to determine ratings is the reliability of the information it needs to maintain ratings, he said.
"The question of fraud would bear on that reliability," Geare said.
He added that "there doesn't appear to be conclusive evidence, or judgment at this point," related to the questions raised in the audit.