New York, February 19, 2016 -- Issue: 2016 General Obligation Refunding Bonds, Series A (Dedicated Unlimited Ad Valorem Property Tax Bonds); Rating: Aa2; Sale Amount: $575,000,000; Expected Sale Date: 03/01/2016; Rating Description: General Obligation
Issue: General Obligation Bonds, Election of 2008, Series A (2016) (Dedicated Unlimited Ad Valorem Property Tax Bonds); Rating: Aa2; Sale Amount: $650,000,000; Expected Sale Date: 03/01/2016; Rating Description: General Obligation
Summary Rating Rationale
Moody's Investors Service has assigned an Aa2 rating to Los Angeles Unified School District, CA's General Obligation Bonds, Election of 2008, Series A (2016) totaling approximately $650.0 million and to the district's 2016 General Obligation Refunding Bonds, Series A totaling approximately $575.0 million. We have also affirmed the Aa2 rating on the district's outstanding general obligation bonds totaling approximately $10.3 billion and the A1 rating on the district's outstanding lease-backed securities totaling approximately $295.9 million.
The Aa2 rating reflects the district's exceptionally large and diverse tax base that is poised for moderate growth in the near term and the below-average socioeconomic profile of the district's residents. The district currently benefits from improved revenues from the state, which have helped to bolster the district's general fund reserves and liquidity to healthy levels for a district of this size. Fiscal challenges still remain, however, including expenditure pressures for salary and benefit increases, pension rate increases, and funding the district's oversized unfunded OPEB liability, which has been considered in the current rating review. The district's trend of declining enrollment creates an additional hurdle management will need to overcome to address its fiscal challenges. The district has a high debt burden and a substantial amount of authorized, but unissued, general obligation debt remaining. The district's pension burden is average relative to other California school districts.
Important to the district's Aa2 rating is the strength of the district management and the demonstrated ability to financially guide the district through periods of revenue uncertainty and severe state budget challenges, which, given the cyclical nature of the California economy, will occur periodically. We feel management will prudently address its long term fiscal challenges, though may need to address long term challenges with short term, one-time solutions, which is a credit weakness.
Also considered in the Aa2 rating is the strength of the California general obligation pledge. The general obligation offering is 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. The county rather than the district will levy, collect, and disburse the district's property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds.
The A1 lease-supported obligations are secured by standard, California abatement leases. The two notch distinction between the general obligation rating represents the weaker security pledge for lease-backed obligations and the additional risk to creditors from the district's financial, operational, and economic conditions compared to the more secure general obligation pledge.
The district has a stable outlook on all of its ratings, reflecting the strength of the district's local economy and improved revenues that will help to offset the district's budgetary challenges.
Factors that Could Lead to an Upgrade
Sustained improvement in general fund reserve levels and diminished long term expenditure pressures
Significant socioeconomic improvement
Significantly diminished unfunded OPEB liability
Factors that Could Lead to a Downgrade
Trend of declining reserves
Protracted decline in assessed value
Material increase in debt burden
Moody's changed opinion on pension and/or OPEB liabilities
The general obligation offering is 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. The county rather than the district will levy, collect, and disburse the district's property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds.
Use of Proceeds
Proceeds from the Election of 2008, Series A (2016) bonds will be used to finance the modernization and repair of aged and deteriorated schools. The district has largely completed its capital program for new construction.
The 2016A Refunding Bonds will be used to refund and defease outstanding general obligation bonds with a call date of July 1, 2016 for substantial present value savings.
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 the cities of Bell, Carson, Commerce, Cudahy, Gardena, Hawthorne, Huntington Park, Lomita, Maywood, Rancho Palos Verdes, San Fernando, South Gate, Vernon, and West Hollywood, in addition to considerable unincorporated territories devoted to homes and industry. Total enrollment for the district is 582,430 as of fiscal 2015.
The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. An additional methodology used in the lease-backed rating was the The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Regional PFG West
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Regional PFG West
Moody's assigns Aa2 to Los Angeles Unified School District, CA's GO Bonds; outlook is stable
Moody's Investors Service, Inc.
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