Los Angeles school ratings take a hit following parcel tax failure

Los Angeles Unified School District, the second largest in the nation, sustained a rating cut after its parcel tax measure failed to win voter approval earlier this month.

Moody's Investors Service on Thursday lowered the district's general obligation bond one level to Aa3. The downgrade affects $10.2 billion in outstanding debt. The Measure EE parcel tax was expected to bring in $500 million annually, and the measure's failure leaves a budget gap of the same size, Moody's said.

“The downgrades reflect the district's structural budgetary challenges and limited financial flexibility stemming from rising fixed costs and recent concessions with the teachers' union for higher salaries and increased resources,” Moody’s analyst Helen Cregger wrote.

Photographer: Cindy Charles

The parcel tax suffered a resounding defeat June 5 with less than 46% of voters saying “yes” to a measure that needed a two-thirds majority to win. Moody's also cited revenue constraints arising from declining enrollment and increasing dependence on state aid.

The ratings service also lowered the rating on the district’s $180.5 million in outstanding certificates of participation to A2 from A1, while revising outlook to stable from negative.

The lower A2 rating on the COPs reflects what Moody’s considers a weaker security pledge for lease-backed obligations. Moody’s draws a distinction between lease-backed obligations and the stronger GO pledge with a two-notch differential.

“The rating also considers strong management that has a record of outperforming budgeted projections and built up sound reserve levels that buy it time in responding to these challenges before they would cause financial strain,” Cregger wrote.

The school district is the second largest in the country by student population, trailing only the New York City School District. LAUSD's 598,744 students include 112,485 enrolled in independent charter schools.

The district's administration has made it a practice over the last few years to warn of a sizable budget gap and then find money to approve a balanced budget.

The Los Angeles County Office of Education appointed James Morris, who worked for decades in administrative positions at LAUSD including chief operating officer, as a fiscal adviser to the district in January after warning the district for years it needs to get its financial house in order.

Ratings agencies have said that LAUSD has the most competition from charter schools of any in the country, which has caused a sharp drop in enrollment and the resultant state funding attached to school attendance.

From 2012 to 2019, LAUSD’s K-12 enrollment declined by roughly 100,000 students, continuing a 16-year-long trend in which the district lost about 260,000 students, according to an S&P ratings downgrade report published in March by analysts Dan Kaplan and Jennifer Hansen. S&P downgraded LAUSD to A-plus from AA-minus citing its structural imbalance, long term trend of declining enrollment and sizable unfunded other post-employment benefits liability. The district expects to lose another 15,000 students in 2020 and 12,000 students in 2021, according to the report.

Fitch Ratings downgraded the school district’s issuer rating to A from A-plus in September and revised its outlook to negative from stable before the teachers' strike in January.

The action did not affect Fitch’s AAA underlying rating and stable outlook on the district’s unlimited tax general obligation bonds. Those ratings are based on a dedicated tax analysis without regard to the district’s financial operations.

Fitch began drawing a distinction between issuer ratings and unlimited tax general obligation bond ratings for California school districts in 2016. It issues a rating based on its “special revenues” distinction and another based on operational risks.

Kroll Bond Rating Agency maintained LAUSD's AA-plus rating with a stable outlook following the teachers' January strike, which lasted six school days. Fitch estimated the union agreement would increase the deficit in fiscal year 2021 to $1.08 billion from the projected $350 million.