Fitch Affirms Chualar Union Elementary School District, CA's GOs at 'A+'; Outlook Stable
--$810,000 series 2001 (Election of 2001).
Fitch has also affirmed its Issuer Default Rating (IDR) for the district at 'A+'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem property tax levied on all taxable property within the district.
KEY RATING DRIVERS
The 'A+' IDR reflects the district's good financial cushion, solid flexibility to adjust spending, and midrange gap closing capacity in a revenue loss scenario. Cumulatively, these help offset the district's limited independent legal ability to raise revenues and moderately high long-term debt liability.
Economic Resource Base
This small, one-school elementary school district is located in the central part of Monterey County, south of the city of Salinas. It provides K-8 education to a population of approximately 2,100 residents in Chualar and surrounding unincorporated areas. The majority of the district's 66 square miles consists of agricultural properties which account for 72% of the district's assessed valuation (AV). The top 10 taxpayers are all agricultural concerns and represent a concentrated 37% of the district's tax base.
While the focus on agriculture results in below-average wealth levels for local workers and their households, it did ensure AV stability during the recession. The district's AV continued to increase through the recession, with strong cumulative growth of 66% during fiscals 2007-2017, to almost $487 million. This was primarily due to the rising value of agricultural land. A number of the largest ranches in the district are under multigenerational family ownership. Agricultural properties within the district share first rights to the Salinas water table, thereby avoiding the water issues that impact other parts of Monterey County.
The local non-agricultural commercial economy and residential property market are both very limited with marginal growth potential. The median AV for the district's 197 single family houses in the district is low at $193,000.
Revenue Framework: 'bbb' factor assessment
Despite student enrollment declines, general fund revenues have rebounded in recent years due to state economic improvement and the district's extremely high unduplicated count of targeted students. However, the district's independent legal ability to raise revenues is constrained by state law, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
While the district has a moderately high and rising fixed cost burden, it retains solid flexibility to adjust spending.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is moderately high relative to the district's resource base. There are no additional debt issuance plans and direct debt will amortize faster after an imminent refunding of parity GO bonds. The district participates in two adequately funded state-run pension plans and its other post-employment benefits (OPEB) liability is very manageable.
Operating Performance: 'a' factor assessment
The district maintains reserves well above the minimum state mandate, providing a good financial cushion. Fitch assesses the district's gap closing capacity as midrange relative to the expected revenue loss (5.7%) during a 1% GDP decline scenario.
Fitch expects that the district will continue to exercise sound budget management and maintain solid reserves through the economic cycle.
As with most California school districts, the bulk of the district's operational revenues are derived from a state-determined per pupil funding formula. Student average daily attendance has declined by 5% since 2011 to a projected 327 students in fiscal 2017. The district's unduplicated count of students who are English language learners, eligible for free or reduced price meals, or in foster care is almost 99%. Consequently, the district benefits significantly from supplemental and concentration funding under the state's new local control funding formula (LCFF).
State aid and local property taxes provide the majority of district operating revenues. State aid has been expanding due to improvements in the state's economy and LCFF, which provides additional funding for targeted students. Actual general fund revenues grew by 6% during fiscals 2013-2015.
Although student average daily attendance (ADA) has declined by 5% since 2011, forward projections show less than 1% further decline through fiscal 2021. The funding impact of ADA declines is somewhat muted by basing each year's funding on the prior year's ADA. This gives California school districts time to respond appropriately to the funding impact of ADA declines.
State law requires voter approval of tax increases, limiting the district's independent legal ability to control revenues. However, Fitch expects that the district will continue to manage its revenue pressures satisfactorily.
Fitch expects general fund expenditure growth to be in line with, or to slightly exceed, general fund revenue growth, partly because of rising special education and employee benefit costs. The district's fixed costs represent a manageable 11% of its general fund expenditures. The district will be negotiating new labor contracts next year. In order to retain maximum expenditure flexibility, the district does not plan to repeat its current three-year contracts, preferring to negotiate single year contracts instead. The district's workforce environment is moderately flexible and labor negotiations have historically been productive.
The district's mandate to provide educational services places some limitation on its ability to reduce expenditures in the event of a revenue decline. Nevertheless, the district maintains good expenditure flexibility, particularly in relation to employee hour reductions, classified staff layoffs, class size increases, reduced professional development and teaching days, and reduced supplemental programs (such as after school classes and Saturday academies). These options are supported by the district's moderately flexible labor environment.
Long-Term Liability Burden
The district's debt burden is moderately high relative to its resource base at 18% of estimated personal income. However, it represents a more moderate 3% of the district's assessed valuation. The district has no outstanding GO bond authorization and no plans to seek voter authorization for new GO bonds, although in the near future it is planning to refund parity GO bonds (not rated by Fitch) for savings. This will further decrease the district's already low overall debt burden and eliminate capital appreciation bonds, which currently slow down its direct debt amortization considerably.
The district participates in two state-funded pension systems, both of which are mandating increasing employer contributions over the next few years to improve their funded ratios. As of June 30, 2015, the district's proportionate share of CalSTRS' and CalPERS' net pension liabilities was $1.9 million (assuming 7.6% and 7.5% discount rates, respectively). Using Fitch's more conservative 7% discount rate, the district's proportionate share increases to an estimated $2.5 million which is still less than 1% of the district's fiscal 2015 AV.
The district pays for OPEBs on a pay-as-you-go basis based on the number of eligible retirees (none in fiscals 2015 and 2016). The district has a special OPEB reserve of $215,129, approximately one-third of its unfunded actuarially accrued OPEB liability.
Since fiscal 2011, the district has maintained year-end unrestricted general fund balances of between 17% and 26% of spending, well in excess of the state's 4% minimum mandate for small school districts. However, this cushion is limited in dollar terms ($666,000 - $896,000) and was inflated during the recession by temporary borrowing from the special reserve capital outlay fund to address general fund cash flow issues caused by state funding deferrals. To control its costs during the recession, the district worked with the Monterey County Office of Education to downsize its classified workforce.
The district's projections for fiscals 2016-2019 indicate maintenance of healthy unrestricted general fund balances of between 16% and 20% of spending. Again, this cushion is limited in dollar terms ($650,000 - $771,000). In the event of a general fund emergency, the district could borrow from its $1.2 million special revenue capital outlay fund. This would provide a useful cushion given the general fund's rather limited liquidity. However, Fitch notes that $1 million of this cushion will cease to be available when a Qualified Zone Academy Bond loan has to be repaid fully in fiscal 2018.
Fitch assesses the district's gap closing capacity as midrange relative to the expected revenue loss (a moderately high 5.7%) during a 1% GDP decline scenario.