|[January 17, 2013]
Fitch Rates Menifee Union School District, CA Rfdg GOs 'AA-'; Outlook Negative
SAN FRANCISCO --(Business Wire)--
Fitch Ratings assigns a 'AA-' rating to the following Menifee Union
School District (the district), CA (News - Alert) general obligation (GO) bonds:
--$7.4 million 2013 GO refunding bonds.
In addition, Fitch affirms the 'AA-' rating on the following outstanding
district GO bonds:
--$9.2 million 2002A GO bonds;
--$5 million 2002B GO bonds.
The Rating Outlook is Negative.
Purpose of Current Debt Issue: The bonds are being issued to advance
refund certain maturities of the 2002A GO bonds and to pay the costs of
The bonds are secured by an unlimited ad valorem tax pledge on all
taxable property within the district.
KEY RATING DRIVERS
STRUCTURAL IMBALANCE: The Negative Outlook reflects a weakening in the
district's fiscal position and ongoing challenges that the district
faces in balancing a structural deficit.
STILL SOUND BUT REDUCED RESERVE LEVELS: The district recorded an
operating deficit (after transfers) in fiscal 2012 leaving the
unrestricted fund balance at a reduced but still sound level. Additional
reductions in reserve levels are projected over the next few years
unless addition spending reductions are made.
TAX BASE STABILIZATION: Assessed value (AV) appears to be stabilizing
after experiencing significant annual declines since fiscal year 2009.
While still below prerecession levels, the resumption of residential
home construction and increased home sales may provide support for
future AV gains.
CHALLENGED ECONOMY: The local economy continues to experience stubbornly
high unemployment rates and below average employment growth. Wealth
indicators for the area are somewhat below the state average.
ABOVE AVERAGE OVERALL DEBT LEVELS: District debt levels are above
average largely due to overlapping issuance. The district does not
anticipate issuing any additional over the next few years and capital
needs are considered manageable. District debt amortizes at a very slow
WHAT COULD TRIGGER A RATING ACTION
DIMINISHED UNRESTRICTED FUND BALANCE: An inability to stabilize
financial operations leading to continued deterioration in the
unrestricted fund balance below the level currently projected for fiscal
2013 likely would result in a rating downgrade.
The district serves approximately 9,000 students in western Riverside
County, largely covering the city of Menifee and some of the surrounding
areas. District facilities include nine elementary schools, three middle
schools, and one preschool.
FINANCIAL PERFORMANCE WEAKENS IN FISCAL 2012
The district's financial operations were positive in fiscal 2011, but
weakened in fiscal 2012. Due to the receipt of federal funds and better
than budgeted state funding, fiscal 2011 operations produced a $2.8
million (4.7% of spending) operating surplus, increasing the total fund
balance to $13.8 million. The fiscal 2011 unrestricted fund balance (the
sum of committed, assigned, and unassigned fund balances under GASB 54)
was $12.9 million or a solid 219% of spending.
Financial performance weakened in fiscal 2012 with an operating deficit
of $1.6 million (2.6%). The unrestricted fund balance declined by $2.2
million with an ending balance of $10.7 million or a still sound 17.6%.
ONGOING STRUCTURAL IMBALANCE
The district's structural imbalance is projected to continue in fiscal
2013 with an estimated deficit of $3.3 million. Fitch notes that the
district historically outperforms its financial estimates due to its
conservative budgeting practices. However, under current projections,
the unrestricted fund balance would be reduced to $7.4 million or a
still adequate 11.8% of spending.
SOME FINANCIAL FLEXIBILITY REMAINS
The district will be challenged to resolve the projected operating
deficits in fiscal 2014 and future years, although the district retains
some options to reduce spending. One of the more significant options
would be raising class sizes to permitted maximums that would allow 43
teacher layoffs for approximately $3.2 million in savings. However, the
school board did not pursue the option of teacher layoffs in fiscal 2013
and has implemented few layoffs in recent years.
INTERNAL RESOURCES MEET CASH FLOW NEEDS
The district does not have a recent history of debt issuance for cash
flow needs. It instead relies on internal cash flow borrowing from the
capital facilities fund. The district borrowed $12 million in June 2012,
with repayment due in June 2013. Currently available resources are
estimated at about $27 million.
CHALLENGED ECONOMY, STABILIZING TAX BASE
The local economy remains challenged with a stubbornly high unemployment
rate of 12.9% (October 2012) and below average employment growth over
the past year. Wealth levels in the area are somewhat below the state
average with per capita and median household income at 85% and 89%,
respectively. The district benefits from increasing enrollment, and
preliminary figures reflect growth of 1.4% in fiscal 2013.
The district's assessed value (AV) appears to be stabilizing with two
consecutive years of modest growth. In fiscal 2012 and 2013,
respectively, AV increased by 2.3% and 0.5%. While the gains are
relatively limited, Fitch views the recent developments positively
following the significant cumulative AV contraction of 26% from fiscal
2008 through fiscal 2011. The district reports increasing commercial and
residential property development, but at a slower pace than in prior
ABOVE AVERAGE OVERALL DEBT LEVELS
The district's overall debt burden is above average at $4,546 per capita
and 5.8% of AV. The district's direct debt comprises a relatively small
portion of the overall debt burden at $655 per capita and 0.8% of AV.
The district's capital needs are manageable and no additional debt
issuance is expected. However, amortization is very slow, with just 25%
of debt retired in 10 years.
Pension costs were a manageable 5.8% of spending in fiscal 2012. The
district's other post-employment benefits liability is minimal with an
estimated unfunded actuarial accrued liability of $661,123.
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, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National
Association of Realtors.
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
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