Schools’ Credit Rating Takes a Hit

For the second time in two years, a major Wall Street rating service said Wednesday that it was slightly downgrading the Los Angeles Unified School District’s credit score. Fitch Ratings cited the district’s deficit spending and still-unsettled labor contracts as among the reasons for the change.

Fitch lowered the district’s general obligation bonds rating to A+ from AA- and the rating for its certificates of participation, another common form of borrowing, from A to A-. Although still relatively good, the new ratings could cost the school district millions in extra interest.

District officials said they had not yet heard from the other two major rating services, Moody’s and Standard & Poor’s, which were meeting Wednesday and today, respectively, to review the district’s credit situation.

The ratings, an indicator of risk to investors, affect how much interest the district must pay on funds it borrows. The highest rating under the system employed by Fitch and S&P; is AAA. Moody’s uses a different system.

L.A. Unified is in the midst of a record $14-billion building and remodeling program, financed with a combination of state and local bond measure proceeds. Much of that comes from the nearly $9.6 billion in school construction bonds that district voters have approved in three measures since 1997.

Fitch’s action could raise the interest rate on future debt by the equivalent of one-tenth of one percentage point; that would add, for example, $7.5 million in interest costs to a $300-million bond issue with a 25-year payback term, district officials said.

L.A. Unified plans to sell $250 million in bonds in the next 60 days and issue $70 million in certificates of participation within the month, said district Controller Richard J. Knott.

“I was a little disappointed but not surprised,” Knott said, blaming the change in part on the budget gap-plagued state’s even lower credit rating, BBB.

School districts depend on the state for much of their funding, and California’s financial troubles were likely to influence the rating services’ assessment of local districts, he said.

He noted that the board of education had taken steps to improve the district’s financial picture, including cutting about $500 million from this year’s $6.8-billion operating budget.

“The board knows it has to correct the structural imbalance” by bringing costs into line with revenue, Knott said, adding, “The board took some major steps along that road and will have to continue along that road in the future.”

In February 2003, Fitch dropped the district’s rating from AA to AA-, the fourth-highest rating. It cited the district’s consecutive deficit budgets and increased indebtedness and the state’s financial condition.

The ratings services take a “very cut-and-dried look” without recognizing the balancing act by the district in continuing to improve achievement and build new schools in the midst of a continuing state budget crisis, said Glenn Gritzner, special assistant to Supt. Roy Romer.

“We think we are sort of holding the line in 100-year-storm financial weather,” Gritzner said.