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21 Jun 2011
APPROXIMATELY $660 MILLION IN SHORT TERM DEBT AFFECTED
Primary & Secondary Education
2011-12 Tax and Revenue Anticipation Notes
Expected Sale Date
Tax and Revenue Anticipation Notes
NEW YORK, Jun 21, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to Los Angeles
Unified School District's approximately $660 million issue of 2011-12 Tax and
Revenue Anticipation Notes, Series A. The Notes are being issued to fund the
District's mid-year cash flow needs and are secured by a pledge of unrestricted,
fiscal 2012 general fund receipts.
The key credit strengths reflected in the rating include the very early setting
aside of funds for Note repayment, the robust coverage levels during the months
of the set-asides by available revenues in those months, and the manageable size
of the Note relative to estimated 2012 receipts. The relatively long history of
conservative projections wherein actual year-end cash balances exceed
projections and, critically, a significant amount of readily accessible
alternate liquidity also factor favorably in the rating. The key credit
weakness is the narrowing of projected general fund balance at the end of
fiscal 2012. However, this weakness is mitigated by the abundance of the
District's available liquidity outside of the cash flows, which is available to
be drawn upon and under certain conditions, does not have to be repaid until the
following year. Also reflected in the rating are the District's strained but
stable financial position, a proposed budget based on conservative assumptions
considering the uncertainties surrounding the State's budget, and the Board's
demonstrated willingness to make difficult decisions in balancing the District's
budget and maintaining financial flexibility.
DISTRICT'S OVERALL LIQUIDITY IS SIGNIFICANTLY WEAKER ALTHOUGH SUFFICIENT FOR THE
After an extended period of cash surpluses in its general fund, the District's
general fund cash position peaked in 2007 with an ending balance of nearly $850
million or 12.1% of receipts. Despite a sizable cash draw-down of approximately
$320 million in 2009, the district's year-end cash position remained at 7.5% of
receipts. In 2010, another cash draw-down of $228 million reduced the year-end
cash to just 4.6% of receipts. In the current fiscal year the District's cash
position appears to be headed for a reversal of the recent trend with cash
increase of $178 million, which will bring the year-end cash position to $458
million or a relatively strong level of 7.2% of receipts. This is significantly
stronger than the projected 2011 ending balance of $208 million or 3.6% of
receipts. Actual receipts outperformed projections by significant
margins. Principal Apportionment was $130 million higher than the
projection. Federal revenues, mostly in the form of stimulus funds, were $196
million more than the projections while categorical state receipts exceeded
projections by $272 million. Combined with other small variations, total
receipts exceeded projections by $597 million. With these better than expected
receipts, the district was able to reverse some of its projected expenditures
cuts and spent $170 million more than projected on salaries and benefits and
$185 million more on Services and Supplies. In total, the district disbursed
$356 million more than projected, which offset most of the higher than expected
receipts of $597 million, and combined with $9.28 million in higher than
expected starting cash position, led to the $250 million higher than projected
ending cash position.
The district's projections for 2012 are conservative as they reflect
uncertainties associated with the state budget. Overall, total receipts for
fiscal 2012, without draws on alternate liquidity, are projected to be $664
million less in than in 2011, and disbursements are estimated to be $187 million
less, to combine for a net worsening of $477 million over fiscal 2011, or a cash
decline of $299 million compared to a cash increase of $178 million in 2011.
Principal apportionment, Federal funds and Other State revenues are all
projected to decrease by $307 million, $232 million and $136 million
respectively. A projected decrease of just $210 million in salaries and benefits
will offset only part of the revenue loss. The revenue estimate may prove to be
overly conservative but not unreasonable. But based on these projections, the
District estimates an ending 2012 balance of just $159 million or a very narrow
2.8% of receipts. Therefore the rating relies heavily on the availability of
As part of its commitment to maintaining satisfactory financial operations, last
March the district sent out approximately 5,000 layoff notices to teachers,
nurses and librarians. Subsequently, the district reached agreement with the
majority of unions, including the teacher's union, to minimize the layoffs by
achieving savings through furloughs in fiscal 2012, the actual number of which
depends on actual revenue cuts from the state.
AMPLE ALTERNATE LIQUIDITY
Moody's views the district's identified alternative liquidity as significant and
crucial for the rating. Most significant of these liquidity sources is the
Workers Compensation fund which is estimated at $470 million by June 30, 2012.
Other key resources include the Special Reserve-Capital Outlay fund, $84
million; Proposition 55 State Facilities fund, $326 million; Deferred
Maintenance, $75 million. The sum total of these and other funds is projected at
$1.155 billion. However, by State law only up to 75% of these funds can
be borrowed, and we have therefore included only $866 million in our analysis.
EARLY SET-ASIDE AND STRONG COVERAGE DURING SET-ASIDE MONTHS
The District's Note issue is a manageable size at 11.7% of projected fiscal 2012
receipts. While the end-of year balances are important to assess the District's
overall cash position for the year, also important for our analysis is the cash
performance in months when the funds for Note repayment are set aside. The 2012
cash flows indicate the following schedule for setting aside funds for Note
repayment: January 2012, $330 million; and March 2012, $330 million. The
weighted average for these set asides is a very early 5.6 months prior to Note
maturity on August 1, 2012. Also importantly as the TRANs have first claim on
unrestricted revenues of the District, coverage ratios with available general
fund receipts in these months ranges from a strong 2.03x in March to 4.88x in
Projected Amount Borrowed as % of Receipts, FY 2012: 11.7%
Actual Ending Cash as% of Receipts, FY 2010: 4.6%
Estimated Ending Cash as% of Receipts, FY 2011: 7.2%
Projected Ending Cash as% of Receipts, FY 2012: 2.8%
Usable Alternate Liquidity Projected at 6/30/12 : $866 million
Alternate Liquidity % of FY 2012 receipts: 15.2%
Pledged Set-Aside timing (months before July): 5.6 months
The principal methodology used in this rating was Short-Term Cash Flow Notes
published on May 2007.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, and public
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS MIG-1 RATING TO TAX AND REVENUE ANTICIPATION NOTES OF LOS ANGELES UNIFIED SCHOOL DISTRICT, CA
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No Related Data.
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