California's two largest school districts sent a cry of help to state lawmakers amid challenges wrought by COVID-19.
The Los Angeles and San Diego districts warned that extraordinary costs mean their budgets are likely to fall out of balance.
“I think there were a lot of school districts, like West Contra Costa Unified and San Diego Unified that were already in financial distress before the coronavirus struck,” said Marc Joffe, a senior policy analyst at the Reason Foundation. “I think what happens here is the biggest risk is state takeover as opposed to a bond default. You could see a wave of state takeovers of school districts.”
The state has procedures in place to step in to take control of insolvent districts.
The San Diego and Los Angeles school superintendents told lawmakers their budgets will not “balance for the current fiscal year, because of the extraordinary costs associated with responding to global pandemic.” The Los Angeles district enrolls more than 600,000 students; San Diego's more than 124,000.
The two districts shut down their campuses March 16, in line with most other California school districts. They're attempting to teach students online.
The letter from Austin Beutner of the Los Angeles Unified School District and Cindy Marten of the San Diego Unified School District asks for additional financial support and for better guidance on conducting classes online.
The districts, which have both faced financial difficulties in recent years, say current efforts are causing them to dip into reserves.
“We appreciate the Legislature’s passage of emergency legislation to ensure schools will continue to receive their existing funding and an appropriation of $100 million for the purchase of personal protective equipment and to pay for costs associated with cleaning school sites,” they wrote. “However, this appropriation is limited in scope and it is not sufficient to cover the costs we are incurring.”
There were no defaults of California school general obligation bonds stemming from the 2008 financial crisis, and Joffe said he doesn’t think there will be this time around.
The two superintendents wrote that they are spending reserves to cover costs, which in ordinary times would be incorporated into the state required three-year budget plans.
“We request an additional emergency appropriation to address these unforeseen costs,” Beutner and Marten wrote.
They asked that a task force be organized for school leaders to work with state officials to develop solutions.
“We recognize the current priority is to address the public health implications of the virus, but these individual health issues are creating significant community issues, which present themselves in our schools, and also need to be addressed,” they wrote.
Lawmakers have offered support by taking actions to save thousands of jobs by ensuring status quo funding, but more is needed now, said the school superintendents.
Both schools have many students who receive free or reduced-price lunches, and are providing meals at centralized locations. San Diego Unified is serving 50,000 meals, while Los Angeles Unified is providing 250,000 meals a day through 60 “grab and go” food centers.
LAUSD is also investing $100 million to provide devices and internet access to all students and expanding training in online education for students, families and educators. San Diego Unified joined an effort that Los Angeles Unified launched with PBS a week ago, and over 100,000 people in the Los Angeles area are watching PBS learning shows each day.
In addition to challenges with operating revenues, school districts may face difficulties accessing the capital markets.
In the years after the Great Recession, when the state was facing its own financial challenges, school districts were pushing out large revenue anticipation notes each year while they awaited delayed funding from the state. Some have capital programs they were planning to sell bonds for this spring. The current volatility has placed most issuers in a situation of going day-to-day on bond sales.
Adam Bauer, president and chief executive officer for Fieldman, Rolapp & Associates, said he typically does six deals a week during this time of year, and has only gone to market with one deal. That school district needed the bond proceeds to support capital projects that are already underway, Bauer said.
He and his team are working up documents on each deal for a negotiated pricing and a bank loan in case the volatility in the market makes it uneconomic to price bonds in the open market. He expects those that do sell in the open market will be priced on a day-to-day basis.
San Diego Unified experienced a rare piece of good luck pricing an $89.9 million taxable refunding March 4, before the municipal bond market ground to a virtual halt.
“I am just excited about the fact we were able to do this for the taxpayers and finalize the deal,” said Debbie Foster, executive director of financial planning and development for the school district.
The deal created the capacity to issue additional bonds under Proposition S, a measure approved by voters in 2008, said Mark Young, a managing director with KNN Public Finance, the school district's financial advisor on the deal.
The deal came as issuers were receiving record low interest rates as a flight to quality occurred. San Diego USD GO bonds carry AAA ratings from Fitch Ratings and KBRA and Aa2 from Moody’s Investors Service.
The school district's bonds sold in a 45-minute order period and were 2.4 times oversubscribed, Young said.
“I have been working with the district since 1994,” Young said. “The district has been very aggressive at looking at refundings to maximize savings to taxpayers. It has never had an advance or current refunding that has achieved present value savings that this deal did.”
The transaction achieved almost three times the taxable advance refunding criteria the finance team laid out, and in terms of the district's debt policy, almost six times the level of present value savings, Young said.
The deal realized $19.9 million in present value savings, or close to 28% or 29% on the amount of the refunding bonds.
"We went to the board on March 3 for approval," Young said. "So, it posted the next day."
Having the bond sale completed means the district’s finance team can focus on its work to support the overall district during the closure, Foster said.
The district has an extensive capital program underway and had expected to issue new money bonds in the next two to six months to support ongoing construction projects, Foster said.
Fitch Ratings analyst Amy Laskey said the agency would not alter its special revenues rating criteria for California school district general obligation bonds. That criteria, based on the property tax base that supports GO bond repayments, moved San Diego USD GOs to AAA in 2015, despite an operating budget with thin margins.
“The virus has no relevance for our legal analysis that leads to the conclusion that the property tax revenues pledged to California school district general obligation bonds would be considered special revenues in a bankruptcy,” Laskey said.
Fitch analysts concluded that the tax revenues supporting repayment of the debt would be considered "special revenues" under the bankruptcy code.
San Diego
Laskey said that “assessed values and economic stress are unrelated to the legal analysis that leads to treating California school district GO bonds as being secured by pledged special revenues.”
She added that Fitch is not at the point of making any kind of assumptions about future enrollment declines.
“Our understanding is that the state will not penalize school districts for closures due to coronavirus,” Laskey said. “If we hear different, of course, we will have to consider that in our ratings.”
The school superintendents wrote in their letter to lawmakers that their school districts “face the largest adaptive challenge for large urban public education systems in a generation. Pick your metaphor: This is the moon shot, the Manhattan Project, the Normandy landing, and the Marshall Plan, and the clock is ticking.
“It is time to stop focusing on uncertainty and what we do not know,” Beutner and Marten wrote. “The one thing we know for certain is we have to serve 750,000 students, so let’s get on with that.”
Continuing the current academic year under the new constraints of a distance learning model means meeting the demands of thousands of individual learners, who include English learners, gifted students, homeless students and students with disabilities. Meeting those demands will require the wholesale retraining of a workforce that exceeds 40,000 educators and a supply of technology devices for all students to access at home, including those students without a home, school leaders said.
