Fitch Rates $45MM Fullerton Joint Union High School District, CA's GO Bonds 'AA+'
--$45 million general obligation (GO) bonds, election of 2014, series A (2015).
The GO bonds are expected to sell competitively Oct. 14. Proceeds will be used to upgrade classrooms, science labs, sites, facilities; repair roofs, floors, plumbing, heating, ventilation and electrical systems; improve student safety and security; upgrade career training facilities and technology infrastructure.
The Rating Outlook is Stable.
The GO bonds are payable from an unlimited ad valorem tax pledge of all taxable property in the district.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The 'AA+' rating reflects the district's strong financial position, with a solid financial cushion and prudent management practices. Fitch expects the district to spend down some fund balance in future years, but to maintain reserves at satisfactory levels for its risk profile.
STRONG LOCAL ECONOMY: The district benefits from its proximity to the Orange and Los Angeles County employment markets. Socioeconomic indicators are above average.
MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are low, although expected to rise with a new bond authorization. Carrying costs are affordable but growing, given future debt plans and expected increases in pension contributions.
GOOD FINANCIAL OVERSIGHT FRAMEWORK: Like all school districts in California, the district is subject to extensive financial reporting and oversight provisions, per state law, which Fitch views positively.
STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in the district's strong financial performance and solid reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely over the coming review cycle.
The district serves about 15,000 high school students primarily in northern Orange County (Fitch implied GO rating of 'AA+', Stable Outlook).
RETURN TO STRUCTURAL BALANCE
After drawing down reserves in fiscal 2011 - 2013, the district regained structural balance in fiscal 2014 and 2015 due in part to negotiated labor concessions (furloughs and increased class sizes) as well as to an improving funding environment for California school districts.
The labor contracts included re-openers based on actual revenues, and given improved Proposition 98 funding the district was able to add back the furlough days and return to the previous class sizes over the two-year contract period that expires in June 2015.
The district ended fiscal 2014 with a modest operating deficit ($827,000) and a solid unrestricted general fund balance of $28.1 million, equal to about 20.5% of spending. The district's unaudited actuals for fiscal 2015 show a $3.6 million operating surplus, increasing available reserves to about 25% of fiscal 2015 spending.
The district and employees are in contract negotiations for fiscal 2016. After seven years of no salary increases, Fitch expects pent-up wage pressure may result in some salary increase. Despite this pressure, and in light of its history of prudent financial management, Fitch expects the district to retain solid reserves and largely balanced operations.
STRONG LOCAL ECONOMY
The district benefits from a fundamentally sound local economy that is linked to the diverse regional economies of Orange County and the greater Los Angeles area. The city of Fullerton (the city) is home to a university, medical centers, and large businesses specializing in defense, aerospace, and engineering. Taxable assessed value (AV) experienced only moderate declines during the recent recession, and growth has since resumed - increasing 6.2% for fiscal 2015 to $28.8 billion (about 9% above its pre-downturn peak).
Socioeconomics are generally above average. Median household income in 2013 was 110% and 127% of state and national averages, respectively. City unemployment was down to 5.3% in July 2015, which is lower than state and national unemployment levels. City labor force growth for the 12 months ending July 2015 was solidly above the state and national rates of growth.
MANAGEABLE LONG TERM LIABILITIES
Overall debt levels are low at about $1,300 per capita and 1.1% of AV. Amortization is moderately slow, with roughly 40% of principal retired in 10 years. The district received voter authorization for up to $175 million in GO bonds in November 2014 to address all of its identified capital needs. These bonds are the first issuance of the authorization which the district plans to issue over the next six years. Fitch does not expect planned issuance to materially impact its debt profile.
The district participates in California Public Employees' Retirement System (CalPERS), as well as the more poorly funded California State Teachers' Retirement System (CalSTRS). In fiscal 2015, the state implemented a multi-year pension contribution rate hike that would more than double current CalSTRS rates through fiscal 2021. Contributions to CalPERS are expected to increase by 50% over the next five years. Fitch expects these increased contributions to generate moderate but manageable budgetary pressure on the district.
Total carrying costs, calculated by dividing debt service, pension, and other post-employment benefits (OPEB) costs by governmental fund spending, equal a relatively low 9% in fiscal 2014. However, Fitch expects total carrying costs to rise to more moderate levels given future growth in pension costs and debt service.