Faced with some deep budget cuts, plummeting reserves and now the downgrading of its bond rating, the Los Angeles Unified School District has run out of money for raises this year for teachers, administrators or other staff members, Superintendent Roy Romer said Wednesday.
Romer said reductions in state funding for education forced the LAUSD to impose $500 million in cuts to sign off on a balanced budget of $6.8 billion. The budget contained no provision for pay raises, but the district and unions have continued negotiations, holding out the possibility that some money for raises could be found.

"I'm sympathetic to them. I don't feel good about it. ... We just don't have it," Romer said in an interview.

Even if more state money would come to the district, Romer said, his first priority would be to shore up reserve funds, which have dropped dramatically, forcing the district to pay higher interest rates on money borrowed through bonds for school construction, he said. He described union leaders as being "pretty realistic" since employees' benefits were preserved.

LAUSD Controller Rick Knott said that, with 80 percent to 85 percent of the district's operating budget in salaries, each 1 percent increase equates to about $37 million, so giving raises would require even deeper cuts elsewhere.

Bev Cook, United Teachers Los Angeles/American Federation of Teachers vice president, said the union is closely monitoring the state budget situation and still wants raises as money becomes available.

"Do you want good teachers in Los Angeles? We want raises. ... If money is there, we'll go after raises."

Romer discussed the situation in the context of the downgrading of district bonds by Fitch Ratings, affecting the sale of more than $5 billion in voter-approved general-obligation bonds and board-authorized certificates of participation. District officials hope to get the rating upgraded before most of the bonds and certificates are sold, however.

The district's total reserves dropped from $579 million on June 30, 2003, to $232 million on the same date this year as it struggled to meet operating expenses.

"The trend is clearly negative. The one-year drop is very significant," said Mark Capell, a Fitch Ratings director in San Francisco.

Without pay raises, the district could reverse its deficit spending and add about $15 million to its total reserves, officials estimate.

School board President Jose Huizar said the district was forced into the no-raise scenario largely by the state's financial crisis that Gov. Arnold Schwarzenegger has been facing.

"We've cut $1.3 billion in the last three years, and that's due to not having sufficient money from the state," Huizar said. "We are under fiscal strain."

Huizar said there is no expectation of raises "unless the state comes through with money."

Board member David Tokofsky said state money would create pressure on the superintendent and board to weigh pay raises "that are overdue" against putting money back into reserves.

"(Schools in) L.A. Unified, like all the local school districts, have essentially given a loan to Gov. Schwarzenegger to balance the state budget, which affects our reserves and bond rating," Tokofsky said.

Fitch downgraded the district's certificates of participation from an A to an A-minus rating, including $66 million in 2004 series A and $4 million in 2004 series B that are to be sold Tuesday.

That's the lowest rating Fitch has given the district's certificates since 1991.

Fitch also downgraded about $4.3 billion in general-obligation bonds from a double-A-minus rating to a single-A-plus, the lowest since the bond house began rating LAUSD bonds in 1997.

Capell said while the lower ratings are a sign of fiscal stress, they are still within the average range for school districts and the borrowing is needed to meet financial obligations.

"I think it's prudent, because they need the short-term relief," Capell added.

Still, the downgrade is expected to cost the district millions of dollars in increased interest payments as it begins to sell more than $5 billion in voter-approved general-obligation bonds, including the $3.87 billion Measure R passed in March to fund an ambitious building program.

The district is preparing to issue the first $300 million in Measure R bonds and is expected to pay about $7.5 million more in interest over 25 years because of the lower rating, Knott said.

The bonds are being sold to cover the LAUSD's massive construction program.

Bond analysts said that, as one worded it, the district "continues to closely monitor its capital facilities program and has completed the bulk of its projects -- to date -- on time and on budget."