Fitch Upgrades San Ysidro School District, CA's GOs to 'A-'; COPs to 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings upgrades the following San Ysidro School District, California (the district) bonds:
--$33.6 million election of 1997 general obligation (GO) bonds series D, E and F to 'A-' from 'BBB-';
--$6.9 million certificates of participation (COPs) series 2007 to 'BBB+' from 'BB'.
The Rating Outlook has been revised to Stable from Positive.
The GO bonds are general obligations of the district, payable solely from the proceeds of ad valorem taxes, without limitation as to rate or amount. The COPs are limited obligations supported by the district's covenant to budget and appropriate lease rental payments for the use of certain district properties, subject to abatement.
KEY RATING DRIVERS
IMPROVED FINANCES AND OPERATIONS: The upgrade to 'A-' for the GOs and 'BBB+' for the COPs is based on continued material improvements in the district's operations and finances. Liquidity levels are solid, management has stabilized, and the district no longer faces the risk of a state takeover, while prospects are good for continued financial strengthening.
MIXED ECONOMIC CHARACTERISTICS: The district participates in the broad and diverse San Diego regional economy, which has seen sustained growth in recent years. However, district home values and income levels remain well below citywide and state averages.
WEAK DEBT POSITION: Overall debt levels are high and amortization of direct debt is slow. Required pension contributions are subject to several more years of planned increases but are expected to remain affordable.
COPs RATING NOTCHED OFF GO: The lower rating for the district's COPs reflects the risk of non-appropriation for lease debt.
STABLE FINANCES AND MANAGEMENT: Continued financial improvements could result in upward rating pressure. The rating would be pressured negatively by operating losses that reduce reserves below state-mandated minimums.
The San Ysidro School District is located primarily within the southeastern portion of the city of San Diego, adjacent to the international border with Mexico, and includes 43,000 residents within 29 square miles. The district serves approximately 4,800 students from pre-school through eighth grade.
IMPROVED FINANCES AND OPERATIONS
The district's operations have continued to strengthen following the recent turnover of its governing board and management, in combination with increased state funding. The district projects a third consecutive year of surplus operation in fiscal 2016 and has restored cash and reserve balances to healthy levels in a sharp turnaround from the fiscal distress of prior years. Although the district faced a potential state takeover due to a cash shortfall as recently as 2014, its finances and operations are now on solid footing, providing the basis for the upgrade.
Unrestricted reserves were equivalent to 12% of general fund spending at the end of fiscal 2015. Management anticipates some reductions in fund balance over the next several years but expects to continue to exceed the state's 3% minimum reserve for economic uncertainty. Revenue growth prospects are strong due to the district's high proportion (98%) of students eligible for supplemental funding under the state's local control funding formula.
The district has also made recent progress on several key operational challenges. Student enrollment declines appear to have slowed as new residential construction in the district has increased school-age population, and relations with labor now appear stable following approval of a three-year contract through fiscal 2019. In addition, the district has hired a permanent superintendent after several years of interim management, and has also resolved a disputed vendor contract that at one point had threatened to burden the district with a $12 million legal judgement.
The district is part of the broad and diverse San Diego regional economy, which has seen sustained employment growth in recent years. San Diego's unemployment rate fell to 4.4% in February 2016, well below the state and national rates of 5.7% and 5.1%, respectively.
Assessed value for the district in 2016 is not available, but the city of San Diego as a whole recorded a 6% increase. San Ysidro area home values, as reported by Zillow.com, increased by 8.5% year-over-year as of March 2016, suggesting good prospects for tax base growth in future years.
WEAK DEBT POSITION
Overall debt levels for the district are high at 7.3% of taxable assessed value and $7,751 per capita. Amortization of direct debt is very slow with 29% of outstanding principal retired in 10 years. Capital needs are limited as a result of the district's recent construction of several new schools and stable enrollment.
The district participates in two state-sponsored employee pension plans and faces steady ongoing increases in contribution rates over the next several years to address substantial unfunded liabilities. Carrying costs for debt service and retirement benefits were somewhat elevated at 21% in fiscal 2014 and will likely see steady increases over the next several years due to escalating debt service and pension rate increases. Other post-employment benefits are funded on a pay-as-you-go basis, resulting in a growing, though still modest, liability.