Fitch Ratings affirms the ‘AA-‘ rating on the following Kingsburg Joint Union High School District (the district), California general obligation (GO) bonds:
–$3.7 million series 1998 (Election of 1998);
–$5.4 million series 2006 (Election of 2006);
–$3.8 million series 2008 (Election of 2006).
The Rating Outlook is Stable.
The bonds are secured by unlimited ad valorem property taxes on property within the district.
KEY RATING DRIVERS
STABLE FINANCIAL OPERATIONS: The district has maintained a strong unrestricted general fund balance of over 20% of spending through the worst of the economic downturn while retaining some expenditure flexibility, and can be reasonably expected to continue balanced operations.
REMAINS VULNERABLE TO STATE FUNDING DECISIONS: While the passage of Proposition 30 enhances the financial outlook for the district, uncertainties still persist. Future state funding deferrals may also weaken the district’s currently strong liquidity position.
AFFORDABLE DEBT: Overall debt burden is modest; debt, pension and other post-employment benefit (OPEB) costs are moderate; and the use of capital appreciation bonds will not cause annual debt service hikes.
LIMITED ECONOMY; ONGOING ASSESSED VALUE (AV) GROWTH: While the area remains heavily agricultural with below-average wealth levels, AV has continued to grow through fiscal 2013. However, the potential loss of a large taxpayer and employer could reverse the gain.
The 32-square mile district is located 20 miles south of Fresno, incorporating the city of Kingsburg and adjacent unincorporated areas of central Fresno county, western Tulare County, and northeastern Kings County. The district operates two high schools.
SOLID FINANCIAL OPERATIONS
After adding $141,238 to the reserves in 2011, fiscal 2012 missed its budget and ended with an operating deficit of $538,034, a result of reduced state funding as well as higher than expected costs. Despite deficit spending in fiscal 2012, the district ended the fiscal year with an unrestricted general fund of $2.1 million, or 22% of spending, a still strong level. This is the fourth year that the district has preserved a reserve level above 20%, notwithstanding adverse economic conditions. Similarly, the district has maintained a strong liquidity level to withstand state funding deferrals.
The district has avoided layoffs, furloughs and wage decreases. It has instead relied on natural attrition and leaving positions vacant for cost savings. The district has also recently imposed a cap on employee healthcare benefits, which will protect the district from future rising healthcare expenses. However, this was made possible only in return for a one-time 3% salary increase granted to the labor group. Total personnel costs may go up further once the district fills another two to three full time positions desired by management. The school year is currently 180-days with no planned reduction.
The passage of Proposition 30 will remove some funding pressure on the district and improve its financial outlook. Unrestricted general fund balances in the out-years are likely to stay around or above 20% as a result. The district also expects a significant increase in its Title I funding. However, the net result of these funding increases will depend on the outcome of labor negotiations and the district’s ability to continue achieve cost savings in light of persistent economic and state funding uncertainties. Ongoing prudent financial management practice and maintenance of a solid reserve level are necessary for the current rating level.
LOCAL ECONOMY SOMEWHAT PRESSURED
The district is located in the heavily agricultural San Joaquin Valley. Major taxpayers engage in agriculture related businesses, and the top ten account for 16% of the total tax base, indicating some degree of concentration. The third largest taxpayer (1.7% of AV) will shut down its operations in the area soon. Until a new owner is found, loss of tax revenue is possible.
AV growth had been rapid until fiscal 2008, but has since slowed and became stagnant in more recent years. Growth came back again in fiscal 2013 with AV gaining 3.9%. However, continued strong growth is not expected, as new construction activities are very limited.
The district’s income and wealth levels are below average, and the unemployment rate is still elevated. Enrollment previously suffered modest declines due to job losses, but is expected to bounce back as more students graduate from the feeder districts.
MANAGEABLE DEBT BURDEN
The district has a modest overall debt burden, with all its direct debt in the form of fixed rate general obligation bonds. Despite the use of capital appreciation bonds, debt service will remain steady and affordable, with a modest annual growth of around 3% in the next 10 years. Total fiscal 2012 debt service, pension and other post-employment benefit carrying costs was equivalent to an affordable 17.2% of total operating expenditure.
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