Moody’s Investors Service on Wednesday slashed the Hayward Unified School District’s certificates of participation to one notch above junk, citing a possible budget implosion.

According to Moody’s, the district in San Francisco’s East Bay suburbs faces a budget crunch, compounded by labor unrest, which could result in state intervention.

Moody’s dropped the COPs two notches to Baa3 from Baa1 and assigned a negative outlook. At the same time, it affirmed Hayward USD’s A2 rating for general obligation bonds.

The four-notch distinction reflects the distinct repayment sources for the bonds. The GO debt is repaid with a dedicated ad-valorem property tax.

The COPs are paid with appropriations from the district’s general operating budget.

According to analysts, that budget is poised to end the fiscal year with a negative balance.

“The likelihood the state would intervene through a takeover of the district’s operations remains high,” Moody’s noted.

While California law requires the state to step in if the district proves insolvent, the state’s own budget woes complicate matters.

An operating loan to the district requires the Legislature to adopt an appropriations bill — something that most recently took place in 2009 for the King City Joint Union High School District.

“This requirement subjects the district to appropriation risk in the event of a declaration of insolvency,” Moody’s noted. “In the unlikely event this action did not occur for whatever reason, Hayward Unified’s continued ability to make its annual payments on its COPs could be threatened by other funding priorities and cash needs.”

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