I'm pleased to send you the most recent State of California Department of Education (DOE) Fiscal Status Report for the first interim period of FY 2010. This report is also available at the California Department of Education Web site.

This first interim period report evaluates the budget and reserve positions of California School Districts and County Offices of Education as of October 31, 2009. These reports are sent to the local County Office of Education for review and the County superintendents then must report to the State Superintendent of Public Instruction and the State Controller within 75 days of the close of the reporting period.

The second report, which will reflect the period ending January 31, was due March 17 and should be available by June.

These reports are designed to reflect the ability of school districts to meet all their obligations for the current and next two fiscal years. It takes into account all obligations, including debt service. School districts are certified as positive, qualified or negative. Below are the DOE's explanations for these certification classifications:

Positive certification is assigned when the district will meet its financial obligations for the current and two subsequent fiscal years.

Qualified certification is assigned when the district may not meet its financial obligations for the current or two subsequent fiscal years.

Negative certification is assigned when a district will be unable to meet its financial obligations for the remainder of the current year or for the subsequent fiscal year.

Risks of Negative Certification
Receipt of a negative certification does not necessarily mean a district will not meet its obligations, including debt service, as receipt of certification requires corrective action. Despite the history of negative and qualified certifications back to Fiscal 1996, no districts have defaulted on debt service during that period. Most returned to positive on their own, however some districts have required state intervention to return to fiscal solvency. State actions include providing additional managerial support in the form of a Financial Crisis and Management Assistance Team (FCMAT), installing a State appointed Master and if needed financial support, including emergency loans. Since 1991 only seven districts have required emergency loans (Source: DOE Website California State Emergency Loans to School Districts, 1991 to 2009).

Below is a history of certifications from Fiscal 2007. Note that there are more than 1,000 school districts in the state and unless reported as qualified or negative, a district's certification is positive.

Some notable districts have qualified certifications for the first interim period, including L.A. Unified (USD), Irvine USD, Santa Ana USD, Riverside USD, West Contra Costa USD and Mt. Diablo USD. Negative certifications include Vallejo City USD and Hayward USD.

Reviewing DOE's interim report certification is a good first step when considering California School district debt. A negative or qualified certification should be taken as a signal to conduct a more detailed review to fully understand the nature and extent of the problem. At the same time, while a positive certification is a plus, more analysis may be needed.

Any debt review should include a look at the specific security pledge on the deal. Voter-approved general obligation deals in California have a separate dedicated unlimited rate property tax pledge that can not be used for anything else. They are the highest quality and relatively immune from budget related issues. Lease transactions, with a requirement to annually appropriate, are more closely tied to the budget process, and therefore slightly behind in credit quality, although their payment is generally of high priority. Actions taken to return to positive certification would include all district obligations and therefore be supportive of lease debt repayment as well.

Please call me with any additional questions,

Peter Bianchini
Managing Director, Senior Municipal Strategist
+1 925.386.0262