Fitch Ratings affirms the following ratings for Fairfax Elementary School District, CA’s (the district) bonds:
–$8.9 million unlimited tax general obligation (GO) bonds at ‘AA-‘.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem levy.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Prudent budgeting and financial management underscore strong financial reserves and performance.
LIMITED ECONOMY: The district’s economy is primarily agricultural and has high taxpayer concentration with high unemployment and below-average wealth levels.
MODERATE LONG-TERM LIABILITIES: The district’s weak debt burden is mitigated by reasonable management of pension and other post-employment liabilities as well as state support.
WHAT COULD TRIGGER A RATING ACTION
DETERIORATION IN FINANCIAL FLEXIBILITY: The district’s maintenance of ample financial flexibility is fundamental to its rating stability. Any deterioration would likely cause negative rating action given the below-average economic and debt profile.
Fairfax Elementary School District serves about 2,400 students and is in the southeastern area of Bakersfield within Kern County. Bakersfield’s 2010 census population was 347,483.
STRONG FINANCIAL PROFILE
The district’s strong financial management and performance is the key credit characteristic supporting the rating and an important mitigant to the limited, below-average economy. The district has operated at a surplus and maintained a fund balance that exceeds 20% of total spending over the last few years. Unaudited fiscal 2012 results suggest a slight decrease in fund balance from 24.5% reported in fiscal 2011 due to a one-time transfer from the unrestricted fund balance to the revocable other post-employment benefits (OPEB) fund.
The passage of Proposition 30 by the California state legislature in November 2012 raises taxes and forgoes state-wide cuts to education. Its passage allows the district to retain important spending flexibility, as the district’s fiscal 2013 budget assumed failure of Proposition 30. The district retains excess reserves outside the general fund approximating 11% of the total fiscal 2013 budget. The district’s first interim budget projects a small deficit for fiscal 2013.
CONCENTRATED ECONOMY WITH WEAK SOCIOECONOMIC INDICATORS
The district’s limited agricultural economy is somewhat offset by its location within diversified Bakersfield, which is the ninth largest city in California and has a presence in the oil, manufacturing, and food processing industries.
The district’s economy has very high taxpayer concentration. The district’s top ten taxpayers total 44% of taxable assessed value (TAV), with its largest taxpayer, Bolthouse Farms, at 38%. Bolthouse Farms is owned by Campbell’s Soup Company as of 2012, and district expectations for stability at the plant appear reasonable given recent private investments to upgrade its facilities and uniqueness of the facility as the major U.S. producer of V8 juices and other notable product lines.
Inherent volatility in the agricultural industry drives the district’s below-average income and wealth levels. Median household income equals 72% and 84% of state and national averages, respectively. The county’s unemployment rate of 12.2% in October 2012 is higher than both state and national levels, which are 9.8% and 7.5%, respectively.
Educational attainment is well below national averages, with only 55.6% graduating high school and 4.5% earning a bachelor’s degree. A weak housing market has led to a recent modest downtrend in TAV. District enrollment has remained steady and district expectations for a slow upward trend seem reasonable given county population trends.
WEAK DEBT BURDEN BALANCED BY REASONABLE LONG-TERM LIABILITY MANAGEMENT & STATE SUPPORT
The district’s overall debt profile is moderate due to a high proportion of capital appreciation bonds (CABs), representing 64% of principal outstanding, which results in a slow 29% amortization rate over 10 years. Overall debt totals a moderate 3.2% of TAV but is understated due to the CABs.
Fitch notes as a credit positive the district’s receipt of a $17 million state grant to cover much of the $18 million cost of construction for a new school site that opens in September 2014. While the grant was received as a result of the district being at its tax limit, the district’s already weak debt burden should stabilize. The district does not have plans to issue new debt in the near future.
The district participates in two cost sharing pension plans, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. Expectations for manageable increases in pension costs appear reasonable given the current age demographic of its teachers. In fiscal 2011, the district contributed 100% of the actuarial required contribution equal to a manageable 4.9% of total general fund spending.
The district funds its OPEB liabilities on a pay-as-you-go basis from its revocable and irrevocable OPEB funds, together totaling $2 million or 116% of the unfunded liability. OPEB cost for current retirees in 2012 was $91 thousand, which is 30.3% of the annual required contribution and equal to 0.5% of total general fund spending. Total carrying costs, calculated by dividing debt service, pension, and OPEB costs by general fund spending, equals a low 6.0%.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria