Moody's downgrades northern California school district's rating

Moody's Ratings cited a trend of declining reserves in downgrading Berryessa Union School District, California's issuer rating to A2 from A1.

The district has $176.1 million in outstanding debt, according to the rating agency.

It also downgraded the district's outstanding general obligation unlimited tax bonds to A1 from Aa3.

"The downgrade is driven by the district's trend of declining reserves, resulting in limited financial flexibility," Moody's analysts said in a Jan. 2 ratings report. "The district has taken action to eliminate structural deficits, but it is unlikely that it will be able to meaningfully grow reserves from current levels through fiscal 2028."

California school districts, in general, are facing challenges as they spend the last of federal stimulus funding related to the COVID-19 pandemic.

In an October report, S&P analysts said they expected school district finances would begin to meaningfully weaken in the medium term. Most "districts across the state are projecting deficits and use of funds over the three-year period, spurred by expiration of stimulus funds, rising fixed costs, and the state's slower economic growth relative to recent years, which could pose a risk to per-pupil funding," S&P said.

California school districts' median available reserves increased by 1% compared to its October 2024 report, S&P said, but financial performance weakened across its rated universe in 2025.

In February, S&P revised its outlook to negative from stable and affirmed its AA-minus rating on Berryessa USD's outstanding general obligation debt.

Fitch Ratings affirmed the school district's issuer default rating at A-plus on Nov. 24, 2025, and assigned a negative outlook. It also affirmed its AAA rating with a stable outlook on its unlimited tax 2014 Series B GO bonds.

Roughly 5,700 students are enrolled in the school district in northeastern Santa Clara County. It operates seven elementary and three middle schools.

Moody's cited the district having only 3.4% of general fund revenue available at the end of fiscal 2025 in the rating downgrade. It also cited the pressure of enrollment declines as it has experienced a three-year enrollment trend of negative 1.9% through fiscal 2025.

The school district's projections through fiscal 2028 show reserves remaining at these narrow levels, Moody's said.

The strong Bay Area economy with above-average resident incomes was considered a positive by Moody's. Plus, analysts said, its long-term liabilities and fixed costs are manageable.

Moody's A1 rating on the district's general obligation unlimited tax 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, analysts said.

Moody's does not assign outlooks to local governments with this amount of debt outstanding.

Sustained improvement in available general fund balances approaching 10% of revenue and stable enrollment trends could lead to an upgrade.

Factors that could lead to a further downgrade include a reduction in available general fund balance below the stated minimum reserve policy of 3%; or sustained enrollment losses exceeding current expectations that are not met with expenditure reductions.