Credit rating company Standard
&
amp; Poor’s is keeping a close eye on the Gilroy Unified School
District until the district can prove it has the means to make a
hefty bond payment due in September.
Credit rating company Standard & Poor’s is keeping a close eye on the Gilroy Unified School District until the district can prove it has the means to make a hefty bond payment due in September.
Standard & Poor’s recently placed GUSD’s general obligation bonds and certificates of participation on CreditWatch with negative implications – a designation given when an event occurs that could result in a rating downgrade – after the district failed to submit instructions to Santa Clara County to collect about $6 million in property taxes that pay off the district’s Measure J certificates of participation. A $5.4 million payment is due September 1 and the district currently has less than half that amount in the appropriate fund because of the missed levy. The bonds and certificates in question are being used to fund the construction of various school facilities, including the first phase of Christopher High School.
“We are concerned about ongoing administrative control issues at the district level, which, in turn, we believe might affect payment on the (general obligation) bonds and other district (certificates of participation),” according to a statement issued by the company.
Superintendent Deborah Flores said the CreditWatch status won’t necessarily affect the district’s credit rating – which ranges from A to A+ depending on the particular series of bonds. An AAA rating is the highest rating assigned by Standard & Poor’s. An A rating is “somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories.” An A rating does, however, still indicate a strong capacity to meet financial commitments.
If the district can correct – as it intends to do – the mistake that temporarily jeopardized the September payment, the credit rating will likely stay the same.
At Thursday’s board meeting, Flores expected the school board to pass resolutions requesting the Santa Clara County Board of Supervisors to approve a loan of up to $3.1 million and authorizing the district to make temporary inter-fund transfers if needed.
“Although interim funding from the county … would mitigate our credit concerns related to this situation, we have not received written confirmation that the county will provide a loan sufficient to make the Sept. 1, 2009 payment,” said Standard & Poor’s Credit Analyst Le T. Quach. “The lack of a written confirmation further compounds our concerns about the administrative shortcomings that led to this specific situation. We are therefore also concerned about the school district’s management and administrative controls.”
Flores said she planned to forward both resolutions, if passed, to Standard & Poor’s today as proof of the district’s ability to meet its financial obligations.
“We’re looking for what kind of plans they’ll put in place to address the current situation and hopefully rectify the way they do business so that this doesn’t happen in the future,” said Gabe Petek, a bond ratings analyst with Standard & Poor’s.
Flores said the tax mistake resulted from a “breakdown at all three levels” – the school district, the Santa Clara County Office of Education and Santa Clara County – and the school district placed its director of business services, Keiko Mizuno, on paid administrative leave April 21. But trustees said the multimillion-dollar tax snafu was not the only reason for Mizuno’s leave and that they hoped to have more information about the position at an upcoming board meeting.
Flores said other corrective action on the tax has been taken.
“We understand why they’re concerned – people purchasing bonds need confidence,” Flores said. “We believe we have two very good ways of making the payment.”
The district is covering its bases by asking the county to approve a loan, but Flores said the district’s preference is to internally borrow the money from the district’s capital facilities fund, which currently has a balance of about $4 million in cash reserves. That way, the district won’t have to eat the fees and interest associated with a temporary loan from the county, an amount Flores could not quantify.
The district will recoup the $6 million in Measure J property taxes by taxing residents at a higher rate in the remaining two years of the measure’s lifespan. Trustees voted to increase the Measure J tax – which voters approved in 1974 at a rate of $102 per $100,000 of assessed value – from its current rate of $70.50 per $100,000 to an amount not to exceed $105.70 per $100,000 in the next two years.
How the tax fiasco happened?
December 2008: Papers for $6 million in Measure J property tax, to be levied April 2009, prepared incorrectly
Mid-February: District learns of error
March 5: School trustees call for corrected tax
March 19: Trustees announce County Board of Supervisors will not issue corrected tax
April 2: Trustees vote to increase Measure J tax levy for final two years of measure’s lifespan
April 17: Standard & Poor’s places district bonds on CreditWatch
April 21: Director of Business Services Keiko Mizuno placed on paid administrative leave in part because of tax error
Thursday: Trustees set to vote on plan to cover $5.4 million payment tax would have funded
