LOS ANGELES — A shift in one rating agency's view of California local general obligation bonds landed a big school district a triple-A rating.
Saying it has changed its opinion of how the tax revenues supporting such bonds would be treated in the unlikely event of bankruptcy, Fitch Ratings assigned the AAA rating to San Diego Unified School District's upcoming $550 million general obligation bond sale.
Fitch analysts concluded that the tax revenues supporting repayment of the debt would be considered "special revenues" under the bankruptcy code.
"As such, Fitch believes the revenues and timely debt service payments would be uninterrupted in the unlikely event of a bankruptcy filing by the district," according to a comment issued Wednesday.
The decision could have broader implications for school districts across the state.
Fitch plans to release a longer report within the next few days on how the special tax analysis could be applied to other California school district bonds with the same legal construct, said analyst Amy Laskey. Fitch rates the GO bonds of 86 California school districts.
Fitch analysts consulted with internal legal counsel and the school district's bond counsel, but Laskey said its action has nothing to do with protections afforded under the state's Senate Bill 222, passed this year to establish a statutory lien for the benefit of bondholders on the property taxes levied to pay local GOs.
"We don't make rating distinctions based on the presence or absence of a lien, because it is still subject to the automatic stay in bankruptcy," Laskey said.
Fitch's analysis on tax liens and pledged revenues has evolved, said John Palmer, a senior associate with Orrick, Herrington & Sutcliffe, the district's bond counsel on the sale.
Though the statutory lien under SB 222 clearly makes bondholders a secured creditor, the rating agencies are still concerned that during the pendency of the bankruptcy that tax revenue to pay the bonds is subject to the automatic stay, said Mary Collins, an Orrick partner.
Even during pendency, using revenues to pay anything other than GOs would fly in the face of state law, said Palmer, but it was the way that school district GO debt is funded that altered Fitch's opinion.
Under Proposition 13, ad valorem taxes collected for the school district are not allowed to be spent on anything other than debt, which means the revenues levied to repay the bonds would be considered "special revenues" in the event of a bankruptcy, Palmer said.
Prop. 13 is best known for the limits it places on property assessment increases. It sets a base statewide property tax rate of 1% of a property's assessed value, and caps increases in assessed value to no more than 2% annually unless that property changes hands, at which point it is reassessed at the sale price.
Orrick sent all three ratings agencies an opinion on SB 222 and also the strength of revenue backing California school district debt.
"We thought the rating agencies should focus on the ad valorem for paying bonds, not the district's general fund, because the general fund is not the security for the bonds," Collins said. "Fitch is the first to acknowledge the opinion."
Fitch said in a rating report that it "concurs with the legal analysis outlined in the opinions and, as a result, the rating is based on special tax analysis without regard to the district's financial operations."
Fitch, which had not rated the district previously, also assigned an Issuer Default Rating of A-plus based on what it called the school district's somewhat challenged operations.
Moody's affirmed its Aa3 rating on the San Diego district's GOs in September, and Standard & Poor's affirmed its AA-minus rating in April.
"This could be helpful to all school districts whose property tax base is stronger than its general fund," Collins said.
