New York, May 08, 2017 -- Issue: 2017 General Obligation Refunding Bonds, Series A (Dedicated Unlimited Ad Valorem Property Tax Bonds); Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $1,100,000,000; Expected Sale Date: 05/16/2017; Rating Description: General Obligation;
Summary Rating Rationale
Moody's Investors Service has assigned a Aa2 rating to Los Angeles Unified School District, CA's 2017 General Obligation Refunding Bonds, Series A (Dedicated Unlimited Ad Valorem Property Tax Bonds) totaling approximately $1.1 billion. Concurrently, we have affirmed the Aa2 rating on the district's $10 billion in outstanding GO bonds and A1 rating on the district's $235.5 million in outstanding lease-backed securities. The outlook is stable.
The Aa2 rating reflects the district's exceptionally large and diverse tax base with moderate growth expected over the near term, coupled with district residents' below-average socioeconomic profile. Improved state funding, including one-time revenues, has helped bolster the district's general fund reserves and liquidity to healthy levels for a district of this size. Fiscal challenges remain, however, including expenditure pressures for salary and benefit increases, rising pension costs, and an oversized, unfunded OPEB liability. Ongoing declines in enrollment and a recent decision letter on special ed spending requirements create additional, long-term challenges. The district has an elevated debt burden and a substantial remaining amount of authorized, but unissued, GO debt. The district's pension burden is average relative to other California school districts.
Important to the district's Aa2 rating is the strength of district management and their demonstrated ability to financially guide the district through periods of revenue uncertainty, severe state budget challenges, and erosion in enrollment figures. While management has successfully addressed long-term fiscal challenges in the past, identified outyear budget gaps will require permanent, structural cost reductions to address budgetary imbalances and maintain current credit quality.
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. Los Angeles County (Issuer Rating Aa2/Positive) 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 district has a stable outlook on all of its ratings, reflecting the strength of the district's local economy and expectations that district management will continue to successfully address long-term financial challenges that will require spending reductions.
Factors that Could Lead to an Upgrade
Sustained improvement in general fund reserve levels and diminished long term expenditure pressures
Stabilization of enrollment figures
Significant socioeconomic improvement
Factors that Could Lead to a Downgrade
Failure to move forward, as anticipated, with proposed budget reductions to address near-term deficit spending
Failure to address ongoing enrollment declines with structural, budgetary adjustments and to reach consensus among board and employee groups on realistic assumptions for future revenue growth
Protracted decline in assessed value
Material increase in debt burden or benefit funding pressures
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. 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 2017 General Obligation Refunding bonds, Series A will be utilized for current refundings of portions of several series of outstanding general obligation bonds, including Election of 2002, Series 2007A-1; Election of 1997, Series 2007A-2; and Election of 1997, Series 2007B.
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. Estimated enrollment for fiscal 2017 equals 625,434.
The principal methodology used in these ratings was US Local Government General Obligation Debt published in December 2016. The additional methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating 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.
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