LOS ANGELES — El Rancho Unified School District lost its A-plus rating from Fitch, which cited concerns over financial projections, one month after the Los Angeles County Office of Education appointed a fiscal advisor to the school board. Such an appointment is often a first step before the state takes over a troubled school district.
Fitch Ratings cut the district to A from A-plus on Feb. 18, affecting the $13.8 million in debt it rates. Moody's Investors Service had downgraded the district's ratings to A2 from A1 affecting $69 million in debt on Dec. 23. Both gave the district a negative outlook. The district's debt is comprised of $69 million in outstanding general obligation bonds, according to financial documents.
"The downgrade reflects material deterioration of the district's multi-year financial projections and negative financial certification by the Los Angeles County Office of Education," Fitch analysts said in a report.
The negative certification indicates the district will not meet its financial obligations in the current or following fiscal year based on first interim projections, including maintenance of the district's legally required minimum 3% unrestricted general fund balance, according to a letter sent to the district by LACOE on Jan. 14.
The district projects its reserves will plunge to negative 3.4% in 2014-15 and negative 13% for 2015-16 from 3% for fiscal 2013-14, according to the letter.
The downgrades come after several years of deficit spending by the school district, which is located in Pico Rivera. The district is facing an estimated $5.4 million budget deficit for the 2014-15 school year, according to financial documents.
Without deep budget cuts, the school could be in danger of being taken over the state. If the state takes over the district, the superintendent would be removed, the school board would become an advisory body, and the state would make the cuts required to balance the budget.
Superintendent Martin Galindo failed to return phone calls seeking comment.
Moody's cited concerns in the negative outlook over the near-term budgets and projections, which indicate the district will remain structurally imbalanced absent successful implementation of the district's restructuring plan. But it also cited the hiring of Galindo last June and his commitment to fiscal restructuring as a strength.
Enrollment has declined from 10,555 in 2009 to an estimated 9,144 for fiscal 2013-14, according to the district's documents. Those numbers are projected to decline to 9,033 by 2015-16, according to the LACOE letter.
The fiscal advisor appointed by the county's office of education has stay and rescind powers over school board decisions. COE-appointed fiscal advisors generally assist fiscally-stressed districts with financial and budgetary decision-making.
Fitch analysts said they view the additional layer of oversight as a positive even though the county appointed FA does not have the power to impose decisions on the board, to modify existing labor contracts, or to impose concession on bargaining units.
An inadequate ability to sufficiently address the concerns raised could result in further negative credit actions over the short term, Fitch analysts said.
Fitch analysts said they plan to conduct a full review of the district's credit rating including a discussion with management. In the report, Fitch analysts said this will likely result in a further downgrade unless management can demonstrate that the district's current financial position and projections are materially better than suggested by publicly available sources.
Two other troubled California school districts - San Ysidro and Denair Unified — are on the verge of state takeover and two other school districts are currently run by state appointed administrators.
Fitch Ratings downgraded $100 million of San Ysidro School District debt to junk on Nov. 18 noting a possible state takeover. Fitch dropped $82 million of the San Diego County district's general obligation bonds to BB-plus from BBB-plus, and $29.1 million of certificates of participation fell to BB-minus from BBB.
Standard & Poor's lowered its long-term and underlying ratings to BBB from A on Denair Unified School District's existing general obligation debt on Dec. 18 and gave the debt a negative outlook with state takeover of the school district also a possibility.
Inglewood Unified School District and South Monterey County Joint Union High (formerly King City Joint Union High) are currently run by state appointed administrators, according to the California Department of Education.