California school district municipal bonds are still a good risk-adjusted value despite a growing list of headwinds, including declining enrollment, according to a Los Angeles-based buyside analyst.
The sector benefits from strong state support, most notably through Proposition 98 funding guarantees and because California school district's general obligation bonds have a first lien on the districts' share of property taxes, said Travis McGahey, vice president-municipal credit analyst at Payden & Rygel.
Proposition 98 was a constitutional amendment approved by voters in 1988 that ensures that a minimum percentage of the state's general fund is dedicated to K-14 education, usually about 40%, protecting schools during periods of budget volatility.
Credit fundamentals remain solid with the majority of California school districts carrying an A rating or higher, reflecting strong essential-service characteristics and broad tax bases, McGahey said.
Though school districts have burned through most of their pandemic-era funding, McGahey said, it has left most with strong balance sheets, liquidity levels and healthy reserves. This situation will enable them to weather periods where expenditure growth begins to outpace revenue.
"The expectation is that any resulting drop in the balance sheet will be gradual, maintaining revenue stability overall, albeit with a potentially negative bias," McGahey said.
Management strength is also a key factor in McGahey's
LAUSD's management is looking a bit shaky these days, but McGahey said the strength of the school district's finance team led by Chief Financial Officer Saman Bravo-Karimi, who was named to the position in September, will help protect the credit.
The school district's board voted to place Superintendent Alberto Carvalho
The changes were "aimed at fulfilling our promise to students and families to provide an excellent public education without distraction," Board President Scott Schmerelson said in a statement. "Andres Chait is a highly regarded leader and educator, and we are lucky to have him step in seamlessly to oversee our schools."
LAUSD officials aren't commenting on the pending investigation, but sources told the Los Angeles Times the
Joanna Smith-Griffin, AllHere's chief executive officer, was indicted in November 2024 on charges of securities fraud, wire fraud and aggravated identity theft on allegations she defrauded investors in the firm out of millions of dollars, according to
Carvalho had been superintendent since 2022 and the board
The board voted on Feb. 27 to issue preliminary layoff notices to 657 employees, after several years of the school district's spending exceeding revenues.
Gov. Gavin Newsom has proposed what he said would be the highest-ever level of funding for schools, $125.5 billion, in
But declining enrollment, combined with rising teacher salaries and other increased costs, is squeezing school districts.
LAUSD's enrollment has fallen nearly 45% to 410,000 in 2025 from 746,000 students at its peak in 2002, according to data on the state's Department of Finance website, McGahey said. Most recently, enrollment data shows a 4% year-over-year drop in 2025-26 due to factors like demographic shifts and outmigration, he said.
The number of negative outlooks S&P assigned to K-12 school districts nationally increased materially by about 40% during fiscal 2025, according to its U.S. Local Governments 2026 Outlook.
Moody's also has the sector on negative outlook.
Despite the storm clouds, McGahey said broad rating declines "are not the base case." Ratings on average are not expected to drop below A-minus, but Payden & Rygel is expecting credit dispersion.
"We think school district management teams will use the high level of reserves to deal with situations where expenses outpace revenues," he said.
The Payden & Rygel team expects there will be more downgrades in school districts that are structurally imbalanced. McGahey noted that Berryessa Union School District in the Silicon Valley was
California school districts in general are facing challenges as they spend the last of federal stimulus funding related to the COVID-19 pandemic.
In an October report, S&P analysts said they expected school district finances would begin to meaningfully weaken in the medium term. Many school districts across California are projecting deficits over the three-year period, analysts said.
Bond issuance for California schools is expected to continue at a strong pace — tracking close to the $14.8 billion seen in 2025 according to Payden & Rygel — driven by deferred maintenance and the need to issue judgment bonds for liabilities, including child sex abuse cases, McGahey said.
The market has easily absorbed the increased supply due to high fund inflows, marking the third-highest year since 2018.
The January effect — where issuers often price debt hoping bond prices will rise and yields fall driven by heavy reinvestment of year-end cash, portfolio rebalancing and a seasonal lack of new supply — has continued into March, McGahey said.
"The market has easily absorbed the increased supply due to high fund inflows, marking the third highest since 2018," McGahey said.
A good time to buy would be in late March, McGahey said, when supply picks up during tax season and spreads, which are currently tight, will start to loosen as the market moves into spring.
The sexual abuse liability exposure is linked to the passage of Assembly Bill 218 in 2019. The law, which allowed adults to file lawsuits over childhood sexual abuse by public employees going back to the 1940s, has affected school districts, counties and cities
LAUSD
