SAN DIEGO - Moody's Investors Service lowered the credit rating of the San Diego Unified School District's general obligation bonds Thursday and gave the district a "negative'' financial outlook.
The drop from Aa1 to a still-strong Aa2 was the result of "substantially narrowed financial flexibility after material draws on reserves in recent years,'' according to a Moody's statement.
"The negative outlook on the rating reflects the district's practice of funding ongoing expenditures with one time sources, which is a distinct credit risk given the potential for mid-year funding cuts in the current year and continued tight funding going forward,'' the organization reported.
The SDUSD is not only facing mid-year cuts in state funding in the current school year, but officials warn the shortfall for next year could top $100 million.
Ron Little, the district's chief financial officer, said the downgrade impacts future bond issues, such as for its $2.1 billion construction program, but not current debt.
He said the downgrade brings Moody's in line with Standard & Poor's, which already had a slightly lower rating for the district -- and investors probably already accepted that lesser rating.
"This rating downgrade, while disappointing, is understandable given the continuing fiscal challenges faced by the district and the pending midyear K-12 education budget cuts potentially coming from the state,'' Little said.
Moody's said the district had some strengths, including a large and diverse tax base, and an uncomplicated debt portfolio. However, the school board has failed to keep expenses in line with declining revenues and has limited flexibility to handle future budget challenges, Moody's reported.