Sweetwater Union High School District
A San Diego-area high school district barred from market access four years ago will ride in Wednesday with a lift from a ratings upgrade and two positive outlooks.
Seven years ago the outlook was bleak for Sweetwater Union High School District, which faced SEC scrutiny and underwent a state takeover resulting in oversight from an outside financial advisor. This week, the school district received an issuer rating upgrade to A1 from Moody’s Ratings, with analysts saying the district’s solid financial position is the “product of an established and sophisticated management team.”
Lead managers J.P. Morgan and Morgan Stanley will price $50 million in general obligations in two tranches: a $2.15 million taxable tranche and $47.85 million in tax-exempt debt, for Sweetwater Union High School District. KNN is municipal advisor. Orrick and Norton Rose Fulbright are co-bond counsel.
Bond proceeds will be used to construct and improve schools using funds from Measure RR to pay debt service on a portion of the bonds and the costs of issuance. The projects funded by the bonds include building and site improvement projects; districtwide access control, safety & security projects; district office relocation and consolidation; Southwest High School stadium; and Sweetwater High School stadium bleachers.
Sweetwater, the state’s second largest secondary school with 33,600 students enrolled in grades 7-12, received a Moody’s upgrade to Aa3 from A1 on its general obligation unlimited tax bond rating and an issuer rating upgrade to A1 from A2. Fitch Ratings assigned an AAA general obligation bond rating and an A issuer default rating ahead of the deal.
The A1 issuer rating “reflects the district’s solid financial position, a product of an established and sophisticated management team that engages in regular budget review and adheres to all state financial and debt policies,” Moody’s analysts said.
Moody’s also assigned a positive outlook, which could indicate future upgrades, while Fitch assigned a stable outlook to the GO bonds, but revised to positive the outlook on the district’s issuer default rating. S&P Global Ratings, which didn’t rate the upcoming debt, raised its long-term rating to A-minus from BBB-plus on the school district’s outstanding GOs.
In 2018, matters
The SEC settled with Sweetwater’s former Chief Financial Officer Karen Michel in September 2021 for misleading investors in connection with a $28 million municipal bond issuance, which was
To state it simply, the school district’s accounting practices resulted in Michel — who worked for the school district from 1996 to 2018 — failing to accurately budget for a 3.75% pay raise approved shortly before the beginning of the fiscal year, the SEC found.
She projected expenses nearly identical to expenses incurred during the 2017 fiscal year, which took into account a less than 1% increase in employee compensation. She also failed to bring the budget in line with actual expenses during mid-year reporting, according to the SEC.
The mistake resulted in misleading budget projections, which indicated the school district could cover its costs and would end the year with a balanced budget.
When Jenny Salkeld came on as CFO in 2018, following Michel’s retirement, she discovered and reported year-end salaries were actually $18.7 million higher, leading Fitch to drop Sweetwater’s issuer default rating to BBB from BBB-plus.
The SEC found the related disclosures failed to reveal Sweetwater’s true financial condition, the 2018 budget projections were inconsistent with its actual expenses and Sweetwater’s budget monitoring procedures did not consider current conditions.
But now, the district benefits from a remarkably quick turnaround given the scathing audit from the Fiscal Crisis & Management Assistance Team in June 2020.
FCMAT, part of the California State Department of Education, tracks school districts’ financial well-being and provides fiscal assistance, education and oversight. The agency said in its audit that there was significant evidence of “malfeasance” by school district employees, but Salkeld said the issue was really more one of creating better practices.
Sweetwater UHSD
“We conducted an overall review of how we did business and looked at what was working and what was not,” said Sweetwater UHSD Superintendent Moises Aguirre. “There was a strong focus on the practices and the culture in the district and making sure everyone understood we needed a more disciplined approach.”
“When I came to the school district in 2018, there was no position control between finance and human resources,” Salkeld said. “We immediately hired a position control analyst. That helped as we were triaging and working with various agencies, the county’s office of education and FCMAT.”
Trying to shore up the finances and navigate the pandemic, which created vast turmoil when state leaders shut down in-person gatherings in March 2020 and forced students to learn online, presented additional challenges to a school district trying to right its ship.
“We were making these changes in the middle of the pandemic,” Aguirre said. “Between the pandemic, and one time funds available (from the federal government and state to ride out the pandemic), we were mindful of who we brought on.”
The school district also had implemented an early retirement program in 2018, because it had hoped to handle personnel reductions to match enrollment declines through attrition and retirements, rather than layoffs, Aguirre said.
The school district, like many in the state, is forecasting continued loss of enrollment and school districts receive state funding on a per-pupil basis.
The shock to the system from the FCMAT report and the SEC investigation helped create the urgency needed to make needed changes, he said. Aguirre said he was appointed because of his skill in bringing different parties together to work toward a common goal.
Often when school districts are taken over by the state, it can take 20 years to be freed from state oversight, Aguirre said. “It’s difficult to get out of that situation.”
“The fact we were able to get back so quickly is indicative of the work done to right the ship,” he said. “They were sometimes very painful measures, but we did them in a way that mitigated the harsher impacts to personnel, through early retirement or attrition.”
That “we were able to do it within three or four years speaks to our advisors, the work done by Mark (Young) and Larry (Lom, a KNN director), and Dr. Salkeld,” he said.
The changes, which brought more discipline and control to accounting practices, were led by Salkeld, Aguirre said.
Aguirre, who had been the school district’s assistant superintendent of facilities and operations, was appointed superintendent in April 2021, after serving as interim since June 2020.
Though the FCMAT report alluded to the possibility of fraud, “it was really more about creating better practices,” Salkeld said. Management created a computer system, rolling it out to stakeholders to build integrity in the accounting system, she said.
The school district changed its practices around inter-fund borrowing, barring the practice, or doing it within time frames stipulated by best accounting practices, she said, adding fortunately “we have not had to borrow from other funds to support the general fund,” she said. The school district also established several reserve funds — and created better programs for tracking information between finance and human resources, she said.
The school district’s financial reporting problems resulted in it being barred from market access until 2022, according to Mark Young, a KNN managing director, and the municipal advisor on the bonds.
School districts with negative certifications from FCMAT are not allowed to take on further debt obligations.
The district has worked hard to dig itself out of a situation that resulted in multiple ratings downgrades and negative certifications from FCMAT, Young said.
In October 2022, it issued $504.7 million in general obligation bonds in seven tranches in a mix of current interest and capital appreciation bonds, mostly tax-exempt with a few smaller taxable tranches. After successfully issuing that investment-grade debt, it followed up with a $59.3 million refunding in August 2024.
The 2022 bonds were multiple times oversubscribed, Young said.
The school district received a Moody’s upgrade to A2 in September 2022 ahead of its market re-entry, with analysts citing “the district’s improved financial position as evident with moving from negative certification in fiscal 2018 to positive certification [from FCMAT], as well as its reasonably strong balance sheet.”
The rating agency also cited the “influx of one-time state and federal funds,” which provided the district with financial flexibility. The 2022 ratings upgrade also reflected “strong governance as evidenced by management’s adopted policies and internal controls” as well as implementation of prudent fiscal practices that support fiscal health moving forward. The district also benefits from strong property wealth supported by a $60.7 billion tax base, Moody’s analysts said.
The school district was also lauded for using one-time funds to preserve adequate reserves, but Moody’s also noted the district’s long-term liabilities ratio, moderate fixed costs as well as its trend of declining enrollment were factored into the rating.
The underwriter pool, bond counsel and KNN each helped individually as outside advisors on various issues to identify what needed to be done to regain market access, Aguirre said. The first re-entry was actually a tax revenue and anticipation note issue, and then the 2022 bond sale.
Part of KNN’s role as the FA was starting a dialogue with the rating agencies, Young said. When the TRANs were issued, bond attorneys were still working through issues with the SEC, he said.
“The lawyers had a lot of work to get us through the balance of the SEC investigation to get that behind us and get a report that the investigation was closed,” he said. Once the case had been resolved, “we were in a position we could issue bonds without worrying about disclosure issues,” Young said.
Still, when the school district did a request for approvals to underwriters ahead of the 2022 deal, it received much less interest than normal for a deal of that size. It ultimately was able to select a pool of four underwriters — and the actions of the board and the school district resulted in upgrades that brought interest from investors when the bonds sold, he said.
“The sale was very successful,” Young said. “We were five to six times oversubscribed.”
Based on the recent ratings, the district has clearly shed its reputational stain from a markets perspective.
Over the past several years, “the district has consistently reported sizable surpluses, increasing reserves and liquidity to 42% and 54% of operating revenue for fiscal 2024 year-end,” Moody’s analysts wrote in its Feb. 6 ratings report. “Looking forward, over the next three years (fiscal 2025 through fiscal 2027), the district is conservatively forecasting deficits due to softer local control funding formula, funding [from the state] in conjunction with enrollment declines.”
The district’s large and diverse local economy, and currently manageable total leverage of 245% of operating revenue are weighed against declining enrollment trends of 1.7%, Moody’s analysts said.
As reported by Moody’s, and confirmed by Aguirre, the school district does “plan to issue regularly over the next several years,” which the ratings agency said may result in modest increases to total leverage.
Moody’s Aa3 GOULT rating is one notch higher than the issuer rating, reflecting California school district GO bond security features that include the physical separation through a “lockbox” for pledged property tax collections and a security interest created by statute, according to the ratings agency.
The positive outlook reflects the likelihood that the “district will continue to budget conservatively and maintain healthy reserves and liquidity in excess of prepared forecasts,” Moody’s analysts said. “Further, we anticipate the district to successfully navigate enrollment declines and/or fluctuations in state funding without materially reducing reserves.”