|[August 19, 2013]
Fitch Downgrades Dixie Elementary School District, CA's GO Bonds to 'AA+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has downgraded the following Dixie Elementary School
District, CA (News - Alert) (the district) bonds:
--$6.3 million general obligation (GO) bonds, (election of 1999) series
A and GO refunding bonds, series 2011 to 'AA+' from 'AAA';
--$2.3 million lease revenue bonds (clean renewable energy bonds),
series 2009 to 'AA' from 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax on all taxable
property within the district.
The lease revenue bonds are secured by lease rental payments from the
school district to the Dixie Education Foundation, a non-profit public
benefit corporation, for use of the district's administrative offices,
subject to abatement.
KEY RATING DRIVERS
FINANCIAL PROFILE UNDER PRESSURE: The downgrade was triggered by an
ongoing structural deficit that has been eroding the district's still
sound general fund balances. Fitch expects further use of reserves for
ongoing operating expenses to result in an unrestricted fund balance no
longer reflective of an 'AAA' rating.
FINANCIAL FLEXIBILITY STILL SOUND: Despite the reduction in reserves,
the district's finances are characterized by good liquidity and
internally borrowable funds, manageable labor cost increases,
conservative budgeting, and considerable expenditure flexibility.
MODERATELY LOW DEBT BURDEN; GROWING PENSION LIABILITIES: The district's
overall debt burden is moderately low and amortizes rapidly, its other
post-employment benefit (OPEB) liability is affordable, and its carrying
costs are moderate. However, the district's CalSTRS pension
contributions are likely to increase significantly in the future due to
current underfunding on an actuarial basis.
DIVERSE REVENUE SOURCES: The district's basic aid status and diverse
local revenue sources, including a parcel tax and lease revenue, provide
atypical revenue stability for a California school district.
RESILIENT ECONOMY AND TAX BASE: The district is well located within the
San Francisco Bay Area economy and its diverse tax base has resumed
growth after small contractions in fiscal years 2011 and 2013.
The rating is sensitive to shifts in fundamental credit characteristics,
particularly ongoing erosion of the district's general fund balances due
to structural imbalance coupled with increasing pension costs.
The district is located in Marin County and covers approximately 50
square miles of which two thirds is the northern portion of the city of
San Rafael and the balance is unincorporated county, including the
communities of Marinwood and Lucas Valley. The district operates three
elementary schools (grades K-5) and one middle school (grades 6-8).
STRONG FINANCES UNDER PRESSURE
Financial operations have been strong historically but weakened in
fiscal years 2011 and 2012 due to state categorical funding shifts which
had a $3.2 million negative impact. The district has used general fund
drawdowns in fiscal years 2011-2013 (in the $300,000 to $500,000 range
each year), plus a budgeted drawdown of $608,000 in fiscal 2014, to
avoid layoffs and protect its education programs. As a result, the
district retains a considerable amount of expenditure flexibility with
options that include increasing class sizes, reducing school days,
modifying staff salaries and benefits, and eliminating underfunded
programs. District officials advise, however, that the district is most
likely to achieve general fund structural balance by fiscal years
2016-2017 through tax base growth. Fitch considers that this timeframe
and reliance on property tax revenue growth, rather than expenditure
cuts, will result in maintenance of lower general fund balances that are
more in line with the 'AA+' rating category median.
To date, the district continues to significantly exceed its policy of
budgeting a 10% unrestricted general fund balance in any current fiscal
year, and forecasting a 5% balance thereafter. The district ended fiscal
2012 with an unrestricted general fund balance of $3.4 million, a sound
19.1% of spending. It now expects to outperform its previously estimated
unreserved general fund balance of $2.6 million in fiscal 2013 (13.6% of
spending) by at least $500,000. The resulting improved fiscal 2013
unreserved general fund balance is likelyto assist the district to
outperform its conservatively budgeted fiscal 2014 unreserved general
fund balance of $2 million (10.9% of spending).
General fund liquidity has remained strong throughout the recent
recession and the district has access to $768,000 in internal borrowable
funds, plus access to Marin County's tax anticipation note (TAN) program
in the unlikely event that should be needed.
MODERATELY LOW DEBT BURDEN; GROWING PENSION LIABILITIES
The district's overall debt burden is an estimated $3,242 per capita,
which is in the moderate range, or a low 1.8% of market valuation. Debt
amortization is rapid at approximately 76% in 10 years. The district has
no further debt issuance plans. Its OPEB unfunded liability is an
affordable $1.1 million, and there is a designated OPEB special reserve
of $118,000 maintained separately from the general fund.
The district's annual debt repayment, required pension contributions,
and OPEB pay-go carrying costs represented a low 8.6% of its fiscal 2012
total governmental expenditures, less capital. However, the district's
obligations to retirees are likely to pose an increasing burden due to
participation in the poorly funded California State Teachers' Retirement
System (CalSTRS). The district also participates in the California
Public Employees' Retirement System (CalPERS). Contribution rates for
CalPERS are actuarially based, but those for CalSTRS are set by statute
and have been below the level required to amortize the system's unfunded
liability for some time.
The CalSTRS system reported a somewhat weak funded ratio of 69.3% for
fiscal 2012. Fitch estimates that funded ratio to be 65.7% based on its
more conservative 7% rate of return assumption. Fitch expects school
districts' CalSTRS contribution rates to rise over the coming years,
perhaps significantly, if the state legislature begins to address the
system's growing unfunded liabilities. Such rising costs could
exacerbate the district's difficulty in achieving structural balance in
its general fund. CalPERS rates will also rise significantly but are a
smaller portion of the district's total pension obligation.
DIVERSE FUNDING SOURCES; STRONG COMMUNITY SUPPORT
The district's revenue base is uncharacteristically diverse for a
California school district. As a basic aid district, the revenue limit
funding amount is met by local property taxes, which reduces the
district's reliance on volatile state-provided funding. In addition, the
district receives approximately 20% of its general fund revenues from
three other sources, higher than typical for California school
districts. These sources include a parcel tax which strong voter support
in June 2011 both renewed through 2019 and increased to $352 per parcel,
up from $245. This parcel tax generated $1.9 million in fiscal 2013.
Additional support is provided by significant charitable donations
generated by the district's parent foundation ($0.7 million in fiscal
2013 of which half went to the general fund). Finally, the district also
receives revenue from leasing out four surplus school sites ($1.3
million in fiscal 2013).
STABLE FINANCIAL MANAGEMENT; GOOD LABOR RELATIONS
District management is stable and there are no apparent notable tensions
with elected officials or labor groups. There was no salary increase in
fiscal 2013, but the hard benefit cap was increased by a minimal 0.18%
($25,000 cost to the district). The district's labor contracts are
typically somewhat flexible, although their average class size
requirement is more restrictive than permitted by the California
RESILIENT ECONOMY AND TAX BASE
The local economy benefits from its participation in the broad and
diverse economy of the San Francisco Bay Area. Wealth levels in the
district are above average. Per capita income and median household
income in San Rafael are below those of Marin County but remain high at
181% and 165%, respectively, of the national average. The unemployment
rates for the city of San Rafael and Marin County are low at 5.5% and
4.6% (April 2013), respectively, compared to the state average of 8.5%
and the national average of 7.1%.
The district's tax base is nearly 80% residential and has remained
relatively stable over the past several years. From fiscal 2006 to 2010,
the district's taxable assessed valuation (TAV) grew by a compound
annual rate of 4.4% before contracting by a modest 1.5% in fiscal 2011.
Modest growth resumed in fiscal 2012 with a TAV increase of 1.2% and
would have continued in fiscal 2013 if not for Marin County's purchase
of a major office building. Since the county does not pay property tax,
its purchase resulted in a slight 0.6% TAV decline for the district in
fiscal 2013 which was more than offset by a 3.3% increase in fiscal
2014. The tax base is diverse with no single taxpayer accounting for
more than 3.5% of total TAV.
Additional information is available at 'www.fitchratings.com'.
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
U.S. Local Government Tax-Supported Rating Criteria
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