San Diego Schools' tough financial decisions earn a ratings boost

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Employee layoffs have enabled San Diego Unified School District to close a deficit and earn a triple-A rating Tuesday from Kroll Bond Rating Agency.

The San Diego school district cut 900 positions last year through layoffs and early retirement, said Patricia McGuigan, a Kroll director. It plans to cut another 200 positions in the upcoming school year, 70 of which are currently filled including 19 teaching positions, according to district documents.

“Last year, we knew that staff reductions were occurring, but we needed more time to see that the structural balance could be sustained,” McGuigan said. “So, now for 2019 they are looking at another operating surplus. In 2018, they had an operating surplus as well — that was the year they closed the structural gap.”

Kroll cited the district’s strong tax base performance, strong legal protections for debt repayment and the district’s improved financial profile in the upgrade of the district’s long- term rating to triple-A from AA-plus in a May 14 report.


Kroll had said in a March 27 report that it was analyzing the credit implications for San Diego schools, Los Angeles Unified School District and the Board of Education of the City of Chicago in light of the March 26 decision by the 1st Circuit Court of Appeals in the Puerto Rico debt restructuring that payment of special revenue bonds in municipal bankruptcies is voluntary, rather than mandatory. That case, brought by Assured Guaranty Corp. and three other insurers, involved Puerto Rico Highways and Transportation Authority’s special revenue bonds.

Fitch Ratings placed four school districts on negative watch following that decision.

“The ratings for each of the school districts was informed by the special revenue opinions furnished to us at the time we initially rated the bonds,” said Karen Daly, a Kroll senior managing director, as to why those three were singled out for analysis.

Prior to the recent upgrade of San Diego schools’ long-term rating, which came as part of annual bond surveillance, Kroll analysts consulted outside counsel regarding the March 26 appeals court decision.

The rating company “believes it is significantly unlikely that the district would be able to cause a cessation of bondholder payments or diversion of the tax revenues in a Chapter 9,” Daly said.

Kroll hasn’t taken any rating actions or made outlook changes as a result of the ruling, Daly said.

“Our approach is to look at each of the credits on a case-by-case basis and to not apply ratings ceilings,” Daly said. “We are going to look at the transactions and the legal underpinning in concert with the 1st Circuit decision on a case-by-case basis.”

The decline in the school age population, economic conditions and competition from charter schools forced a plunge in San Diego schools enrollment over the past 10 years, forcing the layoffs, according to Kroll.

Enrollment fell from nearly 105,000 in 2015 to 98,000 this year and the district expects to lose another 10,000 students by 2025, according to a Kroll chart created using the district’s bond documents.

The district used $12.5 million in one-time money from the state and made $8.5 million in cuts in March to avoid making additional layoffs this year, according to district budget documents. It is anticipating a $13.9 million surplus for fiscal 2019, according to Kroll.

Kroll looks at several determinants in deciding on a rating. It raised the determinant on the district’s financial performance and liquidity to A-plus from A.

“The revision on that determinant reflects the district’s demonstrated expenditure control, elimination of a larger structural gap and improvement in reserves for future needs,” McGuigan said.

The district has close to $4 billion in outstanding GO debt including the $250 million issued in April, according to Kroll.

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