TEXT-Fitch affirms Reef-Sunset School Financing Auth, Calif. GOs at 'A'
Feb 28 - Fitch Ratings has affirmed Reef-Sunset School Financing Authority, California's general obligation bonds (GOs) as follows. --$6.9 million GO bonds, series 2007 at 'A'. The Rating Outlook is revised to Stable from Positive. SECURITY The bonds are secured by an unlimited property tax on all taxable property within the district. KEY RATING DRIVERS OUTLOOK REVISED TO STABLE: The Outlook revision to Stable reflects the Reef Sunset Unified School District, California's (the district) recent debt issuance that substantially slowed principal amortization and somewhat weaker than anticipated general fund performance. SATISFACTORY FINANCIAL OPERATIONS: The general fund balance is sound, liquidity is good, expenditure flexibility is ample, and the outlook for state funding has improved materially in recent months. FINANCIAL VULNERABILITIES REMAIN: The district is significantly exposed to volatile state funding despite recent improvements, management expects fund balance will be drawn down for a third consecutive year in fiscal 2014, and state pension contribution rates likely will rise significantly in future years. WEAK ECONOMY: The local economy is highly concentrated, geographically isolated, and suffers from high unemployment and low income levels. With a large oil and gas segment, assessed valuation (AV) has been fairly stable, benefitting from hikes in oil prices. WEAKENED DEBT PROFILE: The district's debt profile deteriorated when its recent GO debt issuance dramatically slowed principal amortization. Amortization likely will slow further when the district issues its final GO bonds around fiscal 2017. However, the net debt burden is moderate and capital needs are manageable. SATISFACTORY MANAGEMENT PRACTICES: The district's fund balance policy is double the state minimum, and the district benefits from the community's strong history of support for GO authorizations. Like all California districts, the district is subject to strong financial reporting, forecasting, and oversight provisions. RATING SENSITIVITY If the district closes its structural operating deficit and maintains a strong financial cushion, there could be positive rating action. CREDIT PROFILE The district is located in northwest Kings County near interstate 5, about 70 miles southwest of Fresno and 85 miles northwest of Bakersfield. It serves about 2,400 students in grades K-12 in the cities of Avenal and Kettleman. The regional economy is dominated by oil, agriculture and state prisons. About one-third of the estimated district population of 17,000 is in the Avenal state prison, which is also one of the largest employers in the area. Despite the prison's large presence, management reports that the large majority of local residents work in agriculture. WEAK LOCAL ECONOMY County economic data is weak (data is not available for Avenal) as is common for agriculturally-concentrated regions. Unemployment is high at 13.9% and income levels are very low. All of the district's student population are eligible for free and reduced price lunches. The district's AV levels generally have fared well despite the weak local economy due to commodity price gains in recent years. AV fell a substantial 12% in fiscal 2010 but recovered to record levels the next year and increased moderately in both fiscal years 2012 and 2013. Despite this strong performance, Fitch expects AV levels to continue to be susceptible to the volatility of the energy sector. Fitch's concerns about AV volatility are partially mitigated by the state's Proposition 98 funding formula. This formula mandates a minimum per pupil level of district funding. To the extent that local tax base contraction results in lost local property tax revenues, the state is obligated to replace those revenues up to the minimum funding level. However, state revenues have been subject to significant deferrals in recent years that the state has only recently begun to pay back. ADEQUATE FINANCIAL PERFORMANCE TO DATE The district implemented various expenditure reductions during the funding downturn, enabling it to grow its general fund balance each year from fiscal 2009-2011. General fund operations produced a $979,000 deficit in fiscal 2012, however, due to a number of un-planned one-time expenditures on technology upgrades, travel, and training. The total and unrestricted general fund balances for fiscal 2012 ended at still sound levels of $6.8 million (26.8% of expenditures and transfers out) and $4.9 million (22.2%), respectively. The district's first interim report includes projections of ongoing deficits ranging from $826,000 to $1.2 million through fiscal 2015. However, the district historically has out-performed such projections, which are based on conservative projections. The passage of Proposition 30, state-wide temporary tax increases, prevented significant mid-year state funding reductions from occurring, and likely will result in higher out-year revenues. Further, the governor's budget proposes to increase Proposition 98 funding (the district's primary revenue source) 5% next year, and to phase in a new funding formula over seven years that would increase funding for lower income and English-learning students. FINANCIAL VULNERABILITIES REMAIN Depending on future Proposition 98 funding, the district may have to implement further expenditure reductions to close out-year budget gaps. Fitch believes the district has a substantial amount of remaining expenditure flexibility, including the ability to significantly raise class sizes, implement furlough days, or tap categorical flexibility options. However, political considerations could make it difficult to implement some or all of these legal options. Also, the state teachers' pension fund (CalSTRS) contribution rates likely will rise in future years, and OPEB costs may rise as this benefit is being funded on a pay-as-you-go basis. The district's revenues are highly concentrated in volatile state funding that has been weak and subject to significant deferrals in recent years. Fitch believes this exposure represents a long-term financial weakness, though the state funding environment has improved significantly over the past year and could continue to make progress in fiscal 2014. DEBT PROFILE WEAKENED The district's debt profile weakened materially due to a recent GO issuance that substantially consisted of CABs. This issuance lowered 10-year debt amortization to a still moderate 41.5% (when final accreted interest is treated as principal) from a rapid 90% prior to the issuance. The debt profile is also weakened by the district's participation in poorly funded CalSTRS. The debt profile benefits from moderate net debt levels equal to $1,880 per capita, or 3.9% of AV. Also, while the district's identified capital needs are fully met through its GO bond authorization, the district is currently at the tax rate cap for new issues. Management expects the remainder of the authorization to be exhausted around fiscal 2016, and while Fitch does not believe the issuance will materially increase the district's debt burden, it could further slow amortization, depending on the structure of the issuance. Because the district is currently at its tax rate capacity, future issuances could include substantial use of capital appreciation bonds, which could lower amortization to slow levels. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope. 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