Fitch Affirms Chualar UESD, CAs GOs at A+; Outlook Stable

Fitch Ratings affirms its ‘A+’ rating on the following Chualar Union Elementary School District (the district), California general obligation (GO) bonds:

–$880,000 series 2001 (Election of 2001).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax levied on all taxable property within the district.

KEY RATING DRIVERS

SATISFACTORY COST CUTTING EFFORTS: The district has made significant progress in controlling costs, including staff reductions; further cost restructuring is being discussed. These measures are necessary to maintain healthy reserves going forward, in light of the operating deficits in fiscal years 2011 and 2012.

SOME EXPENDITURE FLEXIBILITY REMAINS: In response to the volatile funding environment, the district has acted to further reduce costs by reducing paid administrative staff days. Other options include reducing paid teacher days and more layoffs.

SUSCEPTIBILITY TO STATE FUNDING DEFERRALS: The district’s cash position has dropped to a very low level due to prior state funding deferrals. Going forward, these can be addressed through a deferral waiver request, an external loan and/or internal borrowable resources. While the passage of Proposition 30 will likely improve its liquidity position, this small district remains vulnerable to future state funding uncertainties.

WEAK ECONOMY, LOW DEBT: The local economy is heavily concentrated in agriculture, resulting in below-average wealth levels. However, assessed values (AV) are holding up, and student enrolment has stabilized. Total debt level is low to moderate, with carrying costs (total debt, pension, and other post-employment benefits) at an affordable 12.3% of fiscal 2012 spending.

CREDIT PROFILE

This small, one-school elementary school district is located in the central part of Monterey County, south of the city of Salinas. It provides K-8 education to a population of 2,120 residing in Chualar and surrounding unincorporated areas.

TIGHTER FINANCIAL MANAGEMENT

The district had been slow to respond to the adverse funding environment, resulting in operating deficits in fiscal years 2011 and 2012, as well as an extremely low cash balance at fiscal 2012 year-end. At that point, the district sought advice from the Monterey County Office of Education, and more recently has made meaningful progress toward cost saving. In fiscal 2013, 5.5 full-time equivalent positions have been eliminated, a 15% cut for this small district. The district has also made credible efforts to reduce the general fund’s support for its cafeteria and pre-school operations.

STATE FUNDING UNCERTAINTY PERSISTS

The district has limited local funding sources, and is heavily reliant on state back filling and program funding (80% of fiscal 2011 general fund revenues). The passage of Proposition 30 (which increases the state sales tax rate and certain income tax rates) promises to alleviate most near term financial stress. Nevertheless, the district’s financial position remains exposed to future state funding volatility.

State funding deferrals have particularly aggravated the district’s liquidity problem. The district has been utilizing its internal borrowable resources, and may need to get an external loan to meet cash flow needs during fiscal 2013. The state’s February 2013 funding disbursement of $346,000 reportedly will be delayed until July or August.

FINANCIAL FLEXIBILITY REMAINS; LIMITED FUND BALANCE

The district is actively managing its costs, and the potential for further expenditure reduction exists. Administrative staff agreed to a reduced work schedule, and further restructuring of the classified staff and increasing class sizes also are being discussed; these moves could result in further personnel reductions. The district could also implement up to 10 furlough days, subject to successful labor negotiations.

The district’s unrestricted general fund balance stood at 19% of spending (or $705,283) as of fiscal 2011 year-end, well above the 4% state mandated level. However, the cushion is limited in dollar terms, and is projected to decline in out-years. Maintenance of a stable and healthy reserve level is essential to withstand possible future state funding reductions and/or delays.

STRESSED ECONOMY; LOW DEBT BURDEN

The tax base is concentrated in agriculture, which has provided some stability in assessed values during the downturn. However, the local economy is very limited with marginal growth potential, and the real estate market has shown little improvement since the recession. Residents’ socio-economic characteristics are well below-average. Student enrolment is now projected to be stable, after moderate declines in recent years.

The overall debt burden is low in relation to AV, and moderate on a per capita basis. Debt service has been affordable, but will increase beginning in fiscal 2028 due to the use of capital appreciation bonds in previous borrowings. Contributions to the state teacher retirement program have seen significant increases over the last four years, and are likely to go up further in the future. Despite the increases, total long term liability carrying costs are manageable at 12.3% of fiscal 2012 spending.

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