Moody's Investors Service said it downgraded to A2 from Aa3 the rating on Victor Valley Union High School District, Calif.'s general obligation bonds outstanding in the approximate amount of $70 million.

A negative outlook has been assigned.

The multi-notch downgrade reflects the district's growing trend of structurally unbalanced operations and inability to cut costs amid state funding cuts and declining property tax revenues.

State funding deferrals have substantially narrowed the district's liquidity thus increasing its dependence on intra-fund borrowing for cash flow needs and weakening its financial flexibility. The rating also incorporates the school district's sizable tax base, available liquidity outside the general fund, and manageable debt burden.

The negative outlook reflects the district's inability to issue the additional general obligation (GO) debt needed to pay off the bond anticipation notes (BAN) maturing in December 2012 and the ambiguity surrounding the repayment. The district will either use intra-fund borrowing or issue repayment notes to mature the $27 million worth of BANs.

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