TEXT - Fitch affirms California's Long Beach Unified SD GOs

Fri Feb 15, 2013 3:09pm EST

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Feb 15 - Fitch Ratings affirms its 'AA' rating on the following Long Beach
Unified School District, California (the district) debt:

--$545.6 million general obligation (GO) bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The district has built solid general fund reserves 
during a difficult period of state education funding cuts.

STRONG FINANCIAL MANAGEMENT: Elected officials' willingness to make difficult 
spending reductions, professionalized management, and a thorough oversight and 
financial reporting framework create a strong basic foundation for district 
performance and the credit rating.

STATE DEPENDENCE: The district's dependence on the state of California for 
funding requires careful management of significant revenue volatility and 
payment deferrals. 

LARGE, DIVERSE ECONOMY: The local economy is large and diverse, and centrally 
located in the greater Los Angeles metropolitan area. Socioeconomic indicators 
are mixed, but the economy is fundamentally sound.

STABLE TAX BASE: The expansive and well-established local tax base suffered very
manageable declines during the national housing downturn, and assessed value 
(AV) has grown for the past two years.

MIXED DEBT PROFILE: The district's debt profile is mixed, characterized by a 
moderate overall debt burden and strong community support for its GO bond 
program, balanced against large deferred capital needs and significant pension 
and other post-employment benefit (OPEB) liabilities.

RATING SENSITIVITY

FAILURE TO MAINTAIN RESERVES: A failure to resolve the district's remaining 
structural budget imbalance or a significant decline in reserves from the 
current level would put downward pressure on the rating.

CREDIT PROFILE

Long Beach USD is California's third-largest school district, serving about 
79,000 students and 515,000 residents. It includes 129 square miles of 
southeastern Los Angeles County, including the cities of Long Beach, Signal 
Hill, Santa Catalina Island, much of the city of Lakewood and a portion of 
unincorporated Los Angeles County. The district operates 83 schools.

SOLID FINANCIAL PERFORMANCE

The district has managed well through a period of financial and economic stress 
that continues to force significant expenditure reductions. The district is 
largely dependent on the state of California for funding, which declined 
significantly with the recession and has only recently shown signs of improving.
State funding declines stem from both state spending reductions and declines in 
district enrollment, which has been dropping for most of the past decade. 

Given very limited local revenue raising flexibility due to state law, the 
district has reacted to revenue declines with expenditure reductions. It made 
significant operating expenditure cuts that totaled 13.7% over the four fiscal 
years ended 2012. The cuts included politically difficult school closures and 
deep cuts in teaching staff, with positions reduced by 21% since 2008. 

Management has identified $14 million of $20 million in cuts it expects to make 
fiscal 2014. The district appears to have adequate expenditure flexibility to 
address a remaining structural budget imbalance (after the planned cuts) of 
about $10 million to $15 million. The district has excess school capacity due to
declining enrollment, and the school year is five days longer than the minimum 
required by the state. However, expenditure flexibility has undoubtedly 
diminished significantly.

RESERVES SOLID, BUT MAY DECLINE

Financial reserves are solid. The district's unrestricted general fund balance 
was $94.8 million, or 13.8% of expenditures at the end of fiscal 2012. The 
district built reserves across the recession by combining categorical spending 
flexibility and short-term aid from the federal government with meaningful cuts 
in in ongoing spending. Even with improved fund balances, the district needed 
cash flow borrowing for the first time in many years in 2013, issuing $75 
million of inter-year tax and revenue anticipation notes to manage state funding
deferrals. Historically, the district maintained narrow unreserved fund balances
of about 4% to 8% of spending. The district's very strong expenditure discipline
largely offset concerns about fund balances levels. With expenditure flexibility
significantly reduced and liquidity needs increased, Fitch no longer believes 
spending discipline alone can offset the risk of low reserves. 

 

The district plans to spend some reserves as it gradually closes its remaining 
structural budget imbalance over the next few years, but it is unclear how far 
reserves will fall due to uncertainty about state funding. Indeed, planned cuts 
would be sufficient to return the district to a balanced budget next year if the
governor's budget blueprint were adopted with proposed increases in state 
funding. But with a status quo funding formula, the district would see continued
pressure on its reserve position. The rating would likely be downgraded if the 
district reduces reserves to their former range. 

DIVERSE, SOLID ECONOMY

The economy is large and diverse. The district's assessed value (AV) is $51 
billion, or a solid $99,000 per capita. The housing market decline of recent 
years was somewhat muted in Long Beach because it is a built-out, established 
coastal community. AV declined a manageable 2.9% in 2009 and 2.4% in 2010 but 
has since increased by 1.1% in 2012 and 2.6% in 2013. The level of 2013 AV is 
just 1.8% below its peak in 2009. The district's tax base is a diverse mix of 
residential, commercial and industrial properties, and concentration is low with
the top 10 taxpayers accounting for 9% of AV.

While the district benefits from its position at the heart of the massive Los 
Angeles metropolitan area economy, the district's economy is large and 
reasonably diverse in its own right. The Long Beach economy is heavily 
influenced by the cyclical trade, manufacturing and tourism industries, with 
some stability provided by large healthcare, education and government employers.
The Boeing Co. (Issuer Default Rating 'A'/Stable Outlook) is the largest private
sector employer, and the Port of Long Beach (rated 'AA'/Stable Outlook) is the 
nation's second-largest container port. 

The city's unemployment rate remained elevated at 11.2% in December 2012. The 
non-seasonally adjusted jobless rate was down by almost two percentage points 
over the past year but remained above both state (9.7%) and national (8.1%) 
rates. The urban, blue collar community's socioeconomic indicators are mixed. 
School district median household income is slightly higher than the national 
median at about $55,400, but just 90% of the state median income. The poverty 
rate is above average at 17.9%, versus 14.3% for the nation.

MODERATE DEBT BURDEN

The district's debt burden is moderate with direct and overlapping debt equal to
a moderate 2.7% of AV. The district relies on fixed-rate GO bonds to meet almost
all of its capital needs. Amortization is moderate with 44% of principal repaid 
in 10 years. The district has considerable capital needs. Much of its physical 
plant was built before 1960 and will need to be updated, but the district faces 
no growth pressures and enjoys considerable flexibility in the timing of 
projects and bond issuance. 

District voters approved $1.2 billion of GO bonds in 2008, and the district 
plans to use its remaining $864 million authorization to update its physical 
plant gradually over the coming years. Fitch expects the district's debt burden 
to remain quite manageable, as the district phases projects to minimize impact 
on tax rates. Long Beach USD plans to return to market with another $50 million 
of GO bonds later this year. 

SIGNIFICANT, RISING POST-EMPLOYMENT LIABILITIES

Post-employment liabilities are significant and likely to pose an increasing 
burden on the district in the years ahead. The district participates in the 
poorly funded CalSTRS pension system for teachers, as do all schools in the 
state. CalSTRS contribution rates are set by statute and they have not been 
increased to reflect the weak investment return environment over the past 
several years. As a result, the system's Fitch-adjusted funded ratio has fallen 
to a low 65.7%, and future contribution rates likely will need to rise 
substantially from current levels. 

Statutorily required contributions are substantially below the level required to
amortize existing obligations. It is unclear which stakeholders would face 
increased contribution rates, and how such increases would be implemented, but 
Fitch believes districts would likely bear at least part of the burden. 

The district's unfunded other post-employment benefit liabilities are 
significant at $329.4 million, or 0.7% of market value, though recent changes in
health care offerings will limit the growth in health care spending and reduce 
the liability somewhat. In total, the carrying costs of debt service, pensions 
and OPEB equaled a manageable 12.2% of governmental funds spending, less capital
projects, in fiscal 2012.
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