San Francisco Community College District’s pending accreditation termination is a credit negative, Moody’s Investors Service said Monday.

The Accrediting Commission for Community and Junior Colleges, which evaluates colleges in California, Hawaii and U.S. Pacific Islands, decided to terminate the district’s accreditation based on the district’s failure to address deficiencies regarding governance, fiscal management, and financial accountability.

The termination will be effective July 31, 2014.

“This development is credit negative for the community college district, which has $359 million of general obligation debt, because a loss of accreditation threatens the district’s ability to continue operations,” analysts said in a report. “It also reflects a credit negative trend of growing accreditation pressure on California community college districts.”

The district faces possible cessation of operations if it loses its planned appeal and if the state does not intervene. Termination of accreditation would lead to the loss of both state grant funding and Title IV federal financial aid. These funding streams comprise 54% of unrestricted general fund revenue.

Moody’s does not expect San Francisco CCD’s payment of GO debt to be interrupted due to its accreditation loss because the county, not the CCD, levies and collects property taxes and acts as the paying agent for the district’s bonds.

However, analysts said the smooth functioning of this process has not been tested in the case of a complete closure of a CCD, which is a possible scenario in San Francisco’s case.

Although the district will maintain accreditation over the coming year and during the appeal process, Moody’s expects enrollment to continue declining as students seek alternative local colleges.

The district’s looming loss of accreditation is part of a broader national trend, with such sanctions increasing almost 50% among seven regional accrediting commissions between 2009 and 2010.

California’s accrediting commission has imposed sanctions on 20% of rated California CCDs, up from 12% in 2004.

Also on Monday, Standard & Poor’s downgraded its rating on San Francisco Community College District’s general obligation bonds to A from A-plus, with a negative outlook.

“The rating action reflects our view of the district’s persistent difficulty in resolving sanctions by the accrediting commission and our view that a potential loss of accreditation in fiscal 2015, as recently announced by the commission, has complicated management of operations,” said Standard & Poor’s credit analyst Chris Morgan.

The negative outlook reflects the agency’s view that the potential loss of accreditation could have lasting negative effects on the district’s operating revenue, regardless of the district’s ability to successfully resolve the commission’s accreditation sanction.

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