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.
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
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.
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.
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
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.