San Francisco Unified School District, CA -- Moody's downgrades San Francisco USD's (CA) GOULT ratings to Aa3 & assigns A1 issuer rating; assigns MIG 1 to $100M 2020-21 TRANs; outlook negative
Rating Action: Moody's downgrades San Francisco USD's (CA) GOULT ratings to Aa3 & assigns A1 issuer rating; assigns MIG 1 to $100M 2020-21 TRANs; outlook negativeGlobal Credit Research - 18 Feb 2021New York, February 18, 2021 -- Moody's Investors Service has assigned an A1 issuer rating to San Francisco Unified School District (SFUSD), CA. Concurrently, Moody's has downgraded the underlying rating on the district's general obligation unlimited tax (GOULT) bonds to Aa3 from Aa2 affecting approximately $1 billion of Moody's-rated debt. The outlook is negative. Moody's has also assigned a MIG 1 rating to San Francisco Unified School District's $100 million 2020-21 Tax and Revenue Anticipation Notes.RATINGS RATIONALEThe A1 issuer rating reflects SFUSD's fundamental credit quality and ability to repay debt and debt-like obligations. The rating incorporates the district's declining financial position that underperformed relative to fiscal 2020 expectations and the district self-certifed as "qualified" on its 2021 first interim report, indicating that absent revenue outperformance or a reduction in projected expenditures it will not meet its financial obligations within the two forthcoming fiscal years. Despite its narrowing financial position the district benefits from strong voter approval for supplemental local revenues and unique financial support from the coterminous City and County of San Francisco (Aaa Negative). The district benefits from a world-renowned local economy and strong resident wealth and income profiles. The district's enrollment is slowly declining, though this could be accelerated coming out of the pandemic, and its fixed costs and long-term liabilities are elevated. Governance is a key driver of this rating action, primarily reflecting the district's use of nonrecurring revenues to support salary increases, which has driven a sharp reduction of its various reserves.The Aa3 rating on the school district's general obligation (GO) bonds is one notch higher than the district's issuer rating. The one notch distinction reflects California school district GO bond security features that include the physical separation through a "lockbox" for pledged property tax collections and a security interest created by statute.The assignment of the MIG 1 rating is driven by the strong long-term credit quality of San Francisco Unified School District, as reflected in the district's A1 issuer rating. The MIG 1 also incorporates the district's sufficient projected liquidity position at the time of note maturity, track record of accurate budgeting assumptions, and adequate note structure with advance set asides for repayment.RATING OUTLOOKThe negative outlook on the district's issuer and long-term debt ratings reflects the likely continued narrowing of the district's financial position absent substantial budgetary adjustment.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Effective implementation of budget realignments supporting structurally balanced operations (issuer and GOULT ratings)- Sustained improvement in reserves and liquidity (issuer and GOULT ratings)- Material progress on reducing long-term liabilities (issuer and GOULT ratings)FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Continued use of one-time resources to balance operations (issuer and GOULT ratings)- Further deterioration of fund balance or liquidity position (issuer and GOULT ratings)- Material additions to long-term liability burden (issuer and GOULT ratings)Downgrade of issuer rating (short term rating)LEGAL SECURITYThe district's GOULT bonds are secured by the levy of ad valorem taxes, unlimited as to rate or amount, upon all taxable property within the district. The portion of the levy restricted for debt service is collected, held and transferred directly to the paying agent by the City and County of San Francisco on behalf of the district.The 2021 notes are payable from taxes, income, revenues, cash receipts and other moneys that are received by or that accrue to the district during fiscal year 2020-21 and that are lawfully available for the payment of current expenses and other obligations of the district.USE OF PROCEEDSTRAN proceeds will be used to finance various district operating expenses, bolstering district liquidity given its particularly narrow net cash position that is compounded by the expected deferrals of state aid from fiscal year 2021 into fiscal year 2022.PROFILESan Francisco Unified School District, CA is coterminous with the City and County of San Francisco and provides public education services from pre-kindergarten to grade 12. The district operates 12 early education schools, 64- k-5 elementary schools, 8- k-8 alternative elementary schools, 13 middle schools, 14 high schools, 3 continuation/alternative schools and 5 county and court schools. As the seventh largest school district in California, the district serves approximately 52,800 students and has an estimated fiscal year 2021 average daily attendance of 49,895.METHODOLOGYThe principal methodology used in the long-term ratings was US K-12 Public School Districts Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1202421. The principal methodology used in the short-term rating was was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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