Fitch Rates Los Angeles Unified School District, California's $200MM GOs 'A+'

Business Wire, Sept 7, 2004

SAN FRANCISCO -- Fitch Ratings assigns an 'A+' rating to Los Angeles Unified School District, CA's (the district) $200 million general obligation (GO) bonds, Election of 2004. The bonds will be sold competitively on Sept. 15. Fitch also affirms the 'A+' rating on $4.18 billion in outstanding parity debt and the 'A-' rating on various certificates of participation (COPs). The Rating Outlook for both ratings is Stable. Financial advisors for the upcoming sale are Gardner, Underwood and Bacon LLC, Tamalpais Advisors, Inc., and Kelling, Northcross & Nobriga.

The ratings reflect the district's continued financial pressures as well as initial elements of progress in restoring ongoing operating balance. A sizable operating deficit in fiscal 2004 is expected, substantially reducing the district's year-end reserves, although the fiscal 2005 budget foresees no additional reduction. However, the current budget does not fund cost of living adjustments and labor agreements remain unsettled. Meanwhile, the district's underlying economy remains broad and diverse with declining unemployment levels and healthy assessed value gains. The district operates the nation's second largest school system and serves a broad range of educational and community needs including adult education, jobs skills training, and day care/preschool education.

While cutting nearly $500 million in expenditures for fiscal 2004, the district budgeted to retain some programs at levels beyond that supported by state and local resources. Rather, existing general fund reserves were used, resulting in an expected $259 million fund balance reduction, a significant 4.2% of estimated expenditures. The estimated ending balance is satisfactory at $320 million or 5.2% of the year's $6.13 billion in expenditures. However, this balance is well below prior year's levels, reaching as high as 14.9% of audited results in fiscal 1999 and 9.5% as recent as fiscal 2003. Fitch notes that the estimated fiscal 2004 ending balance is above that projected a few months ago ($232 million or 3.5%) two months ago and well above the budgeted $78 million.

The recently adopted fiscal 2005 brings revenue and spending in balance, budgeting to retain the existing reserve levels, in keeping with the 5% set by policy. Balance is achieved through a number of actions including recurring items and those giving budgetary relief in the near-term only. The non-recurring items include the July 2004 COP restructuring and substituting surety bonds for three debt service reserve funds. The fiscal 2005 budget is vulnerable to the outcome of labor agreements which remain unsettled for both fiscals 2004 and 2005. The district will need to exhibit strong fiscal discipline to secure agreements that fit within the budget's tight parameters, or to take actions that offset unanticipated costs.

This sale marks the district's first issuance from Measure R, a sizable $3.87 billion general obligation bond authorization approved by voters in March 2004. Other than the $150 million issued currently to refund outstanding certificates, the funds will be used for facility modernization. This authorization, along with the district's $3.35 billion Measure K and state resources will fund the district's massive $15.5 billion capital improvement program. Substantial building is needed to meet existing student needs as well as provide for expected moderate growth.

Fitch acknowledges certain positive developments by the district. These include adoption of prudent debt and fiscal policies, which should help maintain healthier financial trends in the future. Fitch also notes rising attendance levels, which had fallen in recent years despite flat or rising enrollment. Lastly, test scores continue to show progress toward reaching statewide averages, which could help increase enrollment and attendance. The decreasing differential is notable given the district's much higher share of students qualifying as English language learners and eligible for federal lunch program funding. While better academic performance does not directly impact credit quality, continued improvement could help attract students, increase attendance (and thereby state funding) and decrease student loss to competing private and parochial schools.