December 29, 2013

Denair Unified School District bond rating falls

Standard & Poors downgraded Denair Unified’s bond rating to BBB, just two notches above junk status. The decision was another blow to the district’s grim financial status as it interviews for a superintendent in the coming week and weighs salary cuts for its teachers.

In another blow to the financial standing of the Denair Unified School District, Standard & Poors this month downgraded its bond rating to BBB, just two notches above junk status.

While the change will not add to Denair’s red ink in the short term, it highlights that national notice is now being paid to the district’s grim balance sheet.

“That is a relatively low rating for a California school district,” said Standard & Poors analyst Matthew Reining on Friday. He estimated there are less than 10 “triple-B” ratings among the roughly 500 California districts given ratings.

To be clear, school bond money does not mix with operating funds, the pot of money Denair will empty before year’s end unless it cuts expenses. Bond debt is entirely paid by local property taxes. But Reining said the prospect of potential bankruptcy or state takeover is a risk they consider.

“It’s our opinion that the general fund performance matters for the rating,” he said.

“The lowered rating reflects our view of the continued deterioration of the district’s financial position,” notes the Standard & Poors published rationale. The firm will reconsider the rating this summer, watching to see if the district gets a state overseer or if it succeeds in balancing its budget, the rationale says.

Denair’s triple-B makes it more expensive for the district to get short-term credit or refinance existing bonds, and it leaves bond investors likely taking a loss if they try to sell them. Investors hold $45.9 million in Denair Unified debt, in bond issues property owners will pay off through 2043.

“Right now that rating has nothing to do with the district – and it’s still investment grade, it’s just a low investment grade,” said interim Superintendent Walt Hanline. However, he added, “If we went out for a (short-term loan) right now, it would affect our ability to get financing. The county continues to be our credit line. But the county’s not willing to front us money past June 30.”

The Stanislaus County Office of Education has lent the district $1.3 million. About half is month-to-month cash flow help, and half is debt the district will need to pay back, Hanline said.

It is against that backdrop that a citizens committee and school board members will interview six superintendent candidates Friday, with two or three finalists likely to return for second interviews with the board on Saturday, Hanline said. The board expects to announce its choice Jan. 9.

Denair parents have become more active in recent months, speaking out at meetings and now forming a Facebook page. The page takes teachers to task for not settling and comments on teacher salaries.

With 76 percent of its operating money going to salaries and benefits, the district must rein in labor costs to slash about half a million dollars from this school year’s expenses. The district has not been able to reach a deal for this year with its teachers, and their salaries reverted to prerecession highs on top of ongoing seniority and education raises.

A fact-finding report, probably in the second week of January, will make recommendations for salary levels. The board committed to implementing the recommendations, and its nonunion employees agreed to follow suit. Denair Unified Teachers Association negotiators, however, have said they cannot agree to any deal without a membership vote.

The district had demanded an 11 percent cut, which if condensed into the year’s six remaining months would be a steep 22 percent taken from teacher paychecks.

But Hanline said decisions have to be made. “The report will be the facts and thus being horrified is not an option. It is what it is,” he said.

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