OREANDA-NEWS. Fitch Ratings has affirmed the 'AAA' rating on outstanding unlimited tax general obligation (ULTGO) bonds of the Carmel Unified School District, CA as follows:

--Approximately $1.1 million general obligation (GO) bonds, series 2002;

--Approximately $9.4 million GO bonds, series 2006;

--Approximately $10.3 million GO bonds, series 2008.

Fitch also has affirmed the district's Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable

SECURITY

The bonds are payable from an unlimited ad valorem tax pledge on all taxable property within the district.

KEY RATING DRIVERS

The 'AAA' rating is based on the district's abundant gap-closing capacity which is supported by the district's ample reserves, strong growth prospects, a low long-term liability burden and ample general fund expenditure flexibility.

Economic Resource Base

Carmel USD is located 54 miles south of San Jose in northern Monterey County and serves the beach community of Carmel and unincorporated portions of Pebble Beach, Carmel Valley, and Big Sur. The district's local economy is anchored in high-end tourism and characterized by low unemployment and very high wealth levels; according to state data, Carmel's unemployment rate was 2.4% in 2014. Taxable assessed value (TAV) per capita in the district was a very high $635,000 in fiscal year 2015. As of 2015, the district served a population of approximately 24,000 residents.

Revenue Framework: 'a' factor assessment

General fund revenue growth has been above national GDP growth and Fitch expects that trend to continue given the solid economic underpinnings of the district. The district is one of the few school districts in California to qualify for 'basic' aid because locally generated tax revenue per student exceeds what the state guarantees per the Local Control Funding Formula (LCFF). As a result, unlike the majority of school districts in the state, the district's primary revenue source is property tax revenue. Limits on the district's discretion over general fund revenues leave it with only limited independent legal ability to raise revenues.

Expenditure Framework: 'aaa' factor assessment

The rate of spending growth is expected to be in line with, to marginally above, expected revenue growth in the absence of policy action. There will be some upward expenditure pressure from rising pension system (CalSTRS) contributions; however, the district is expected to maintain ample expenditure flexibility given its low carrying costs and manageable to favorable workforce environment.

Long-Term Liability Burden: 'aaa' factor assessment

The district's overall debt and unfunded pension liability are moderate relative to its resource base. The district participates in two state-run pension plans and funds the bulk of its capital needs from a special capital improvement fund or voter-approved property tax levies. The resulting long-term liability burden is expected to remain moderate relative to its resource base. The district is currently assessing capital needs, but does not anticipate the need for a bond issuance in the near future.

Operating Performance: 'aaa' factor assessment

The district has exceptionally strong gap-closing capacity supported by strong general fund reserves and solid control over spending. The district budgets conservatively, building in potential increases in labor costs.

RATING SENSITIVITIES

FINANCIAL OPERATIONS: The rating is sensitive to the district's continued sound budget management and maintenance of solid reserves through the economic cycle.

CREDIT PROFILE

Monterey County employment is concentrated among the tourism, governmental, and agricultural sectors, and the Carmel area is especially dependent on leisure and tourism. TAV continues its strong growth, with 7% TAV increase in fiscal 2016 preceded by 5% and 4% in fiscals 2015 and 2014. The area is well established with no additional room for new material development. Thus, the TAV growth is attributed to high-end home turnover in the district.

Revenue Framework

For a small subset of California school districts, local property tax revenues result in dollars per average daily attendance (ADA) which exceeds the state's revenue limit. Those districts are allowed to keep all their property tax revenue but do not receive any unrestricted general fund monies or statutory minimum aid from the state, only certain state categorical program funding. Consequently, these 'basic aid' school districts are very dependent on local property taxes. While Carmel USD has this exposure to its local tax base (more than 90% of general fund revenues are from the property tax), its basic aid status insulates the district from state funding volatility and mitigates funding losses associated with potential decline in student enrollment. Locally generated tax revenue in fiscal 2015 was nearly 64% higher than what would have been guaranteed to the district under the state's LCFF.

The district's general fund revenue growth has been above national GDP growth and ahead of inflation. However, it has limited discretion over general fund revenues, since Proposition 13 limits AV growth to inflation (capped at 2%) plus new development.

General fund revenues will likely continue to surpass U. S. economic performance due to the affluent nature of the district's tax base.

The district is one of the few school districts in California to qualify for basic aid, because locally generated tax revenue per student exceeds what the state guarantees per the LCFF. As a result, unlike the majority of school districts in the state, the district's primary revenue source is property tax revenue. Limits on the district's discretion over general fund revenues leave it with no independent legal ability to raise revenues.

Expenditure Framework

Labor costs are likely to be in line with or moderately above expected revenue growth in the absence of offsetting policy action based upon existing and anticipated future labor agreements and increasing contributions to CalSTRS. Carrying costs are expected to remain low despite rising pension system contributions. The district participates in both CalPERS and CalSTRs and the combined Fitch-adjusted adjusted ratio of assets to liabilities for both pension plans is 73.8%.

The district has two-year contracts with each of its bargaining units. The district absorbed a 4.6% and 2.5% salary increase in fiscals 2015 and 2016. The district reports teacher salaries as comparable to those in peer wealthy districts. While professional development is not part of union contracts, the district provides significant professional development programs.

The district demonstrates relatively ample flexibility in adjusting spending to match revenues, in part due to its low carrying costs, which are a low 6.4% of total expenditures. The district also prefunds OPEB costs. Carmel USD has among the lowest class ratios in the state - under 20 students per class vs. its internal cap of 29. As such it identifies headcount as well as professional developmental programs as areas of expenditure flexibility if needed. Cuts in support staff, and the district's maintenance and grounds budget may also be an option.

Long-Term Liability Burden

The district's long-term liability burden (overall debt and pension liability) totals a moderate 10.5% of personal income. However, including the wealth and income of second-home owners, Fitch assesses the long-term liability burden as low relative to the resource base. The district is currently assessing capital needs but a new money bond issuance is not anticipated in the near future. Annual OPEB costs are prefunded but the district's employer contributions to the state-run pension plans (CalSTRS and CalPERS) will increase over time given pension funding pressures.

Operating Performance

The district is consistently well above its minimum policy reserve of 5% of general fund expenditures (3% minimum state requirement plus an extra 2% cushion because of the district's board policy). Additionally, board policy has established a basic aid reserve of no less than 10% of the differential between property tax revenues and the district's revenue as defined by state LCFF.

The district has a history of very conservative budgeting, with actual reserves being significantly higher than budgeted levels. As a result, its combined available fund balance amounted to over $23 million (46% of spending) in fiscal 2015. Historically, the district had kept unrestricted balances over 50% of spending; however, in fiscal 2014 it transferred over $6 million to a Special Reserves Fund for Capital Outlay. The Capital Outlay and Retiree Benefits (OPEB) funds are monies available for the district's use in the event of unanticipated revenue loss. Fitch expects the district to maintain strong financial flexibility going forward, both in the general fund and in other funds, which could support the general fund if needed.