The state budget crisis is taking a hidden toll on College of the Canyons – hidden to most students, but not to investors who buy government bonds.
The financial ratings firm Fitch downgraded COC’s outstanding debt instruments by one notch Wednesday due to what the company called COC’s “inability to offset deep cuts in state funding for community colleges.”
Fitch issued a downgraded rating of “AA” on $141.7 million worth of general obligation bonds outstanding under COC’s voter-approved bond measure of 2006 – down from the previous rating of “AA+.”
The company also issued an initial rating of “AA” for $35 million in bonds due to be priced May 16. The bonds are to be issued under the same 2006 authorization.
In addition, Fitch downgraded $33.4 million in outstanding certificates of participation (COPs) to “AA-” from “AA.” The COPs were used to finance the construction of the new student services and administration building.
Lower ratings can lead to higher interest rates – i.e., the cost of paying off the debt – because they’re riskier investments.
Sharlene Coleal, COC’s vice president of business services, noted that “AA” is still a solid investment grade for bonds.
“We are pleased to once again earn an ‘AA’ bond rating from both Standard & Poor¹s and Fitch Rating,” Coleal said in a statement Wednesday. “In light of the economic conditions that continue to burden the state of California, and the fact (COC) has absorbed millions of dollars in cuts while still providing outstanding service to our students and the community, the ‘AA’ rating underscores the (college) district’s commitment to strong fiscal management while still providing high quality instructional programs.”
Coleal said COC “will have no problem” issuing the $35 million in bonds in the next few weeks.
“In fact, these tax exempt bonds will be very attractive to investors,” she said.
In its statement, Fitch said it was lowering COC’s previous “stable” outlook to “negative.”
Fitch explained: “The negative outlook reflects uncertainty associated with the district’s fiscal 2013 budget and management’s plans for restoring balance. Further state revenue cuts, in combination with ongoing cost pressures, will challenge the district’s ability to maintain adequate reserves in fiscal 2013.”
It said: “State revenues, which provide nearly two-thirds of the district’s general fund support, declined sharply in fiscal 2012. The potential for greater cuts exists if state voters turn down a proposed tax increase in November 2012.”
Fitch is looking at forecasts of a $6.3 million operating deficit in fiscal 2012-2013, which would draw down reserves to $7.1 million, or 8 percent of general fund spending.
The draw-down would be necessary, Fitch said, to offset an anticipated loss of $9.7 million from the state’s general fund, equivalent to 11 percent of the college’s total state general fund revenue.
If California voters reject Gov. Jerry Brown’s tax measure planned for the November ballot, COC stands a further loss of $3.5 million in 2013, Fitch said.
On the bright side, Fitch noted that household incomes in the area are higher and unemployment is lower relative to the county, state and nation. It said COC benefits from its access to and participation in the greater Los Angeles economy “and appears to be on the path to recovery.”
But it warned that if the college can’t “implement significant recurring solutions to the district’s budget gap in fiscal 2013,” further negative rating action would likely result.