Fitch Affirms Cottonwood Union School District, CA's GO Bonds at 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the following Cottonwood Union School District (the district), CA general obligation (GO) bonds.
--$1.3 million GO bonds, election of 2003, series A.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax pledge on all taxable property within the district.
KEY RATING DRIVERS
SOLID FINANCIAL FLEXIBILITY: Significant expenditure reductions have preserved positive financial margins despite sharp revenue declines over the past few years. Improved state funding and continued constraint in spending are projected to keep the budget in balance in fiscal 2016 and beyond.
HEALTHY RESERVES: The district's unrestricted balance has increased modestly over the past several years with a fiscal 2015 ending balance of $3.4 million or a healthy 44.2% of spending.
MANAGEABLE LONG-TERM LIABILITIES: The district's debt burden is low, and there are no additional debt plans. The district's carrying costs are currently low, but Fitch expects carrying costs to rise if and when pension contribution rates are adjusted upwards.
LIMITED ECONOMY: The local economy is somewhat limited with a concentration in agriculture and lumber. County unemployment rates remain high. The district's assessed value (AV) increased moderately in recent years following recessionary declines.
STABLE FINANCIAL OPERATIONS: The rating is sensitive to shifts in the district's strong financial operations, which may be challenged due to declining enrollment and enrollment based funding.
The district serves approximately 8,700 residents in a small portion of Anderson and unincorporated Shasta County. The district operates two elementary schools after closing a third site in fiscal 2013 for financial reasons. Management reports that the remaining two school sites have sufficient capacity for current student levels and potential modest future growth, if any.
Enrollment for the district continues to trend negatively as a result of competition from local charter schools and generally weak economic conditions. In fiscal 2015, the district's average daily attendance was 861, which is approximately 11.3% below the fiscal 2010 figure.
SOUND FINANCIAL PROFILE
The district maintains a sound financial profile with generally positive operating results, healthy reserves, and satisfactory liquidity levels. At the end of fiscal 2015, the district's unrestricted reserve was approximately $3.4 million or 44.2% of spending.
The district has recorded positive operating margins annually since fiscal 2010, including a $388,000 operating surplus (5% of spending) in fiscal 2015. Approximately $450,000 of fiscal 2015 revenues were related to the state's reimbursement of mandated costs, which the district will expend at a future date with limited fund balance impact expected.
Financial performance has remained solid largely due to management's prudent spending cuts to offset enrollment-based revenue declines as well as from declines in state per pupil funding levels. For example, in fiscal 2013 the district closed one of its three school sites, reduced its workforce, scaled back transportation services, and eliminated school days. Audited expenditures in the year were 13.5% below fiscal 2012 levels.
Operations are expected to remain balanced in fiscal 2016 with management projecting a surplus of $450,000, or 5.2% of projected spending. While the district continues to deal with the gradual decline in enrollment due to encroachment from charter schools, fiscal 2016 revenues are projected to increase due to the general improvement in the state's finances. Long-term fiscal health will depend on the district's management of future enrollment declines to the extent that they affect finances.
MANAGEABLE LONG-TERM LIABILITIES
While specific information on overlapping debt is not available, overall debt in Shasta county is low, and the district's direct debt load stands at a low 0.4% of AV and $276 per capita. Direct debt levels will gradually decline as 76% amortizes within 10 years and the district has no debt plans.
The district's obligations to retirees, though manageable, are likely to pose an increasing fiscal burden. Like all California schools, the district participates in the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS). Contribution rates for CalPERS are actuarially based, but those for CalSTRS are set by statute and were below the level required to amortize the system's unfunded liability for several years.
CalSTRS reported a funded ratio of 68.5% for fiscal 2015. Fitch estimates that funded ratio to be 65% based on a more conservative 7% rate of return assumption. School districts' CalSTRS contribution rates are scheduled to rise significantly over the coming years until they reach the actuarially required level.
In addition, the district offers other post-employment benefits (OPEB) and had an unfunded OPEB liability of approximately $725,000 in fiscal 2015. Total carrying costs, including debt service, OPEB contributions and pension obligations, are currently an affordable 13.6% of governmental fund spending.
LIMITED ECONOMY; STABILIZING TAX BASE
The district's service area serves as a bedroom community for Redding, and the local economy is limited with a focus on agriculture, lumber, and tourism. Economic data on the unincorporated area is not available; however, economic indicators for Shasta County are somewhat weak. The 2015 unemployment rate remains elevated at 7.6%. Wealth levels for the district are modestly below average with per capita and median household income at 82% and 88% of the national average, respectively.
The district's tax base stabilized in fiscal 2014 after four consecutive years of declines aggregating a 14.8% loss. Total AV increased 2.2% in fiscal 2014 and a further 4.2% in fiscal 2015 as the residential real estate market improved with significant growth in developer fees suggesting future residential growth. Despite recent development, AV figures remain about 7.5% below their pre-recession peak.