LOS ANGELES — The San Diego Unified School District, despite double-A ratings, has put California lawmakers on notice that if proposed trigger cuts are implemented, it could be facing insolvency in the next two years.
When the Legislature passed this year’s budget, they did so with the caveat that if revenues fell below a certain level, it would trigger automatic spending cuts.
The district was already anticipating a $57 million deficit for 2012-13 before the state’s announcement of a shortfall in September, but had achieved a balanced budget for 2011-12. The state’s cuts could create a $30 million shortfall for this year and ratchet up the following year’s deficit to $118 million, said Linda Zintz, the district’s communications director.
In order to cover this year’s shortfall, the school system would have to spend the entire $25 million in its reserve fund and use $5 million in proceeds from real estate sales and other funding sources they were hoping would help close next year’s funding gap, Zintz said.
“We aren’t the only school district in the state in this situation,” she said. “Our superintendent just made a decision to make a bold statement.”
If the district becomes insolvent, Zintz said, the state would fire the superintendent, appoint someone to run the district, and the school board would only have advisory powers, she said.
The state also would provide an emergency loan to the San Diego district to make up the shortfall and the school would have to pay back the loan before it could resume full local control, according to the California Department of Education’s website. In the past, such loans to insolvent districts have been converted into bond issues.
Despite its financial problems, the district is not in danger of defaulting on its bonds, said board president Richard Barrera.
“Luckily, our bond measures are paid for through a dedicated source of funding that comes from local property taxes,” he said. “We are OK there, but we do worry a little about our credit rating.”
In California, voters approve a special property tax when they pass a local school general obligation bond measure, and the revenue is not to be used for operating expenses such as salaries.
In 2010 the district received a Aa1 from Moody’s Investors Service and a AA from Standard & Poor’s for $163 million of GO bonds. The district reported $1.6 billion of outstanding GO debt at the end of fiscal 2010.
Sussan Corson, a credit analyst with Standard & Poor’s, said the agency is in discussions with the district about its current fiscal challenges. “Ultimately, when we get new information, the ratings come under review,” she said.
Even though the GO bonds are secured by local property taxes, the financial performance of the district is also important, according to Corson. Its debt profile is also low to moderate, she said.
“We did mention the current state funding pressures in our last write-up,” Corson said. “We said if the district failed to make budget adjustments and the fund balance further declined, it could put downward pressure on the rating.
Analysts are keeping an eye on California’s school districts, because many are facing fiscal challenges because of their dependence on uncertain state funding, Corson said.