WASHINGTON -- The bankruptcy of California's Richmond Unified School District has opened the way for more school district bankruptcies and is raising some serious questions about the security of some state school certificates of participation, according to a report issued last week by John Nuveen & Co.
The most pressing question was raised in a petition brought by the California Teacher's Association before the Richmond bankruptcy court, which asked the judge to invalidate and cancel the district's $8.35 million of outstanding lease-backed certificates, to prevent teacher layoffs and salary reductions, the report says.
The report was written by John Illyes, a leasing analyst at Nuveen.
The teachers' petition, if successful, could "entice" more districts into bankruptcy so they can "cancel millions of dollars in COPs," the report says. Besides the inducement of canceling lease obligations, school districts may file for bankruptcy in hopes of prompting a state bailout or avoiding responsibility for harsh belt-tightening measures that may be ordered by the court, the report says.
Three other school districts besides Richmond -- while not in as difficult financial straits -- nevertheless have informed the state Department of Education that they do not expect to be able to meet their financial obligations this year, the report noted. In addition, two other districts have said they are highly unlikely to do so and are included on the department's financial "watchlist."
Even state education officials have said that more of these financially strapped districts may file for bankruptcy, the report noted, particularly if they fail to bargain aggressively with unions to reduce their labor costs, which typically constitute 80% of their budgets.
The total outstanding certificates of the six districts -- including Richmond, Montebello, Woodland, Ukiah, Coachella Valley, and Delano High School -- is $29.6 million, while the districts have only $4.1 million of outstanding general obligation bonds, the report notes.
Moody's Investors Service offered a less gloomy assessment of the school financing outlook in a report issued shortly after the April 19 bankruptcy filing, predicting no further impending bankruptcies. But the report nevertheless downgraded the ratings of several of the school districts and said that Moody's would closely monitor the situation.
Richmond is not the first California school district to file for bankruptcy. The San Jose district also sought Chapter 9 protection in 1983 'to escape paying teachers' salaries," the Nuveen report says, while Lassen County Community College declared bankruptcy in 1986 to avoid paying off a $7 million certificates issue for an unsuccessful energy co-generation project.
All of California's school districts have relied heavily on lease-backed certificates offerings to finance building projects, with the volume of such offerings ranging between $200 million and $700 million in recent years, according to Securities Data Co./Bond Buyer.
Besides using such lease securities for capital construction, some districts recently have started a disturbing trend by using the technique to finance short-term operating expenses, the report says.
The Richmond certificates at stake in the bankruptcy case originally were issued in 1988 to finance $6.7 million of current operating expenses. Also in 1988, one of the largest districts -- Oakland -- sold $13.5 million of certificates "to correct its budget problems," the report says. Both issues were unrated.
The Oakland offering was criticized by California's Auditor General as "a stopgap which will do nothing to improve the district's fiscal health and could well deplete the general fund balance." At the same time, Moody's cited the questionable offering in downgrading the district's general obligation bonds.
Montebello -- one of the districts on the watchlist -- is planning a similar certificates sale this month, totaling $12.43 million, to partly fund current expenses, the report says. The report called such a long-term offering essentially to pay salaries "indefensible."
The questions posed by the Richmond bankruptcy are heightened by the growing use of "noneviction" clauses in California school lease contracts, which prevent investors from using the traditional remedy of repossession and eviction in cases of default, the report says.
None of the outstanding certificates issues mentioned in the report apparently have such clauses, but new lease contracts for school buildings, most of which are built on state-owned land, are now required by the state to include clauses preventing eviction of school tenants or reletting or conversion of the property in case of default, the report says.