Sacramento school bonds dropped to junk on fiscal woes

Fitch Ratings downgraded Sacramento City, California, Unified School District's issuer default rating and unlimited tax general obligation bonds to junk and placed its ratings on rating watch negative.

The issuer default rating and unlimited tax GOs were lowered to BB-minus from A-plus, dedicated tax GOs to BBB-plus from AAA, and lease revenue bonds issued by Sacramento City Unified School District Joint Powers Financing Authority to B-plus from A.

"The downgrade of the IDR reflects the district's projected rapid depletion of liquidity, which Fitch views as the most immediate risk, as well as the swift deterioration of reserves," Divya Bali, a director, and Karen Ribble, a senior director at the agency, said in an email.

The downgrade "reflects rapid fiscal deterioration driven by ineffective budget management and a sharp rise in spending relative to resources beginning in fiscal 2025," Bali and Ribble wrote in a report published Tuesday.

In a letter to parents in February, Board of Education President Tara Jeane said, the board is "tentatively confident that we can avoid state receivership and maintain local control of our schools."

The board also announced on Feb. 5 the retirement of Superintendent Lisa Allen, the first black woman to lead the school district, and the appointment of Candy McCarn as interim superintendent.

Allen had served as superintendent since July 2023, following a 30-year career within the district as a teacher and administrator.

"Both Superintendent Allen and the board believe that creating space for new leadership is the best way to address and overcome our current challenges," Jeane wrote.

The difference in the ratings ? where some remain investment grade while others were downgraded to junk ?arises because "the dedicated tax general obligation bonds are rated five notches above the IDR, reflecting the constitutional and statutory protections afforded to property tax revenues levied for bond repayment," Bali and Ribble told The Bond Buyer.

Fitch expects reserves to be nearly depleted by fiscal yearend 2026 (June 30). Liquidity is very thin, heightening the risk of state intervention and the expected need for an emergency loan to fund operations, according to the report.

The district adopted a fiscal solvency plan intended to generate savings, Fitch said, but it remains uncertain whether those measures will be enough to avoid declines in unrestricted reserves and depletion of cash balances.

"The district's fiscal distress has stemmed primarily from a history of poor budgetary oversight and overspending, weak management practices and an inadequate response to budgetary challenges," according to the report.

"While Fitch recognizes that the district is receiving targeted support from [the Fiscal Crisis and Management Assistance Team] and the Sacramento County Office of Education, it appears increasingly likely the district may require an emergency loan from the state under the AB 1200 framework, and execution risk remains significant," Bali and Ribble told The Bond Buyer.

In the report, they wrote that in order for the district to receive an upgrade or outlook revision, it would need to display "evidence the state's AB 1200 oversight framework functioning as intended in order to provide emergency liquidity and facilitate state receivership, resulting in heightened state control over the district; and [have] sustained increase in available general fund reserve levels above 2% of spending."