LOS ANGELES — The Los Angeles Unified School District's issuer rating was knocked to A from A-plus by Fitch Ratings Thursday, and its outlook revised to negative from stable.
The action does not affect Fitch's AAA rating and stable outlook on the district’s unlimited tax general obligation bonds, ratings based on a dedicated tax analysis without regard to the district’s financial operations.
Competition from charter schools, pressure from unions for cost-of-living increases and volatility in state funding sources because of the state’s dependence on income taxes in its revenue mix were cited in the issuer rating downgrade.
“Maintaining general fund structural balance is an ongoing challenge, which could be significantly worsened depending on the outcome of the current labor negotiations with the district's teachers,” Fitch analysts Alan Gibson and Karen Ribble wrote.
LAUSD, the country’s second largest school district, is in a
"UTLA's last, best, and final bargaining proposal is estimated by the district to have an annual budget impact of at least $952 million (almost 13% of spending) over the budgeted remuneration increases already included in its fiscal 2019 budget," Fitch said.
There are significant risks associated with either granting labor concessions, which could worsen the district's structural imbalance, or refusing to do so, as that could trigger a strike that could further reduce the district's attractiveness to parents within a highly competitive marketplace, analysts wrote.
Fitch began
Fitch assigned AAA underlying general obligation ratings to bonds issued by several California school districts in 2016. The higher underlying GO ratings reflect Fitch's opinion that the property tax revenues pledged to bond repayment would be considered pledged special revenues under the bankruptcy code.
The negative outlook on the new issuer rating reflects the challenges the ratings agency expects the district to face in reaching structural balance.
LAUSD operates 1,054 schools and educational centers, including 54 affiliated charter schools. The number of charter schools operating within the district’s boundaries have grown to 225 from 179 in 2012, according to Fitch.
“The district has the largest fiscally independent charter school program in the country, with charter school enrollment growing 1,137% between fiscal years 2003 and 2018 to a current population of over 112,000 students, which is roughly 19% of total district student enrollment,” analysts said. “By contrast, the district's student enrollment is projected to continue declining due to student out-migration and an above-average student dropout rate despite district efforts to improve student attendance.”
Since the most recent student enrollment peak in fiscal 2003, Fitch said, the district lost approximately one-third of its students by fiscal 2018; lower county birth rates, combined with students shifting to charter schools, have been the primary contributors to the decline in enrollment.
Revenues grew by almost 27% during fiscal years 2013-2017, notwithstanding student enrollment declines, analysts said. Significant increases in per-student and targeted funding by the state have been offsetting downward revenue pressures caused by fewer students, analysts said.
“Given competition with charter schools, cuts to district services and/or protracted teacher strikes could result in more students leaving the district, with immediate negative revenue impacts,” analysts said.
The district is in good shape in terms of long-term liabilities, which includes bond debt and pensions, Fitch said.
“The combined burden of overall debt and direct unfunded pension liabilities (adjusted for Fitch's standard 6% rate of return assumption) is expected to remain moderate, given district issuance plans and trends in personal income,” Fitch wrote. “The district's approximately $11.4 billion in outstanding direct debt represents about 38% of the overall long-term liability burden.”
LAUSD has over $5.5 billion in unused GO bond authorization, and has plans to issue $1 billion of new debt every other year, according to Fitch.
Fitch expects that the impact of this additional debt will be offset by the district's direct debt amortization and continued assessed valuation growth. Five bond measures since 1997 have received between 63% and 71% voter approval indicating historically good taxpayer support.
