Los Angeles school bond outlook dropped to negative by Fitch, Moody's

Fitch Ratings and Moody's Ratings both revised their outlooks for the Los Angeles Unified School District to negative ahead of the district's plans to issue debt.

The ratings reports indicate the school district plans to issue $1.09 billion in new money and refunding general obligation bonds in the next few weeks. The district has not yet announced bond sale plans.

Fitch revised to negative the outlook on LAUSD's AA-minus issuer default rating, its AA-minus judgment obligation bond ratings and A-plus certificate of participation rating. It retained the stable outlook on the district's GOs, affirming their AAA rating and assigning it to forthcoming GOs. That rating reflects Fitch's assessment that the legal structure of local GO bonds in California would protect them in a district bankruptcy.

Fitch said its negative outlook "reflects the risk of weaker financial resilience in coming years and the need for fiscal stabilization measures to slow fund balance erosion.

"While the district has historically managed its budget well and outperformed projections, which Fitch continues to expect, growing fiscal pressures, including rising labor costs, may create increasing challenges," the rating agency said.

"It's an outlook revision, because the school district has a lot of mitigants and levers it can pull to deal with the outyear fiscal gaps," said Karen Ribble, a Fitch senior director. "They are working on a stabilization plan that is estimated to yield $1.4 billion savings. They also have very strong budget management, which we expect to continue to be the case."

Moody's revised its outlook on the district to negative from stable and affirmed the district's Aa3 issuer rating, the Aa2 rating on outstanding general obligation unlimited taxbonds, the Aa3 on outstanding judgment obligation bonds, and the A1 on outstanding certificates of participatio. Concurrently, Moody's assigned a Aa2 rating to the district's propose GOs.

Moody's cited "the expectation that reserves will decline materially beginning in fiscal 2026 and will continue declining thereafter absent significant spending reductions or additional recurring revenue."

KBRA Wednesday affirmed its AAA rating and stable outlook for the district's GOs, citing the "exceptionally strong security structure" supporting the GOs and the "consistent performance and breadth" of the property tax base.

The district recently with unions representing teachers, administrators and support staff.

Fitch Director Divya Bali said the revised outlook wasn't related to concessions made as a result of the new labor agreements, but a trend of rising labor costs. In addition, the recent agreements still need to be ratified by the unions and adopted by the board, Bali said.

What Fitch is tracking is the intersection of a few different things including declining enrollment, which is a concern for school districts across California, but has been exacerbated by immigration enforcement, Bali said. Plus, the state funding framework is more constrained.

The mitigants include the ability to control staffing levels through attrition, Ribble said. That includes unfilled positions included in the budget that can be cut, she said.

The school district has not had to close schools to date, but plans to consolidate programs like dual language immersion, which is currently offered at several schools, Ribble said.

"The overarching theme is that they recognize what they need to do and have started to do it," Bali said.

"The big picture is they have identified places they can cut their spending and those plans have been approved by the board for 2027-28," Ribble said.

LAUSD enrollment is about 389,000, according to KBRA, down from more than 746,000 in 2002-2003.

Fitch Ratings assigns AAA ratings to many California school district GOs, including LAUSD's, by classifying the dedicated property tax revenues as "pledged special revenues" under the U.S. Bankruptcy Code. This special revenue status allows bonds to be rated up to five notches above a district's issuer default rating, reflecting a low risk of disruption in debt service payments, even if the district faces bankruptcy.

Fitch believes bonds that receive pledged special revenue opinions provide bondholders additional protections from the operating risk of the district as expressed in its issuer default rating, according to the ratings report.

Following the planned sale, LAUSD will have about $11.8 billion in long-term debt, according to Moody's.