Fitch Ratings has assigned a ‘AA-‘ rating to the following San Joaquin Delta Community College District, California’s (the district) bonds:
–$35.0 million general obligation (GO) bonds, election of 2004, series 2014C.
In addition, Fitch has affirmed the following ratings:
–$118.1 million outstanding GOs at ‘AA-‘.
The Rating Outlook is Stable. The bonds are scheduled to price the week of July 28 via negotiated sale and will fund various capital projects.
The bonds are secured by an unlimited property tax on all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: The district has maintained healthy reserves despite a challenging state fiscal environment and severe economic declines. Financial operations are consistently balanced.
WEAK LOCAL ECONOMY: Income levels are below average and both employment and assessed values (AV) continue to suffer from steep declines in the recent downturn. The local economy has begun to show signs of recovery but most economic indicators remain well below pre-recession peaks.
STRONG MANAGEMENT: The district managed recent state funding shortfalls with minimal disruptions to its operations or finances and has taken steps to address key liabilities.
SATISFACTORY DEBT PROFILE: Overall debt levels and carrying costs for debt and retiree benefits are moderate. Rising pension contributions are likely to pressure the district’s finances over the next several years but management appears prepared to address these increases with offsetting budget reductions.
MAINTAINED FINANCIAL POSITION: An unanticipated and substantial reduction in reserves would create downward pressure on the rating.
The district serves a 2,300 square mile service area in economically stressed San Joaquin County, as well as small portions of Alameda, Calaveras, Sacramento, and Solano counties. With an estimated population of over 725,000, the district provides educational services to approximately 24,000 students. Services are provided at the district’s main campus in the city of Stockton (the city) and its learning centers in Tracy and Manteca.
STOCKTON REGION HARD-HIT BY RECESSION
The city historically has been dominated by agriculture, despite some recent diversification, and is located between the two large employment centers of the San Francisco Bay Area and the Sacramento region. Population growth was rapid prior to the recession, fueled by the area’s affordability and availability of land. However, the city and county were severely affected by the housing-led recession.
The county’s housing market was one of the worst-affected in the nation, with peak-to-trough price declines of nearly two-thirds. These real estate losses resulted in cumulative AV declines of 19.2% for the district over a four-year period before a return to growth in fiscal 2013. The district experienced a healthy AV growth of 5.4% in fiscal 2014 and appears poised for further gains as a result of recent home price increases. Home values remain depressed relative to pre-recession levels despite these improvements. June 2014 home values reported by Zillow.com for San Joaquin County were 22.6% above prior year levels but remained 45% below 2005 peaks.
Local employment also remains depressed, with a county unemployment rate of 10.3% as of May 2014, as compared to state and national rates of 7.1% and 6.1%, respectively. Median household incomes are approximately 88% of the state average.
SOUND FINANCIAL OPERATIONS
The district has maintained consistently balanced financial operations despite recent state funding and local property tax declines. Although state apportionment revenues fell by nearly 14% between fiscals 2011 and 2012, reserves remained healthy at approximately 11.5% of general fund spending.
Total fund balances rose to approximately 14% of general fund spending in fiscal 2013 and management projects balanced results for fiscal 2014. Additional budgetary flexibility is provided by approximately $24 million (equivalent to 25% of 2014 general fund spending) held outside the district’s general fund in reserves for capital, self-insurance, and retiree benefits.
Financial prospects for the district appear positive with the recent improvement in state revenue collections. The district continues to depend on the state, however, for nearly two-thirds of general fund revenues and remains vulnerable to its volatile finances. Enrollment levels are impacted by state revenues and fell during the downturn, but have recently resumed growth at a moderate pace.
The district benefits from an experienced management team that has deftly handled state funding decreases while developing plans to address key financial challenges. To address a sizable OPEB liability the district has closed its plan to new members and established an internal reserve fund, now in excess of $5 million, with plans to increase it to $21 million by 2026. Management projects that these efforts will allow the district to cap its annual contributions to OPEBs by 2026, relieving a growing budgetary pressure.
The district has also begun work on a comprehensive deferred maintenance and capital improvement program to address capital requirements outside of its bond program. Funding has been identified for approximately $10 million of $15 million in needs projected over the next several years. Management expects to extend the planning horizon for this program to 10 years, and to incorporate additional funding into future budgets. Approximately $2 million in funding is planned to come from fiscal 2014 budgetary savings.
SATISFACTORY DEBT PROFILE
The district’s overall debt burden is moderate at $3,283 per capita, or 4.7% of AV. Amortization is average, with 46% of principal due for repayment over the next 10 years. Carrying costs for debt service and retiree benefits are affordable at approximately 14% of operating and non-operating expenditures. Following the current issuance the district will retain approximately $33 million in GO authorization, and is considering a subsequent issuance in 2016 that would not materially impact its debt burden.
District employees participate in two state-sponsored pension plans, each of which has announced substantial increases in contribution rates over the next several years. The district has begun to build such increases into multi-year budget projections and expects to fund them from existing resources.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.
Applicable Criteria and Related Research:
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria