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MOODY'S ASSIGNS MIG-1 RATING TO TAX AND REVENUE ANTICIPATION NOTES OF LOS ANGELES UNIFIED SCHOOL DISTRICT, CA

21 Jun 2011

APPROXIMATELY $660 MILLION IN SHORT TERM DEBT AFFECTED

Primary & Secondary Education
CA

Moody's Rating

ISSUE

RATING

2011-12 Tax and Revenue Anticipation Notes

MIG 1

  Sale Amount

$660,000,000

  Expected Sale Date

06/22/11

  Rating Description

Tax and Revenue Anticipation Notes

 

Opinion

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.

RATING RATIONALE

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 CURRENT RATING

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 alternate liquidity.

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 January.

KEY STATISTICS

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.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

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

Michael Wertz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
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New York, NY 10007
USA

MOODY'S ASSIGNS MIG-1 RATING TO TAX AND REVENUE ANTICIPATION NOTES OF LOS ANGELES UNIFIED SCHOOL DISTRICT, CA
No Related Data.
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