A California school district gets a four-notch downgrade

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LOS ANGELES — S&P Global Ratings lowered a California elementary school district’s ratings four notches after it received confirmation from district officials about an investigation by the Santa Clara district attorney’s office.

S&P Global cut Alum Rock Union Elementary School District’s general obligation bonds to BBB-plus from AA-minus.

The downgrade impacted $74 million in rated debt.

S&P also lowered its long-term rating and underlying rating to BBB from A-plus on the district's certificates of participation. All of the ratings remain on credit watch with negative implications.

"The rating actions reflect a change in our assessment of the district's management, brought about by confirmation from the district that the Santa Clara District Attorney's Office has opened an active investigation into the district, our concerns about the district's ability to reconcile its cash position in a timely manner, and the difficulties we have encountered in obtaining information from district management," said S&P analyst Benjamin Geare.

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 audit.

The report also noted that FCMAT had "serious reservations about the district's ability to repay the COPs without affecting the unrestricted general fund. As a result, the debt service payments pose a serious threat to the district's ongoing fiscal solvency."

The district confirmed to S&P Sept. 14 that the Santa Clara County District Attorney's Office was investigating the school district, according to the ratings agency. District officials could not confirm if the investigation's scope went beyond the issues identified in the FCMAT report, Geare said.

Management has indicated that the district has a plan to address the debt service payments for the COPs, but declined to provide responses to questions about how the district is planning for any fiscal contingencies that could arise as a result of the investigation, S&P said. The next debt service payment for the series 2010A COPs is Dec. 1, 2017.

The Santa Clara County Office of Education completed its review of the school district’s budget on Sept. 15 and conditionally approved it.

But the Santa Clara COE has requested that the district prepare monthly cash reconciliations by each monthly due date and prepare a cash flow report for the current fiscal year that is verified by a third party auditor.

“We note that while the district has received clean opinions on its recent financial statement audits, the Santa Clara COE has additionally required that the district seek approval from the Santa Clara COE for the third-party auditor retained by the district for this audit,” Geare said.

The negative outlook “reflects our concern that the district may be unable to provide sufficient information to assuage the Santa Clara COE's concerns about the district's cash reconciliation,” Geare said.

If the district can’t address the concerns, S&P said, its determination that the information provided by the district is reliable could be called into question.

“After we have further evaluated the deliverables expected in October and other relevant information, we may lower our ratings, or withdraw our ratings, or both,” Geare said.

This would occur during the 30 days of the CreditWatch horizon, although it is possible that the CreditWatch status could be resolved sooner, he added.

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School bonds General obligation bonds Ratings Financial crimes California