SAN FRANCISCO - An accreditation policy change recently approved by the U.S. Department of Education is a credit positive for San Francisco Community College District, according to Moody's Investors Service.

The agency currently assigns an A2 rating with a negative outlook to the college district, which was notified last year that its accreditation would be terminated by July 31 this year.

The policy change at the Accrediting Commission for Community and Junior Colleges will give colleges facing termination of accreditation an opportunity to apply for "restoration status" in order to receive an additional two years to comply with requirements and standards.

"If SFCCD is granted restoration status, the additional time provided to address its deficiencies would significantly reduce the likelihood that it would lose its accreditation," Moody's said in a report Thursday. "The loss of accreditation would render SFCCD ineligible for state and federal aid funding, approximately 56% of its general fund revenues, and likely result in closure of the college."

SFCCD has reported that it plans to apply for restoration status before July 31.

Separately, the district's appeal of last year's termination decision will result in an additional progress evaluation by the accrediting commission, following a June 13 ruling by the appellate panel.

While the district is pursuing these options, the city attorney is also contesting the termination of its accreditation in San Francisco superior court. The judge presiding over the case has order a stay on the termination until the case is heard in October.

"Regardless of the result of ACCJC's upcoming review or court case, we believe the new restoration status offers a strong opportunity for SFCCD to maintain its accreditation," Moody's said.

If the district is granted restoration status, the agency said it believes SFCCD would likely receive a reaffirmation of accreditation from the ACCJC. Management reports that the district has resolved 95% of its deficiencies as of June 2014, and will likely be fully compliant with commission standards within 18 months.

Fitch Ratings also recently said it views the policy change as a credit positive for SFCCD.

Still, the district faces significant financial challenges with thin reserves and a heavy reliance on short-term cash flow support, driven by loss of state funding tied to student enrollment, Moody's said.

The district experienced a 34% drop in full-time equivalent students between the fiscal year ended June 30, 2011, and fiscal year ended June 30, 2014. Moody's said the decline in enrollment can largely be attributed to the looming threat of accreditation loss.

"Though unlikely, if SFCCD were to fail to come into compliance with ACCJC standards at the end of the restoration period, we expect payment on its general obligation debt would continue without interruption," analysts said. "The county levies and collects property taxes and acts as the paying agent for the district's bonds and would continue to do so even if the college were to close."

The policy change is also a credit positive for the six other Moody's-rated California community college districts facing accreditation sanctions from ACCJC, including the Los Angeles Community College District.

While the change is a credit positive for these colleges, Moody's said its opinion on the impact of accreditation sanctions has not changed for colleges overseen by other accreditation commissions across the country.

However, analysts said the introduction of the restoration status at ACCJC could inform and guide future policy changes at the other accreditation commissions.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.