Sac City Unified schools downgraded to near rock-bottom bond ratings amid budget crisis

Sacramento City Unified school board grapples with massive budget shortfall

Parents and school officials discuss the Sacramento City Unified School District’s budget shortfall at a meeting Thursday, Oct. 4, 2018. The district has until Monday, Oct. 8, 2018, to submit a revised budget to the county office of education.
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Parents and school officials discuss the Sacramento City Unified School District’s budget shortfall at a meeting Thursday, Oct. 4, 2018. The district has until Monday, Oct. 8, 2018, to submit a revised budget to the county office of education.

Amid a budget crisis, Sacramento City Unified School District bonds have been downgraded to near rock-bottom ratings, district officials said.

The rare low ratings from the Standard & Poor’s agency come weeks after the district announced it expects to run out of money by November 2019, after months of financial crisis.

S&P Global Ratings credit analyst Dan Kaplan said the magnitude of the district’s deficit was projected to grow over time.

“The lowered rating reflects our view of the district’s weakened financial position, specifically, its forecasted negative fund balance and structural imbalance in fiscal 2020, which we think may continue to deteriorate over the next two years if sustainable expense reductions are not implemented,” Kaplan was quoted in the agency’s ratings action summary.

Sacramento City officials said in a statement Wednesday that the new ratings indicate the district is at even more risk, and its interest payments will be higher for bonds issued under the downgrade.

“Increased interest rates and bond costs will create an increased burden for the taxpayers who voted to support bond initiatives for capital improvement projects,” the statement read. “The district must prioritize projects and consider whether bonds to pay for those projects should be issued in the near future given the financial risk involved.”

The downgrade will not have an impact on the district’s general fund, or interest rates on existing general obligation bonds.

According to Standard & Poor’s report, the agency downgraded the district’s general obligation rating four notches — from a midrange “A+” to “BBB.” The agency downgraded the district’s lease bonds two notches below “BBB” to a “BB+.”

Kaplan noted that the Financial Crisis and Management Assistance Team, an organization that provides financial analysis to school districts, issued a report to Sacramento City Unified saying it must immediately cut least $30 million from its budget. The district has identified only about a third in savings.

The ratings could drop even further if the district is unable to make significant reductions by the June 30 budget adoption deadline, or take an emergency loan, according to S&P’s release.

S&P said it made the downgrade after the district’s fund balance declined dramatically, primarily due to cost increases for staffing and benefits. The agency said it expected district reserves to deteriorate further in the near term, and said that if Sacramento City Unified doesn’t make its budget deadline, “insolvency is imminent.”

“Our district’s financial future is in jeopardy unless all employee partners come together immediately to collaborate with the district and make significant budget cuts,” Sacramento City Unified’s statement read.

Four of the five district labor groups are in negotiations with the district to address its budget turmoil. The largest of the five labor groups, the Sacramento City Teachers Association, has been in sharp disagreement with the district about the budget.

S&P noted that negotiations between labor unions and the district have had a “contentious nature.”

“The S&P downgrading should be another wake-up call that the district needs to cut bureaucratic bloat; instead it looks like it will just be another opportunity for the district to shift blame away from its own fiscal mismanagement,” teachers union President David Fisher said in a statement to The Sacramento Bee.

According to the district, it can request a new credit rating when it is ready to issue new general obligation bonds. The district said it will be eligible for an upgrade when a plan to balance the budget is in place.

The district also said it may not be able to responsibly issue new general obligation bonds without a plan to balance the budget. And without issuing bonds, the district will likely need to delay planned construction projects.

In 2018, less than 1 percent of California schools received the “BBB” rating, according to S&P’s statistics. Nearly 70 percent of California schools had mid-range ratings.

Nearly 90 percent of California schools were upgraded in their ratings in 2018, while the remainder were downgraded.

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Sawsan Morrar covers school accountability and culture for The Sacramento Bee. She grew up in Sacramento and is an alumna of UC Berkeley Graduate School of Journalism. She previously freelanced for various publications including The Washington Post, Vice, KQED and Capital Public Radio.