Fitch Ratings last week downgraded the Capistrano Unified School District School Facilities Improvement District No. 1’s general obligation bonds by two notches to A-plus from AA.

The action affects $51.2 million of outstanding general obligation bonds. The agency said the downgrade came as part of its routine surveillance, not a new issue.

The downgrade “reflects the district’s deteriorating financial position due to sharply reduced state aid,” analysts Tom Cowell and Karen Ribble said in a report. “Consequently, the district is forecasting a significant draw down in general fund balance for fiscal 2010, and risk budgeting for a negative fund balance for fiscal 2011 pending significant wage concessions or implementation of substantial budget reductions.”

Capistrano USD is located in a relatively wealthy area of Orange County and includes most of the city of San Juan Capistrano and a portion of Mission Viejo.

The report cited a series of fundamental credit strengths, such as “a relatively wealthy tax base, stable enrollment and low debt levels” and “strong assessed valuation growth.”

But the report said the district’s operating budgets are hurting because of falling state aid to education and a failure to offset the losses with spending cuts.

The district plans to spend most of the 9.1% general fund balance that it came into the current school year with and will finish fiscal 2010 with a “slim” fund balance of 2.2% of expenditures. The report said the district will have to cut spending by at least $25 million in fiscal 2011 to balance its budget.

“Achieving budgetary balance in fiscal 2011 and preserving operating flexibility in 2012 and beyond will be critical in maintaining the A-plus rating,” the report said. “The district’s financial position is under serious pressure.”

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