Nov 20 - Fitch Ratings has affirmed William S. Hart Union High School
District, California's (the district) general obligations bonds (GOs) as
--$91.7 million (2001 election) GOs series B at 'AA-';
--$80.8 million (2008 election) GOs series A at 'AA-'.
The Rating Outlook has been revised to Positive from Stable.
The general obligation bonds are secured by an unlimited property tax levied on
all taxable properties within the district.
KEY RATING DRIVERS
--SOUND FINANCIAL POSITION: The Positive Outlook reflects years of financial
outperformance, resulting in four consecutive years of general fund operating
surpluses and a solid unrestricted general fund balance.
--SOME FINANCIAL VULNERABILITIES REMAIN: The district is exposed to various
vulnerabilities, in spite of its currently sound financial position, that could
pressure reserves over the coming years. These include a challenged state
funding environment despite recent passage of Proposition 30, four years of
enrollment losses, a material degree of charter school competition, and
participation in the state-run CalSTRS pension plan, which has a low funded
--SOLID LOCAL ECONOMY: Santa Clarita benefits from its location within the large
and diverse Los Angeles employment market. Further, the local economy enjoys
materially stronger income and unemployment levels than the state and the
nation, and population growth historically has been rapid.
--MIXED TAX BASE: The district's tax base is well diversified, but its assessed
valuation (AV) has contracted in three of the past four years, reflective of
substantial home price declines from the housing market's peak. Home values in
2012 have risen modestly, and developer fees are well above trough levels of
fiscal 2009. However, it remains to be seen whether home values have entered the
beginning of a longer-term recovery.
--IMPROVED DEBT PROFILE: The district successfully retired its $41.5 million of
GO bond anticipation notes (BANs) with GOs. The refunding was accomplished
within the politically promised tax rate under the assumption of 4%-5% long-term
annual AV growth, which Fitch views as somewhat aggressive. Future capital needs
are significant and financing them may slow an already below average principal
amortization rate, and likely will hike debt levels to moderate levels.
What Could Trigger A Rating Change
CONTINUED FINANCIAL OUTPERFORMANCE: The district will need to maintain a sound
financial cushion and show a credible plan for balanced operations on a going
forward basis to have its rating considered for an upgrade.
MAINTAIN ADEQUATE DEBT PROFILE: An upgrade would also be conditional on the
district's ability to complete its sizeable capital improvement plan without
material deterioration of its debt profile.
Located in the northwestern portion of Los Angeles County (the county), the
district includes the city of Santa Clarita (the city) and nearby unincorporated
parts of the county. Population growth had been very high until recent years, as
real estate and economic weakness has weighed on new development. Recent data
shows new construction activity is rebounding significantly from trough levels,
suggesting population growth may also recover somewhat.
STRONG LOCAL ECONOMY
The district's economic profile is good overall, thought recent data has been
mixed. Poverty rates are very low, and median household income levels are well
above average at 158% and 169% of state and national levels, respectively.
August unemployment measured just 6.9%, down from 8% the year prior. However,
improvement was attributable to a drop in the employment participation rate, not
improvement to the labor force, which contracted 0.2% year over year.
The local tax base is well-diversified and assessed value (AV) growth had been
strong until fiscal 2010 when the hard-hit local housing market resulted in two
consecutive years of moderate AV decline. AV rose in fiscal 2012 by a slight
0.4%, but fell 1.7% in fiscal 2013, suggesting house prices have not yet
demonstrated a convincing recovery despite a pick-up in new construction.
SOUND FINANCIAL OPERATIONS SOMEWHAT OFFSET BY BUDGETED DEFICIT
The district's financial operations have performed well over the past several
years, but are moderately vulnerable to various pressures moving forward.
Management prudently enacted significant expenditure reductions early in the
downturn, thus allowing the district to grow its unrestricted general fund
balance in each year from fiscal 2008 to 2012 (fiscal 2012 results are estimated
and unaudited). Estimated fiscal 2012 results show break-even operations, with
total and unrestricted fund balances at high levels of $42 million (24.2% of
expenditures and transfers out) and $39.3 million (22.7%), respectively.
General fund operations in fiscal 2013 are budgeted for a large $12.3 million
operating deficit, which would lower the unrestricted fund balance to a
still-sound $26.5 million (14.5%). This reduced level of financial cushion would
continue to be consistent with the current rating level. However, there could be
downward rating pressure if, in future years, funding levels remain weak and the
district does not initiate sufficient expenditure reductions to regain
structural balance, resulting in an inadequate financial cushion. Fitch does not
anticipate this scenario based on the district's history of strong financial
management, outperformance of budgetary expectations, and maintenance of high
In November voters approved Proposition 30, a tax hike measure that prevented
automatic state funding reductions. The passage of Proposition 30 will not
result in additional revenues compared to budget, as the budget already assumed
trigger cuts would not be enacted. However, Fitch believes offsetting elements
of budgetary conservatism will result in budgetary out-performance in fiscal
OPERATIONAL PRESSURES MITIGATED BY STRONG MANAGEMENT PRACTICES
The $12.3 million budgeted fund balance deficit in fiscal 2013 largely stems
from the expiration of federal stimulus funding, step and column wage
adjustments, the addition of nine positions, and increased benefit costs.
Multi-year projections indicate similar operational deficits in fiscal years
2014 and 2015, though prior year projections have been similarly negative while
actual financial performance has been positive.
These operational pressures are mitigated by strong management practices. The
district has a considerable amount of legal expenditure flexibility in addition
to the district's history of conservative budgeting and positive operating
results. Management has identified a list of potential cost reductions totaling
$20.6 million (12% of fiscal 2012 revenues), should cost-cutting be necessitated
in future years.
DEBT PROFILE IMPROVED, ADEQUATE OVERALL
The district's debt profile improved as the result of refunding a $41.5 million
BAN with GOs that mature within 25 years and are funded at a tax rate below the
politically promised $35 per $100,000 AV limit. However, staying under the tax
rate promised will require 4%-5% average annual AV growth over the long term,
which Fitch views as aggressive. Although this rate of increase is consistent
with the area's long-term historical averages, recent performance has been
notably weaker and AV gains tend to diminish as a community becomes increasingly
Tax rates will adjust to whatever level is necessary to pay GO debt service,
however, Fitch would view negatively an increase of the rate to above the
promised ceiling as it may suppress voters' appetite for future bond
Direct and overlapping debt levels are low to moderate at $3,318 per capita
(2.6% of AV), but amortization is slower than average at 39.3% over 10 years.
The district has a sizeable capital improvement plan, however, that likely will
push debt to moderate levels, and could result in even slower amortization. The
district is looking to modernize three schools, build a new high school, and
construct two new auditoriums. To fund these costs, the district expects to
issue $175 million over the next two years under separate issuances. These
issuances are expected to exhaust the district's only two GO authorizations,
Measures C and D.
OPEB, PENSION COSTS CURRENTLY MANAGEABLE BUT LIKELY TO RISE
The district's other post-employment benefit (OPEB) costs currently are
manageable, but are likely to rise moving forward as the district funds OPEB on
a pay-as-you-go basis. The unfunded liability currently is small at $66 million,
or just 0.2% of AV.
As with all California school districts, the district participates in the
state-run CalSTRS pension plan for its teachers. Although the district is paying
100% of its required rate, in fiscal 2011 system contributions were equal to
just 46.7% of the actuarially required rate. 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. It is unclear
which stakeholders would face increased contribution rates, and how such
increases would be implemented, but Fitch believes districts would be likely to
bear at least part of the burden.