SAN FRANCISCO - The Vallejo, Calif., City Unified School District wants you to know it isn't declaring bankruptcy.

The district's municipal cousin, the city of Vallejo, last week decided to seek Chapter 9 bankruptcy protection. The city of 120,000 plans to file this week. Vallejo USD, which is not a part of the city government, quickly felt the impact of the city's decision, as nervous investors called to ask if their bonds would be repaid or else simply sold the bonds they held.

"This is a total shock to us because we have absolutely nothing to do with the city," said Jason Hodge, a spokesman for the district. "The bonds that we issue in order to build schools are safe and secure."

School district general obligation bonds with a 5% coupon maturing in August 2027 traded as low as 85, yielding 6.35%, late last week, according to the Securities Industry and Financial Markets Association's Web site, The infrequently traded bonds last sold at 99 with a yield of 5.1% a month before the bankruptcy vote. The bonds have traded more since the bankruptcy vote than they did in the previous month.

The school bonds had already taken a hit because they are insured by Financial Guaranty Insurance Co. The insurer has faced a wave of downgrades as it struggled with losses on collateralized debt obligations. FGIC is rated Baa3 by Moody's Investors Service, BB by Standard & Poor's, and BBB by Fitch Ratings.

The school district has about $153 million of debt outstanding and has voter approval to issue another $20 million of GOs. It plans to be back in the market later this year and wants to make sure investors know its bonds are good. The district does not have an underlying credit rating and issues all of its bonds with insurance.

Solano County collects the property taxes that back the school GOs and transfers the money directly to the debt service fund, according to Hodge. While the city of Vallejo provides security guards and some funding for after-school programs for the district, it does not control the school system's finances or have the right to divert money from its operating or debt service funds.

That's not to say that Vallejo USD doesn't have financial problems of its own. All California public school districts are preparing for state budget cuts. Gov. Arnold Schwarzenegger has proposed a $4.8 billion cut in school funding this year as the state tries to close a $16 billion to $20 billion budget gap this year. The governor will present a revised budget plan later this week.

"We're in the same boat as everyone else," Hodge said, adding that the school district will pass a balanced budget no matter what the governor proposes. It issued layoff notices to 240 workers in March and April, and it has identified $5.8 million in cuts to its $153 million budget for fiscal 2008-2009. The district won't know exactly how much it has to cut until the state passes a budget.

Vallejo USD has been working to recover from a fiscal crisis of its own. In June 2004, it borrowed $60 million from the state and entered state receivership. The receiver must approve all budgets, and the district must submit to audits by the California controller. Hodge said the district hopes to exit receivership in the next two years.


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