Fitch Ratings affirms the ‘AA-‘ rating on the following Shasta Union High School District (the district), California general obligation (GO) bonds:
–$11.5 million series 2002 and series 2003 (Election of 2001);
–$10.9 million series 2011.
The Rating Outlook is Stable.
The bonds are secured by unlimited ad valorem property taxes on property within the district.
KEY RATING DRIVERS
ROBUST GENERAL FUND BALANCE: The district has a strong record of producing operating surpluses and has maintained solid reserves through the economic down cycle. Although the district is still vulnerable to state funding volatility, the passage of Proposition 30 removes some uncertainties in the near term, and supports healthy fund balances.
AVERAGE DAILY ATTENDANCE (ADA) DECLINE: ADA is continuing a downward trend with considerable additional student enrollment losses projected for the next few years. Corresponding cuts in spending will be key to maintaining balance. District management is fully aware of the challenge, and has been tackling it in an effective way.
WEAK ECONOMY AND TAX BASE: With a high unemployment rate and a soft real estate market, the local economy remains weak, despite signs of stability. Assessed value (AV) has entered the fourth year of decline, down a cumulative 14% from its peak value.
LOW DEBT BURDEN: The total debt level is low and debt service is affordable. Around half of the outstanding debt is in capital appreciation bonds, resulting in ascending but still manageable debt service in the future.
SOLID FINANCIAL RESULTS DESPITE CHALLENGES
The district’s financial operations have faced considerable headwinds from state funding cuts, falling ADA, and a still weak economy. Management has shown competency in prudent budgeting and effective cost control, resulting in fund balances that are 20% or more of general fund spending since fiscal 2009. Liquidity has held up strongly, with modified quick ratios above 2 times on average.
On a pre-GASB No.54 basis, the fiscal 2011 general fund outperformed its budget and ended with a $1.1 million surplus and a total general fund balance of $15.2 million. This is expected to decline slightly to $14.7 million at fiscal 2012 year-end. Since GASB No.54 required the general fund to be combined with other funds, the fiscal 2011 audit shows a higher total general fund balance of $22.6 million (52% of spending) and an unrestricted fund balance of $21.2 million (49% of spending).
Expenditures have consistently been kept below revenues since fiscal 2007, helping to build up the general fund reserve to a level sufficient to withstand the assumed budget cuts for the current fiscal year that would have been triggered if Proposition 30 had failed in the November 2012 state election. Now with the passage of Proposition 30, the district will likely reduce or avoid previously forecasted reserve drawdowns in the out-years, keeping its reserve at a healthy level. Fitch notes that state funding remains volatile with additional reductions always a possibility. State deferrals could also be a drag on the district’s cash position. In conjunction with the projected ADA declines, these factors underscore the importance of high reserve levels in maintaining the district’s current credit profile.
COST CUTTING FLEXIBILITY REMAINS
The district has implemented certain cost cutting and revenue enhancing measures over recent years such as giving early retirement incentives, bringing regional occupational programs in-house, and freezing salary. The district relied mainly on attrition and leaving vacancies unfilled to save personnel costs, rather than instituting furloughs or layoffs. Similarly, no concessions on wages or benefits have been sought. The district also continues to operate on a 180-day school year basis, five days above the state minimum. Therefore, Fitch believes that the district retains flexibility to cope with potential revenue underperformance and continued enrollment declines.
WEAK ECONOMY AND ADA DOWNWARD TREND
The district covers a large portion of the city of Redding and adjacent unincorporated areas of Shasta County. Redding is a regional commercial hub in northern California, and has significant exposure to the government sector, with the county and the city being its major employers. The local economy has expanded into service industries, but agriculture and natural resources still play an important role. As the local economy weakened, the lack of job opportunities caused out-migration in the district. At the same time, affordability has not improved to the extent that it attracts new residents. This has been a prevalent theme in this region. Consequently, student enrollment dropped significantly by more than 15% from fiscal 2006 to fiscal 2012. The district expects a further loss of around 600 ADA (or 13%) between now and fiscal 2015.
TAX BASE DETERIORATION
Since the district is largely residential, it was unable to escape the housing market downturn. Drops in house prices resulted in Proposition 8 adjustments, depressing assessment values. Although the pace of AV decline has slowed, the turning point has yet to be reached. On a positive note, foreclosure numbers are falling, and inventory is being cleared.
LOW DEBT LEVEL
The district refunded all of its outstanding GO current interest debt in 2011 to take advantage of the favorable interest rate environment. No capital project or debt issuance is planned in the near future. The overall debt burden is low at $1,044 per capita, or 1.3% of TAV. Roughly 15% of the total debt bears variable interest rates. Other post-employment benefit (OPEB) liabilities amount to a moderate $7.5 million, and the fiscal 2011 debt, pension and OPEB carrying cost is manageable at 12.7% of total general fund spending. However, with the use of capital appreciation bonds and expected pension cost increases, total carrying costs are likely to go up in the future.
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, Zillow.com, 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