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MOODY'S ASSIGNS A1 RATING TO LEASE SUPPORTED OBLIGATIONS OF LOS ANGELES USD

07 Dec 2010

AFFIRMS OUTSTANDING Aa2 GO RATING

Airport
CA

Moody's Rating

ISSUE

RATING

Certificates of Participation 2010 Series B-1 (Federally Taxable Direct Pay Build America Bonds) (Capital Projects I)

A1

  Sale Amount

$46,000,000

  Expected Sale Date

12/09/10

  Rating Description

Lease Rental

 

Certificates of Participation 2010 Series B-2 (Tax-Exempt) (Capital Projects I)

A1

  Sale Amount

$36,680,000

  Expected Sale Date

12/09/10

  Rating Description

Lease rental

 

Opinion

NEW YORK, Dec 7, 2010 -- Moody's Investors Service has assigned A1 ratings to the Los Angeles Unified School District's Certificates of Participation 2010 Series B-1 (Federally Taxable Direct Pay Build America Bonds) and Certificates of Participation 2010 Series B-2 (Tax-Exempt). At this time we have also affirmed the underlying, long-term ratings on both the district's outstanding general obligation bonds and its various general fund-related financings as discussed below. The outlook for these ratings is stable, notwithstanding the region's current economic weakness and financial pressures stemming largely from the state's own financial difficulties. These pressures have thus far been no greater than those experienced by other urban districts in the state, and the district has displayed considerable willingness and ability to make deep, difficult budgetary adjustments to preserve financial flexibility consistent with the current ratings. There may also be pressures from the state budget which affect the district disproportionately as the district is the recipient of a significant amount of assistance not available to most districts in the state.

RATINGS RATIONALE

Our ratings and outlook reflect our expectation that the district will continue to make appropriate cuts in its budget to maintain operating reserves consistent with the rating level and its board adopted policies. Should our expectations prove incorrect, the district's ratings would come under negative pressure. The district serves much of the city of Los Angeles and adjacent communities. The size and diversity of the economic base serve as key credit strengths. Despite the diversity of the employment base, the local unemployment rate has climbed above the statewide rate which is significantly higher than the national rate. Continued economic weakness will likely undermine tax base growth in the near term. After remaining flat in 2010, the current year's tax base is 2.4% lower than in 2010. The district expects that the weak economy will continue to result in reduced Assessed Valuation (AV) in the near term which will limit the district's capacity to borrow and could lead to debt ratios which are higher than those of other districts in the state and large districts nationally.

The current rating action represents an affirmation of our existing Aa2 ratings on the district's general obligation bonds, the A1 rating on the district's general fund, fixed asset abatable leases, and the Aa3 rating on the district's fixed asset leases with diminished likelihood of abatement.

The two notch rating distinction between the A1 on the district's general fund, fixed asset abatable leases and the district's Aa2-rated general obligation bonds represents Moody's standard notching differential for fixed asset leases relative to a California issuer's general obligation rating. Broadly speaking the two notches reflect the risk of abatement and the narrower, general fund security pledge for leases compared to the very strong, voter-approved unlimited property tax pledge securing general obligation bonds.

USE OF PROCEEDS: The proceeds will be used to fund the district's integrated financial system, a new system for automation of classified seniority calculation system and to renovate vacant space at one of the district's high schools to house some of the district's offices that are currently occupying leased spaces.

LEGAL SECURITY: Standard California abatable lease, with typical security provisions, including two years of rental interruption insurance, title insurance, cash funded debt service reserves and a covenant to annually appropriate lease payments in the budget. The assets serving as the subjects of the lease are two new school buildings valued as nearly $130 million.

REVENUE REDUCTIONS FROM THE STATE PLACE SIGNIFICANT PRESSURE ON THE DISTRICT'S GENERAL FUND; 2011 BUDGET BALANCED WITH RELIANCE ON RESERVES

As with the vast majority of school districts in California, the district's financial position is closely associated with the financial health of the state. Since 2000 the district's general fund revenues have mirrored the budgetary fluctuations of the state. During periods of growing state revenues the district has prudently added to its general fund balances and during periods of declining revenues, such as the current budget period, the district has adjusted expenditures, often with mid-year cuts, to preserve operating flexibility consistent with the rating level.

FY 20010-11 BUDGET. Last Spring the Board anticipated a funding deficit of $620 million for fiscal 2011 and made several decisions to address the shortfall. Some of the options include cooperation with the bargaining units with respect to potential lower salaries, furloughs, etc. In the absence of any such cooperation from the bargaining units, the Board made a decision to eliminate between 5,000-8,000 positions as an option to bridge the shortfall. As part of its commitment to maintaining satisfactory financial operations, last March the district sent out approximately 5,700 layoff notices to current employees. Subsequently, the district reached agreement with the teachers' union as well as the administrators' union to minimize the layoffs by achieving savings through furloughs in 2010 and 2011. Five furlough days in 2010 saved $52 million that were used to address the 2011 deficit and seven furlough days in 2011 are expected to save an additional $88 million. The combined savings of approximately $140 million have enabled the district to rescind approximately 2,000 of the layoff notices. The district's 2011 budget is also helped by an additional $250 per student from the state's current budget as well as approximately $103 million from the Federal Jobs and Medicaid Act of 2010. Another $43 million is expected to be made available from adult education funds. Also approximately 700 certified and 1000 classified employees were laid off. As a result of all of these actions, the district's 2011 budget now calls for an ending general fund balance of $475 million or 7.4% of budgeted revenues.

While we view most of these measures as one time solutions for the district's long term budgetary problems, they nevertheless represent concrete measures for addressing next year's budget shortfalls. Moody's expects the district to make all cuts necessary in order to offset actual and potential revenue shortfalls from the state to preserve reserve levels consistent with the current rating and outlook.

FY 2009-10 and 2008-09 FINANCES. For 2010, the district adopted a balanced budget well before the start of the fiscal year and made several adjustments to reflect changes in the state's own budget. The most significant cuts were approved in April and included $320 million of reductions, including significant personnel cuts. A total of 8,846 layoff notices were sent out to certificated staff by March 15, 2009. In April and May 2009, a total of 2,947 of the certificated notices sent out in March were rescinded as a result of federal stimulus funding. In addition, 1,470 certificated employees and 700 classified employees took early retirement packages. After the "bumping" rights were enforced on all existing vacancies, a total of 2,040 certificated employees and 917 classified employees were actually laid off. For the classified employees the district continued to process layoffs through December. These cuts make up the bulk of the reductions which lowered general fund (GF) expenditures from $6.6 billion in fiscal 2009 to $6.2 billion in 2010. Total revenues during this period decreased from $6.7 billion in 2009 to $6.2 in 2010; however, the 2009 revenues are inflated as a result of the receipt of federal stimulus funds. In 2009 the district's GF balance was approximately $750 million or 11.1% of receipts but this figure again is skewed by $360 million in Federal stimulus funds which were spent in 2010. Without the stimulus funds, the district likely incurred a deficit in fiscal 2009 of $200 million despite mid-year cuts of $140 million. With all of the budgetary adjustments outlined above, and the revenue reductions discussed above, the district's unaudited 2010 ending GF balance stands at $647 million or a comfortable 10.3% of revenues.

EXCEPTIONALLY LARGE, DIVERSE PROPERTY TAX BASE; MODERATE ASSESSED VALUATION DECLINE PROJECTED

Los Angeles USD's $464 billion 2011 gross assessed valuation is more than twice that of each of the next three largest districts in the state (San Diego, San Francisco, and San Jose). Nationally, the district's tax base size is second only to New York City. Like most large issuers, taxpayer concentration is not a risk, and Los Angeles' industry diversity is arguably the highest in the country. Assessed valuation growth in the last few years has been very strong for an essentially built out district, averaging 7.4% from 2006-2010. The AV for 2010 was essentially unchanged from 2009. For the current year AV has declined by 2.3%. Some of the previous growth no doubt resulted from the easy credit and excessive optimism that characterized the housing market during this period, but the dampening effect of Proposition 13's assessed valuation growth limits should keep any AV reversal relatively moderate and well below the reported declines in home sale prices. The national economic recession and housing market downturn have significantly weakened Los Angeles' near term economic prospects, as they have for most cities nationally. This weakness, however, is likely to be cyclical rather than permanent, reflecting in large part the region's still vital economic core, its entertainment and tourism industries, and its position as a hub for international trade. While the local employment diversity has not protected it from high unemployment--most recently 13.0% in August, 2010--we believe the district's employment diversity should still help it emerge from the recession.

BELOW AVERAGE SOCIOECONOMIC PROFILE

Los Angeles residents' socioeconomic profile is well below average for the rating level, even among similarly rated, large U.S. school districts. The district's poverty rate is particularly high at 22.0% as of the 2000 census and at 19.0% for the city as of the 2006 American Community Survey. The Census Bureau's 2006 American Community Survey suggests that the city's per capita and median family income levels had at least not lost ground in the years since the decennial census. They may have even improved just a bit, though this may be more reflective of the early part of the decade's downturn in northern California pushing down the state average rather than real improvement in the Los Angeles area. Accounting for the 2006 survey's margin of error, Los Angeles residents' per capita income was anywhere from 88% to 92% of the state median. This compares to a 2000 census figure of 91.0% for the city. Similarly, the city's median family income was 76% to 80% of the state average, compared to the 2000 census figure of 75.3%.

DEBT LEVELS ARE HIGH AND RISING

Since 1997 district voters have authorized over $20 billion in GO debt to modernize all existing schools and add approximately 167,000 seats to enable the district to return to the traditional school calendar for all students. To date approximately $12.5 billion has been issued and 100 new K-12 schools have been completed with more than 93,000 new K-12 classroom seats. However, the cost of these notable achievements has resulted in direct and overall debt burdens which are significantly higher than levels common for school districts. Following the current offerings, the district's direct debt of 2.7% and overall debt burden of 4.1% will be significantly higher than the typical levels for California school districts, which are 0.7% and 2.7% respectively. A more relevant comparison with similarly rated large districts nationally indicates a similar pattern: the ratios for similarly rated school districts with populations greater than 500,000 are 1.3% and 2.6% for direct and overall debt respectively. With billions of authorized but unissued debt remaining, combined with a stagnant AV, these ratios are likely to diverge further from the district's peers, which is a potential bond holder credit weakness. In addition to $11.9 billion outstanding GO bonds, the district also has approximately $540 million in lease supported obligations of which $109.6 million are in variable rate mode. The district's generally favorable average daily liquidity of $299 million mitigates its exposure to the relatively small amount of variable rate debt.

Outlook

The outlook for our ratings on LAUSD's long-term debt remains stable at this point, as we expect the district will likely preserve financial flexibility by making all necessary budget reductions to offset revenue reductions from the state, and maintain a financial position consistent with its highly rated, large district peers.

What could move the rating-UP

- Significant improvement in the district's financial position

- Trend of significant growth in assessed valuation

- Substantial improvement in socioeconomic measures

What could move the rating-DOWN

- Significant deterioration in the district's financial position

- Protracted decline in the district's assessed valuation

KEY STATISTICS

Fiscal 2009, GAAP basis:

Net cash as % of revenue: 7.6%

Total fund balance as % of revenue: 11.1%

Available fund balance as % of revenue: 2.7%

Net direct debt as % of FY 2011 AV: 2.7%

Overall net debt as % of FY 2011 AV: 4.1%

2000 Census:

Median Family Income: $39,372 (74.3% of the state average)

Per Capita Income: $19,637 (86.5% of the state average)

Individuals below poverty level: 22.0%

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Kevork Khrimian
Analyst
Public Finance Group
Moody's Investors Service

Eric Hoffmann
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS A1 RATING TO LEASE SUPPORTED OBLIGATIONS OF LOS ANGELES USD
No Related Data.
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