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Rating Action:

Moody's affirms LA USD, CA's GO at Aa3; outlook is stable

16 Sep 2020

New York, September 16, 2020 -- Moody's Investors Service has affirmed the Aa3 ratings to Los Angeles Unified School District, CA's outstanding general obligation unlimited tax debt and the A2 Certificates of Participation rating. Concurrently, Moody's assigned a Aa3 to the district's 2020 General Obligation Refunding Bonds, Series A (Dedicated Unlimited Ad Valorem Property Tax Bonds) expected to be sold by the end of September and General Obligation Bonds, Measure Q, Series C (2020) (Dedicated Unlimited Ad Valorem Property Tax Bonds) expected to be sold by the end of November. We also assigned an A2 rating to the Refunding Certificates of Participation, 2020 Series A, expected to be sold by the end of October. The expected par amounts are: $298.9 million for the General Obligation (GO) refunding bonds, Series A; $1.0 billion in GO bonds Measure Q, Series C, and $29.1 million in Refunding Certificates of Participation (COPs) Series A. Post sale, the district will have close to $11.1 billion in outstanding GO bonds. The district currently has $162.9 million in outstanding COPs. The outlook is stable.

RATINGS RATIONALE

The Aa3 rating reflects the district's extremely large and growing assessed valuation (AV) that now approaches $787.7 billion, as well as financial performance that will remain stable despite additional costs associated with the coronavirus pandemic coupled with flat state aid. Strong financial performance positioned the district to address both immediate challenges stemming from unreimbursed costs associated with the eventual reopening of the district's schools as well as longer term trends including declining enrollment and rising fixed costs that contribute to continued dependence on one-time revenues to fund operations. Favorably, the state's commitment to hold districts harmless for any enrollment losses in fiscal 2021, in combination with federal and state coronavirus mitigation payments, reduce projected operating deficits to levels allowing the district to maintain the required 1% unrestricted reserve through fiscal 2023. The rating is also based upon a slightly elevated, but manageable debt burden, inclusive of the current issuance and rising pension costs.

The rating further incorporates the above-average legal strength of California school district general obligation bonds.

The A2 rating on the district's outstanding COPs reflects the security of the standard, California abatement lease underlying these COPs. The two notch distinction from the general obligation rating represents the weaker security pledge for lease-backed obligations. The rating also takes into consideration the lack of a reserve account for the refunding COPs.

We regard the coronavirus outbreak as a social risk under our ESG framework, given its substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for LAUSD given the district's reserve levels and anticipated reimbursements. However, the situation surrounding the coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of the district changes, we will update the rating and/or outlook at that time.

RATING OUTLOOK

The stable outlook reflects our expectation that notwithstanding projected deficits in part stemming from additional costs associated with the district's coronavirus response, the district's financial position will remain satisfactory for the current rating level.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Elimination of structural budget gap

- Reversal of enrollment declines

- Addition of new revenue streams to offset expenditure growth

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Weakened state funding absent offsetting expenditure reductions

- Actual financial performance significantly weaker than multi-year projections

- Continued and worsening declines in enrollment

LEGAL SECURITY

The general obligation bonds are secured by an unlimited property tax pledge of all taxable property within the district boundaries. Debt service on the rated debt is secured by the district's voter-approved unlimited property tax pledge. Los Angeles County (Aa1 stable) rather than the district levies, collects and disburses the district's property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds.

The district's COPs are structured with standard California abatement leases on essential property, and leased property for outstanding COPs largely consists of the district's headquarters building. The leased property for the refunding COPs consists of the Playa Vista Elementary school, which is considered an essential asset with an estimated enrollment of 529 students. In selecting Playa Vista as the leased property, the district identified at least six other schools with similar book values averaging close to $34.3 million that could be substituted for Playa Vista in the event that the school is not able to be occupied. Playa Vista's book value equals close to $37.8 million. The district's pre identification of equivalent assets and its willingness to substitute pledged property in the event of abatement serve to offset the risk associated with the district's release of a debt service reserve fund in conjunction with this refunding.

USE OF PROCEEDS

The 2020 GO Refunding Bonds, Series A will refund, on a current basis, all outstanding maturities of the Series KRY (2010) GO bonds. Amortization of refunding debt service will be shortened by one year, producing strong estimated net present value savings of close to $127.5 million or 33.6% of refunded bonds. The $1 billion in Measure Q GO bonds will fund a variety of capital improvements throughout the district. Projects will focus on modernizing and renovating schools.

The refunding COPs, 2020 Series A, will refund and defease three outstanding series of lease obligations: the 2010 Series B-1 and B-2 COPs and a 2013 private placement lease financing. The refunding will provide cash flow savings to the district's general fund estimated at $1.1 million in fiscal 2021 and around $500,000 annually thereafter through maturity in 2035. The existing debt service reserves of close to $8.6 million associated with the outstanding COPs are being released and contributed to the refunding, with no debt service reserve associated with the refunding COPs. While weakening the security of the COPs, the district's existing cash balances as well as its policy of restricting general fund debt service associated with COPs to a maximum of 2.0% of general fund expenditures also help to offset this weakness.

PROFILE

The district encompasses approximately 710 square miles in the western section of Los Angeles County. The district is located in and includes virtually all of the City of Los Angeles and all or significant portions of several surrounding cities, including Bell, Carson, Cudahy, Gardena, Huntington Park, Lomita, Maywood, San Fernando, South Gate, Vernon, and West Hollywood, in addition to considerable unincorporated territories devoted to both residential development and industry. The district is the second largest district in the country, with estimated enrollment for fiscal 2021 equal to 463,539. An additional 116,257 students attend independent charter schools, accounting for around 20% of district area enrollment. The district's enrollment has been steadily declining since fiscal 2003, with a loss of over 250,000. Over the past decade, annual enrollment declines have averaged close to 2%, with a similar loss projected for fiscal 2020.

METHODOLOGY

The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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No Related Data.
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