On Thursday afternoon, just as two members of the San Diego Unified school board were vowing to remove one of the most distasteful options from their menu of choices to save money, the credit rating agency Moody’s announced it was downgrading the district’s long-term credit rating, partly because of the district’s failure to make distasteful cuts in the past.

San Diego Unified must cut $60 million out of its spending just to break even next year. But that’s just the start. If the state issues midyear cuts to education funding, that deficit could skyrocket to as much as $115 million. Superintendent Bill Kowba recently announced the district may go insolvent if the state makes those cuts, stirring anxiety about the future of the district.

San Diego Unified planned to lay off about 1,400 employees to balance its books this year. It eventually pared that back to about 800, about of 450 of whom were teachers. The school board has also voted to lay off hundreds of nurses, custodians and other staff, reduce busing and cut popular programs like sixth grade camp.

That wasn’t good enough for Moody’s. The agency took the district to task in the written statement announcing its decision to downgrade the rating one notch from Aa1 to Aa2.

“The district’s financial flexibility continues to diminish as it draws down fund balances, rather than cut spending sufficiently to match declines in revenues. The district has endeavored to minimize cuts affecting the classroom, and has therefore used one-time solutions to offset cuts,” the statement reads.

There’s an irony in the fact that as those words were sitting on a document somewhere in district headquarters, school board member Scott Barnett was holding a press conference to call on his colleagues to cancel a controversial but as-yet-unfinished plan to close some district schools.

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And, as that was happening, school board President Richard Barrera was making his own plans to take the school closures off the table.

If the district had closed all the schools recommended by a staff committee, it could have saved an estimated $5 million. Closing schools is one on a list of options, ranging from selling school property to negotiating pay and benefit concessions from district employees, to close the $60 million initial deficit.

Barrera doesn’t think the school closings are the most effective or fair way to close that deficit, and Barnett said he doesn’t think his district (in which seven of the 14 schools planned to be closed or moved sit) should suffer cuts if the board’s not willing to cut other spending, such as a busing cut he supported earlier this week.

Instead, both men have their own plans for how to solve the district’s crisis that don’t involve closing schools.

Barrera’s relies primarily on pressuring the state to provide school districts with more money while pushing for higher taxes on wealthy individuals, oil extraction or alcohol sales.

Barnett says he’ll announce his plan on Monday. At Thursday’s press conference, he hinted that he, too, would suggest raising revenue in addition to asking employees to make concessions on a contract that includes raises next year.

Moody’s said the downgrade is likely to stick around for a while. Even if the whole school board agrees on a comprehensive plan with a realistic chance of success, the rating isn’t likely to rise until that plan starts to have positive financial effects.

For now, the impact of the reduced credit rating is largely symbolic.

District Chief Financial Officer Ron Little said the downgrade will have no immediate financial impact, and said that its future effect would also be limited.

San Diego Unified already has the lower rating from another rating agency, he said. Because investors usually only look at the lowest rating, the Moody’s downgrade is therefore unlikely to affect the district’s cost of long-term borrowing, Little said.

If the downgrade is followed by a similar downgrade in the district’s credit rating for short-term borrowing, however, that would have a significant effect.

A one-notch downgrade in that credit rating, which is currently good, would result in a doubling of the district’s borrowing costs to more than $8 million annually, Little said.

San Diego Unified, like many governments, relies heavily on short-term borrowing to pay bills before tax revenue come in. That reliance has magnified in the last 10 years since the state began writing billions of dollars in IOUs to school districts rather than giving them the tax money they’re owed.

This year, the district borrowed about $215 million in short-term debt.

As the discussions over what to do about the district’s looming deficit continue, the announcement from Moody’s suggests that the credit rating agencies have their eye squarely on the district.

And the wording of Moody’s statement clearly shows that the agency will be watching to see if the school board is capable of, and willing to, make the sort of difficult cuts that will stave off financial ruin.

Will Carless is an investigative reporter at voiceofsandiego.org. You can reach him at will.carless@voiceofsandiego.org or 619.550.5670.

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Will Carless was formerly the head of investigations at Voice of San Diego.

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