Correction: Fitch Rates Benicia Unified School District, CA GO Bonds 'AAA'
Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by Benicia Unified School District, California (the district):
--Approximately $29.6 million general obligation (GO) bonds, election of 2014, series B.
Fitch also has assigned an Issuer Default Rating (IDR) of 'A+' to the district. The distinction between the 'AAA' rating on the bonds and the 'A+' issuer rating reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.
The Rating Outlook is Stable.
The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.
KEY RATING DRIVERS
Special Revenue Analysis: The 'AAA' rating on the 2016 unlimited tax general obligation bonds is based on a dedicated tax analysis without regard to the district's financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered "pledged special revenues" in the event of a district bankruptcy.
Strong Tax Base; Low Debt: The economic resource base supporting the GOs is strong despite the high taxpayer concentration. The unlimited nature of the tax offsets any concern about tax base volatility. Overall debt is low relative to the tax base.
Tax Base Drives Go Rating: The 'AAA' GO bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.
IDR Sensitive To Financial Performance: The 'A+' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility and sufficient levels of reserves to withstand a moderate economic recession.
The district is comprised of one comprehensive high school, one continuing education high school, four elementary schools and one middle school. Fiscal 2015 enrollment of 4,924 students reflects the district's maintenance of a steady enrollment since at least fiscal 2009. Minimal to no growth is projected in future years.
Tax Revenue to Repay Bonds Viewed as Pledged Special Revenues
Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U. S. bankruptcy code, and therefore the lien on pledged revenues would survive and would not be subject to the automatic stay (that is, payment interruption) in the event the district were to file for bankruptcy. Fitch has reviewed and analyzed legal opinions provided by district counsel and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily Proposition 13), which limit and direct the use of pledged property tax revenues for bond repayment.
As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district's bonds eliminates the need for such calculations.
The $5.4 billion tax base provides strong fundamental support for the 'AAA' 2016 GO rating. The district's economy and taxable assessed values (TAV) have increased after the previous recession. The 10-year CAAGR for the district's taxable assessed values is 2.6% with more robust growth of 5.7% over the past three years. Future AV growth is likely given some ongoing development and the potential for increases to AV when properties are sold and reassessed at current price versus the Proposition 13 value, which can only be inflated 2% per year.
The top taxpayer in the district is Valero Refining Company, paying nearly 20% of the total TAV (the other nine taxpayers make up for approximately 5% of the total TAV), which represents a concentrated tax base. The refinery, previously owned by another company, has been part of the Benicia economy since 1968. Currently Valero employs 480 people and produces propane, butane, ultra-low sulphur diesel, jet fuel, fuel oil, residual oil and asphalt. Approximately 70% of the refinery's product is CARB (California Air Resources Board) gasoline, California's clean burning fuel.
IDR Expands Analysis to Include Operating Performance and Framework
The 'A+' IDR reflects the district's adequate gap closing capacity with moderate reserves relative to historical revenue volatility. The rating also reflects the district's weak revenue framework with stagnant historical revenue growth and no independent legal ability to raise revenues without a vote of the people. These weaknesses are partially offset by the district's low long-term liability burden, solid expenditure flexibility and stable enrollment.
Economic Resource Base
The district services a population of approximately 28,000 and covers a 16 square mile area. It is located 35 miles northeast of San Francisco. The city of Benicia sits on the southern tip of Solano County with Contra Costa and Alameda Counties just to the south and east, Napa, Sonoma and Marin Counties to the north and west and San Francisco County to the south-west. Valero Refining Company is the city's largest employer, but health care is a growing industry. The city of Benicia's 2015 unemployment rate was a low 3.9% compared to the county and state's 6.2% and 6.5%, respectively. Per capita personal income is 46% higher in Benicia than Solano county and 17% higher than in the state.
Revenue Framework: 'bbb' factor assessment
The district is largely reliant on formulaic per pupil funding from the state of California, and policymakers have no meaningful independent revenue raising flexibility due to tax limitations. The combination of stable enrollment and the state's strong revenue growth should result in the district's revenue growth at least at the level of inflation.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending is likely to remain in line with or rise marginally above revenues. The district's carrying costs of 17.8% are moderate and management retains the ability to control labor costs and staffing levels after engaging in a structure bargaining framework.
Long-Term Liability Burden: 'aa' factor assessment
The district's overall debt and long-term liabilities are moderate relative to its resource base. The district participates in two adequately funded state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies.
Operating Performance: 'a' factor assessment
The district's reserve funding levels are adequate relative to Fitch's expectations of revenue sensitivity and ability to adjust spending.
Historical revenue growth was below U. S. economic performance and inflation; however, given stabilized enrollment and positive trends in state per pupil funding, the district should see revenue growth at or above the level of inflation. Currently the district has a low proportion of students - 22% of total student population - targeted under the state's Local Control Funding Formula (LCFF), which provides additional funding for such students. The district received $3.7 million in additional state revenues in fiscal year 2015-16 and is expected to receive an additional $1.8 million in FY 2016-17.
California's Proposition 13 requires a vote of the people to raise taxes which leaves the district with no independent ability to raise revenues.
Expenditure control is solid. Personnel costs for teachers and staff comprise the vast majority of district expenditures. Fitch expects expenditure growth to be in line with to moderately above expected revenue growth based on the district's current spending profile. The district's mandate to provide educational services places some limitations on its ability to make expenditure reductions in the event of a revenue decline. Nonetheless, the district's moderate carrying costs and ability to raise class sizes, negotiate salary freezes, reduce personnel, adjust curriculum, and make cuts in supply and services if needed provides solid expenditure flexibility.
Long-Term Liability Burden
The district's combined debt and pension liabilities relative to personal income is moderate at 11% with direct debt accounting for about 4.7%, overlapping 4% and pension liabilities the remainder. This issuance exhausts the districts bond authorization and it has no current plans to seek additional authorization. The district participates in both CalPERS and CalSTRs. The Fitch-adjusted ratio of assets to liabilities for its pension plans is adequate at 73.7%. The district's liability related to other post-employment benefits (OPEBs)is 1% of personal income.
Current reserve levels at about 12% of spending at fiscal yearend 2015 are above the district's policy of 7% of spending. However, given Fitch's estimated revenue decline in a 1% GDP decline scenario of 6.3% and the need to make all budget adjustments on the expenditure side, Fitch assesses the district's gap closing capacity as adequate. However, Fitch believes that the district, supported by its solid expenditure flexibility would make the necessary budgetary changes to maintain an adequate safety margin in a moderate economic decline scenario as is evidenced in their reserve levels in the last recession.
Budget management is sound and is supported by California's robust Assembly Bill 1200 (AB 1200) school oversight framework, which requires conservative budgeting and multi-year forecasting with oversight from the county office of education. The district's three-year projections show a return to positive operating results from fiscal 2016-2018.