Sacramento schools take a multi-notch ratings hit from two agencies

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Sacramento City Unified School District’s budget crisis has resulted in multi-notch downgrades from two rating agencies.

Moody’s downgraded the school district’s ratings two notches to A2 from Aa3 on Friday and revised the outlook to negative from stable on $327 million in general obligation debt it rates.

S&P Global Ratings on Jan. 25 lowered its long-term rating on the school district four notches to BBB from A-plus and lowered the district's lease-revenue bonds five notches to junk-level BB-plus from A. S&P also placed the ratings on CreditWatch negative.

California's 10th-largest school district has 43,000 students enrolled on 76 campuses.

The Sacramento County Superintendent of Schools installed a fiscal advisor with veto power over spending after it disapproved the district’s budget in October. The budget carried a $24 million deficit.

“This deficit will grow rapidly without prompt action and would lead to the district having a negative cash balance by November 2019 in the absence of fiscal adjustments,” Moody’s analysts said.

The district said, if it finds itself in that situation, it would not be able to issue tax revenue anticipation notes, because of a suspected inability to pay, S&P credit analyst Dan Kaplan wrote.

“Given the possibility of cash insolvency, we believe that the district's lease is currently more vulnerable than its voter-approved GO debt, as the district may need to make decisions about how to allocate diminishing levels of cash as liquidity pressure increases,” Kaplan wrote.

Moody’s A2 rating takes into consideration the range of options available to the district to balance its budget prior to exhausting reserves, analysts said. Those options include negotiating cost saving measures to its health and welfare benefit packages, implementing programmatic cuts and workforce reductions.

“These measures, if implemented promptly, will likely see the district end fiscal 2019 with narrow but positive financial reserves in the general fund and stable finances in fiscal 2020,” Moody’s said.

Moody’s rating weighs the county school superintendent’s strong fiscal oversight and the district’s growing and diverse tax base in the rating against what analysts called an elevated, but manageable debt burden and pension liabilities.

“The rating further reflects the strength of the unlimited tax pledge backing the GO bonds, which is secured by a statutory lien on an ad valorem property tax levy that is dedicated to debt service on the GO bonds and levied, collected, and disbursed by the county, separate and apart from the district's operating funds,” Moody’s analysts wrote.

Though the district is conversing with its labor unions, S&P analysts said they “feel that considerable uncertainty remains regarding the district’s ability to make necessary cuts by its June 2019 budget adoption deadline. Should it fail to do so, the district may need to seek state assistance, ranging from emergency loans to the possible appointment of a state administrator.”

Superintendent Jorge Aguilar has said the school district cannot eliminate the structural deficit without concessions from the unions.

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