Legislative changes in California that shift some state level responsibility for school districts to the county in situations of fiscal distress won’t change how Fitch Ratings rates school districts in the near term.
Fitch created an issuer default rating in 2015 for California school districts’ general obligation bonds based on how they would fare in a bankruptcy that vaulted some of the state’s larger school districts to a triple-A rating.
The Legislature passed a bill this fall that shifted some takeover responsibilities from the state to county level, which the Legislative Analyst’s Office said in a
Though the LAO has identified incremental changes that could weaken implementation of the state’s oversight structure, Andrew Ward, a Fitch director, said the rating agency thinks the Assembly Bill 1200 process remains strong even after the recent changes.
A noticeable weakening in implementation of the law could affect the Issuer Default Ratings of lower rated California school districts, generally those in the lower end of the A category, in the BBB category and below, Ward said.
“We don’t believe that a shift in some oversight responsibilities to the county office of education makes such a weakening a foregone conclusion, and our Issuer Default Ratings are not expected to change in the near term as a result of the legislation,” Ward said.
Fitch Ratings
California has three unique characteristics that bond attorneys have said provide reassurance in bankruptcy. First, there are limitations through Assembly Bill 1200 to prevent a school district from entering bankruptcy. Second is Senate Bill 222, adopted in 2015, which says that local GOs would be treated as a statutory lien in bankruptcy, which makes the bondholders a secured creditor. And third is that the bonds would be treated as special revenues in bankruptcy, which means the bondholders could continue to receive payments while a bankruptcy was pending.
Fitch told the Bond Buyer in March 2015, however, that it would need a special legal opinion in order to issue a general obligation bond rating on a California school district based on its assessed property values, as opposed to its general fund and operations.
Such opinions prompted Fitch to assign AAA or AA-plus underlying general obligation ratings to bonds issued by several California school districts that have lower issuer default ratings.
Fitch still rates each school district on an individual basis.
Moody’s Investors Service, Kroll Bond Rating Agency and S&P all took the
Even with the changes, Ward said the county offices of education and state provide strong oversight of school districts providing a protection against fiscal insolvency for all school districts and key support for lower rated school districts in particular.
The state’s system has worked well for many years, Ward said.
“The oversight regime generally puts a floor under our financial resilience assessments — our opinion of a municipality’s ability to withstand recessions — through procedures for identifying fiscal imbalance, strong incentives for local policymakers to address imbalances, and direct intervention from higher levels of government in case of actual distress,” Ward said. “These core protections for school district solvency remain fundamentally in place.”
Despite assurances, Ward said Fitch will monitor school districts and assess the changes.
“A fundamental weakening in implementation of oversight mechanisms — or incentives for school districts to address emerging fiscal imbalances — could put downward pressure on weaker California school district Issuer Default Ratings,” Ward said.
Though it could pressure some ratings, Ward said he doesn’t expect it to affect the rating agencies' special revenue analysis of unlimited school GOs in California.
“The key point of that analysis is that legal features of those securities insulate bondholders from the operating risks of the district,” Ward said. “Based on an analysis of the statutory and constitutional framework and legal opinions, we have concluded that certain GO bonds issued by many California schools, among other tax-supported issuers, are effectively insulated from the sort of operating risks that AB 1200 seeks to manage.”
