Fitch Rates Sulphur Springs USD, CA's GO Bonds 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following bonds issued by the Sulphur Springs Union School District, CA (the district):
--$35 million general obligation bonds, election of 2012, series 2016C.
The bonds are expected to sell via negotiation on or around May 24. Proceeds will be used to refund in full or in part the district's 2014 general obligation bond anticipation notes, series A and series B.
Fitch also has assigned an Issuer Default Rating (IDR) of 'A' to the district.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax on all taxable property within the district.
KEY RATING DRIVERS
The 'A' rating is based on the district's lack of revenue flexibility, limited expenditure flexibility based upon the ability to impose staffing cuts and flat compensation, moderate long-term liability burden relative to its resource base, and poor recent financial performance, which is expected to improve given projected reversal of enrolment declines and increase in state funding.
Economic Resource Base
The district covers approximately 75 square miles and serves nine elementary schools in northern Los Angeles County. It is primarily residential with access to the large and diverse Los Angeles employment market. Its median household income is well above county and state averages, but per capita income is lower. March 2016 unemployment of 4.6% for Santa Clarita was lower than county (5%) and state (5.6%) averages. The tax base exhibits no concentration and taxable assessed value (TAV) has increased an annual average of 6.2% over the last three years.
Revenue Framework: 'a' factor assessment
The district has limited discretion over revenues as it is dependent upon the state for the majority of its revenues. In recent years, revenues have declined or flattened due in part to modest annual declines in enrollment; however, the revenue picture is likely to improve with continued implementation of the state funding formula as well as an expected reversal in enrollment declines beginning in fiscal 2019.
Expenditure Framework: 'aa' factor assessment
Spending is likely to increase at a rate equal to or faster than revenues. The district's carrying costs are moderate, but expected to rise through fiscal 2021 due to increased pension contribution rates.
Long-Term Liability Burden: 'aa' factor assessment
The district's overall debt and personal liabilities are low to moderate relative to its resource base.
Operating Performance: 'bbb' factor assessment
The district drew down reserves during and after the economic downturn due in part to limited spending cuts despite enrollment and other revenue declines. However, the district has made cuts more recently to right-size staffing and does not expect to provide any salary adjustments in the near term. Management has stated its intention to increase reserves going forward.
Reserves Key to Rating: The rating could be upgraded upon achievement of sustained adequate reserve levels in the context of financial flexibility and revenue volatility. Conversely, a decline in reserves, though not expected, could lead to negative rating action.
Historical revenue growth has exceeded inflation but fallen below U.S. economic performance. Future revenue growth will be determined by overall state revenue performance, the funding formula established by the state (which is based upon each district's average daily attendance (ADA) as well as the proportion of students that are English language learners, eligible for free or reduced priced lunch, or are foster students ('unduplicated count') and enrollment. Fiscal 2016 is the district's seventh year of modest enrollment declines, though management expects a reversal of this trend beginning in fiscal 2019 due to housing development under construction. In addition, the district is expected to benefit moderately from the state funding formula as it has an unduplicated count of 53% of students.
The district has no independent ability to raise revenues.
Labor costs drive the district's spending and are likely to be in line with or moderately above expected revenue growth based upon increasing contributions to CalSTRs through fiscal 2021, offset to some extent by increasing revenues under the LCFF funding formula through fiscal 2021.
The district's main financial flexibility lies with its ability to cut headcount. The district recently implemented some layoffs in order to right size staffing given the continued modest enrollment declines. Carrying costs are moderate, though expected to rise through fiscal 2021 due to increased pension contributions for CalSTRs.
Long-Term Liability Burden
The district's combined debt and pension liabilities relative to income are moderately low at 10%. The district participates in both CalPERS and CalSTRs and the Fitch adjusted ratio of assets to liabilities for its pension plans is 73.4%. The district's liability related to other post-employment benefits (OPEBs) is $8.7 million, or 0.3% of personal income.
Gap-closing capacity is now limited, reflecting the district's drawdown of reserves during and after the economic downturn as revenues declined while spending remained flat. The district posted operating deficits in four of the last five fiscal years (a surplus in fiscal 2014 was due to proceeds from the sale of property). The district's reluctance to adjust spending in a timelier manner is a credit weakness. However, current management has stated its intention to rebuild reserves. The district's fiscal 2016 second interim report shows an increase of $3.1 million (6.2% of spending) to funding balance. The unrestricted ending fund balance would be approximately $4.4 million (8.7% of spending); this is up from $1.2 million (2.3% of spending) in fiscal 2015. Fitch believes the district's expectation that the decline in ADA will reverse in the next two years is reasonable.