Feb 19 - Fitch Ratings has affirmed the following Taft City School District,
California's (the district) general obligation bonds (GOs) at 'A+':
--$1.3 million election of 2001 GOs series 2001A.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax levied on all taxable
property within the district.
KEY RATING DRIVERS
SATISFACTORY FINANCIAL OPERATIONS: General fund operations have produced three
consecutive years of balanced-to-surplus operations, the financial cushion is
currently sound, expenditure flexibility is good, and liquidity is ample despite
state funding deferrals.
FINANCIAL VULNERABILITIES REMAIN: Financial operations are exposed to a
challenged state funding environment in spite of recent improvements. Also,
CalSTRS costs likely will rise in the near term, and policymakers will have to
implement significant expenditure reductions to close forecasted out-year
WEAK ECONOMY: The local economy and tax base is highly concentrated in the oil
and gas sector, and also is characterized by weak income and poverty levels and
high regional unemployment.
ADEQUATE DEBT PROFILE: The district's debt profile is weighed by slow
amortization, high other-post employment benefit (OPEB) costs and, like all
California schools, participation in the poorly funded CalSTRS pension plan.
However, the debt burden is moderate, and capital needs are manageable.
GOOD MANAGEMENT PRACTICES: Management prudently has implemented significant
expenditure reductions to maintain a sound financial cushion, and management's
fund balance target level exceeds the state minimum. Like all California
schools, the district is subject to strong financial reporting, forecasting, and
A material deterioration in the district's financial profile due to cost
pressures could negatively pressure the rating; Fitch does not anticipate such
an occurrence over the review cycle. Upward movement in the rating is unlikely
given the weak and concentrated local economy.
The district is located 40 miles southwest of Bakersfield in Kern County and
serves a population of 19,400 in Taft City. The local economy is dominated by
oil and gas enterprises, which make up over three quarters of the district's
highly concentrated tax base.
WEAK LOCAL ECONOMY
Economic indicators are weak overall. October 2012 unemployment registered a
high 12.2%, well above the state and national rates of 9.8% and 7.5%,
respectively. However, employment levels have improved in each of the past three
years. Median household income levels are low and poverty rates are high.
The district's assessed value (AV) levels have generally fared well despite the
weak local economy due to commodity price gains in recent years. AV fell a
substantial 15.7% 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 be susceptible to the volatility of the
energy sector moving forward.
Fitch's concerns about AV volatility are 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
GOOD FINANCIAL PERFORMANCE TO DATE
The district has implemented significant expenditure reductions in recent years,
resulting in the maintenance and growth of its financial cushion. This
improvement has occurred in spite of the district's exposure to the declining
and uncertain state funding environment. Fiscal 2012 general fund operations
were nearly breakeven, with large ending total and unrestricted fund balances of
$7.5 million (41% of expenditures and transfers out) and $7 million (38%),
respectively. The fund balances include about $3.3 million in an OPEB reserve.
State revenues are subject to significant deferrals, but the district's large
financial cushion provides it with ample liquidity and no need to date to issue
cash flow notes.
FINANCIAL VULNERABILITIES REMAIN
The district will have to continue managing through a period of financial
vulnerability. Management anticipates a $500,000 general fund drawdown in fiscal
2013 due to declining federal revenues and the end of a multi-year state capital
reimbursement. The drawdown would lower the unrestricted general fund balance to
a still sound $3 million (16.4%), excluding the district's OPEB reserve.
In future years the district will also have to contend with likely increasing
CalSTRS pension contributions, a large OPEB liability, and pent-up salary
pressures after years of wage freezes. Fitch believes the district has a
moderate amount of remaining expenditure flexibility to offset these cost
pressures, if necessary.
Out-year projections show the district's operating deficit widening to $1.2
million-$1.5 million through fiscal 2015, although the district typically
budgets conservatively and historically has out-performed its projections. Fitch
expects management will sufficiently narrow its projected deficits to maintain a
sound financial profile through expenditure reductions and anticipated revenue
enhancements (based on improving state revenue projections and the governor's
budget proposal to increase K-12 funding beginning in fiscal 2014).
ADEQUATE DEBT PROFILE
The district's debt profile is weighed by slow amortization resulting from the
district's significant use of capital appreciation bonds, as well as
participation in poorly funded CalSTRS and a large OPEB liability. These
weaknesses are somewhat mitigated by a manageable capital plan with moderate GO
issuances planned through fiscal 2017, and an affordable debt burden.
SOUND MANAGEMENT PRACTICES
The financial management team is tenured and has exhibited a willingness and
ability to reduce spending as necessary to maintain an adequate financial
cushion. Like all California schools, the district is required to publish a
large amount of forward-looking financial data multiple times per year. The
district does not have a formal minimum fund balance policy, but management's
fund balance target of at least 5% of spending exceeds the state-required 3%.
The existence of an OPEB reserve provides an additional level of cushion and a
significant source of liquidity.
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
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