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| [February 28, 2013] |
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Fitch Affirms El Rancho Unified School District, CA's GOs at 'A+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the following rating for El Rancho Unified
School District (the district):
--$13.8 million general obligation (GO) series 2003A, 2004, 2005, and
2007 bonds at 'A+';
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited ad valorem property tax levy.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PROFILE: Despite several years of structural
imbalance, the district continues to retain adequate reserves and has
achieved favorable labor concessions that should support structural
balance over the near term. The district has been mitigating cash
shortfalls due to state deferrals by issuing short term debt.
MANAGEABLE LONG TERM LIABILITIES: Carrying costs are currently low but
are expected to increase due to ascending debt service resulting from
capital appreciation bonds (CABs) and poorly funded state pension plans.
MIXED SOCIOECONOMIC PROFILE: The district benefits from its location in
the broader Los Angeles County employment market. Per capita income
levels and unemployment rates are weaker than national averages. Median
household income is about equal to the national average.
REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of
Proposition 30 tax increases by California voters removed the threat of
mid-year funding cuts for the district in fiscal 2013. The proposed
fiscal 2014 state budget, if adopted, would present a more favorable
near term fiscal outlook for K-12 school districts.
RATING SENSITIVITIES
REVERSAL IN FINANCIAL PROGRESS: Fitch expects the district to remain
challenged in achieving financial equilibrium given its revenue raising
constraints and declining enrollment. A reversal in the district's
current level of financial flexibility and/or active expense management
practices would cause negative rating pressure.
CREDIT PROFILE
The district serves about 10,000 students in the city of Pico Rivera
(the city; implied GO rated 'A+' by Fitch), located about eleven miles
east of downtown Los Angeles.
WEAK FINANCIALS EXPECTED TO STABILIZE IN FISCAL 2014
Fiscal 2012 district operations resulted in a $3.4 million net deficit
due to revenue declines which were not fully offset by expenditure cuts.
Reserve levels remain adequate, with fiscal 2012 unrestricted fund
balance (sum of the unassigned, assigned and committed funds) at 7.0% of
total general fund spending, although down from 12.2% the year prior.
The passage of state Proposition 30, which temporarily increases state
income and sales taxes, allowed the district to avoid a budgeted $4.5
million cut in state aid in fiscal 2013. The district's fiscal 2013
first interim report (dated 12/14/2012) shows a $2.6 million net
operating deficit, but management expects unrestricted ending fund
balance levels to remain adequate, at 6.9% of total general fund
spending.
Fitch believes the district is well poised to achieve structural balance
in fiscal 2014 due to planned expenditure cuts over the nexttwo fiscal
years. For fiscal 2013 and 2014, the district achieved labor concessions
of $16 million in aggregate, representing recurring savings equal to
18.1% of fiscal 2012 general fund spending. Concessions include staff
reduction, furlough days, step and column freezes, and increased
employee contributions for health and welfare. The district also has
flexibility to decrease the number of school days or keep staff
vacancies unfilled, if necessary.
PRESSURED LIQUIDITY
The district has been issuing tax revenue anticipation notes (TRANs) to
mitigate cash shortfalls due to state funding deferrals. In fiscal 2012,
the district issued $15.0 million in TRANs and plans to issue about
$21.0 million in the current fiscal year, totaling 25% of 2012 general
fund revenues. Fitch views the growing trend of cash flow notes
borrowing as a credit concern but expects the district's cash position
to improve at least modestly over the next few years. Fiscal 2013 should
benefit from the passage of Proposition 30 and the resultant paydown of
some deferrals. The governor's proposed fiscal 2014 budget includes an
increase in funding as well as a plan to paydown more deferrals over the
next four years.
LONG-TERM LIABILITIES MANAGEABLE BUT GROWING
Overall debt levels are moderately low at $1,728 per capita and 2.8% of
assessed value. However, 24% of the district's $67 million direct debt
is in the form of capital appreciation bonds, which are structured with
increasing debt service. As a result, amortization rates are very low.
Carrying costs for debt service, pension and other post-employment
benefit (OPEB) costs are currently manageable but will continue to rise
given the rising debt service associated with CABs and the poor funded
ratios for both state pension plans. Total carrying costs, calculated by
dividing fiscal 2012 debt service, pension, and OPEB costs by
governmental (less capital) fund spending, equal a low 10.9%.
BELOW AVERAGE SOCIOECONOMICS
Median household income in 2011 equals 91% and 106% of state and
national averages, respectively, but per capita money income is below
average at 63% and 67% of state and national averages, respectively. The
city's unemployment rate improved to 9.2% in November 2012 (below the
state's 9.6%) from a year prior largely due to a labor force decline.
Population in the district and the city has declined in recent years,
which district management has attributed to growing costs of living and
fewer children per household. Educational attainment is lower than
national levels. Assessed value has remained relatively stable.
MIXED MANAGEMENT PROFILE
Fitch views management's successful negotiation of meaningful large
concessions as a credit positive but Fitch has some concerns about long
term financial planning due to current vacancies in key positions.
Management has reversed its 2011 position on future bond issuance, now
indicating no imminent plans to tap its $47 million outstanding GO
authorization.
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, and 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=685314
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
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