|[August 28, 2013]
Fitch Affirms Capistrano USD SFID No. 1, CA's GOs at 'AA-'; Outlook Revised to Negative
SAN FRANCISCO --(Business Wire)--
Fitch Ratings affirms an 'AA-' rating on the following Capistrano
Unified School District School Facilities Improvement District No. 1,
California (the SFID) general obligation (GO) bonds:
--$12.1 million series 1999B.
In addition, Fitch assigns an implied GO rating of 'AA-' to the
Capistrano Unified School District, CA (News - Alert) (the district).
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by an unlimited ad valorem property tax on all
taxable property in the SFID.
KEY RATING DRIVERS
NEGATIVE ON (News - Alert) FINANCIAL PERFORMANCE: The Negative Outlook reflects a
financial profile that is notably weak for the rating category with
ongoing structural budget deficits and minimal financial reserves.
INSTITUTIONAL CONSTRAINTS: The district is largely dependent on the
state of California for funding, exposing it to significant revenue
volatility that to the district has been unable to offset fully with
expenditure adjustments. The district has no meaningful local revenue
IMPROVING FUNDING ENVIRONMENT: State voter approval of additional taxes
to support education funding and an economic recovery have eased
near-term funding pressures despite the inherent volatility in
California's tax structure and school funding system.
SIGNS OF MANAGEMENT STABILITY: The district's management appears to have
stabilized after a period of significant board and administrative
turnover and a teachers strike in 2010.
VERY STRONG ECONOMY: The district serves a group of affluent suburbs in
southern, coastal Orange (News - Alert) County. Median household income is high at 187%
of the U.S. level.
DIVERSE, STABLE TAX BASE: The SFID's assessed value (AV) has recovered
from minor declines during housing downturn and appears to be growing at
a healthy pace. Taxpayer concentration levels are modest.
MANAGEABLE LONG-TERM LIABILITIES: The SFID's direct and overlapping debt
burden equals just 0.6% of AV. Amortization is healthy. Post-employment
liabilities are quite manageable, despite pressures from a poorly funded
state teachers retirement fund.
FAILURE TO BUILD RESERVES: Fitch expects to downgrade the rating within
two years if the district does not meaningfully rebuild reserves.
Capistrano Unified is Orange County's second largest district with about
50,300 students, serving the communities of San Juan Capistrano, Aliso
Viejo, Dana Point, Laguna Niguel, Rancho Santa Margarita and San
Clemente. The SFID was created to fund capital improvements in the more
established parts of the school district and includes about 90% of area,
as well as two-thirds of its assessed value.
Capistrano Unified's inherent economic strengths are offset by a
decidedly weak financial profile that weighs on the rating, pushing it
well below the level suggested by the economic and debt profiles. The
district has posted four consecutive years of net operating deficits
after transfers that have drawn fund balance to a very low level. The
district's $8.3 million net operating deficit after transfers for the
fiscal year ended June 30, 2012 equaled 2.1% of spending and reduced the
district's unrestricted general fund balance to a barely adequate 4.4%
of expenditures and transfers out.
Preliminary unaudited results for fiscal 2013 show that the district
expects a $ 2 million surplus, equivalent to 0.6% of spending. The
improvement was partly based on temporary spending reductions such as
furlough days. The district has had more trouble aligning expenditures
with revenues than most California school districts due to a sometimes
poor relationship with its labor unions and the high cost of employing
teachers in the region. Management has made painful reductions,
including raising class sizes, reducing employee headcount by 12% since
2008, closing schools and shortening the school year.
A structural budget imbalance remains across the forecast horizon of the
district's multiyear financial projections. The district's fiscal 2014
budget shows a slight draw on general fund balance equal to about 0.7%
of spending, and the out years of the forecast show that the district
will need to continue to ask labor for signifcant concessions (worth
about $17 million a year) to balance budgets.
EXPECTATION OF LOW RESERVES
Fitch believes the district is likely to continue to use nonrecurring
cuts to maintain an unrestricted general fund balance slightly in excess
of the state-required 2% reserve for economic uncertainty due to an
improving revenue outlook and the district's recent history of securing
concessions from labor. However, the district is likely to have trouble
building fund balances above the low single digits (as a percentage of
spending) in the near term. Reserves at this level are very low for the
current rating category and leave the district with little financial
cushion to absorb unexpected declines in funding or cost overruns.
MORE POLICYMAKING CONSENSUS
The district's governance and labor relations experienced a period of
turmoil during the recent recession, but conditions appear to have
improved under new management. The district's teachers went on strike in
2010 after the district imposed a 10.1% pay cut. The current
superintendent is the seventh top administrator since 2006 and has been
in the position for three years. He has been able to improve relations
with labor and helped secure spending cuts that are likely to stabilize
the district's reserves at the current minimally adequate level. The
school board has turned over completely since 2010 when voters recalled
a significant portion of the district's board. While the development of
greater policymaking consensus is positive, the district has not yet
reached a consensus on how to achieve ongoing structural balance and to
rebuild reserves to a healthy level.
VERY STRONG ECONOMY
The district benefits from one of the strongest economic bases in the
state of California. Coastal southern Orange County includes some of the
most expensive real-estate in the state. Incomes vary in across the
district, but even the least affluent communities in the district have
median household incomes above 150% of the national median.
The district participates in a large and diverse regional economy that
is recovering from a deep downturn, but is fundamentally strong. The
workforce is highly educated, and local freeways provide good access to
jobs centers. Orange County was a center of the subprime lending
industry and suffered significant job losses in the recent recession,
but it began to recover earlier than most of the state. The school
district's service area includes cities with significantly lower
unemployment rates than the county, state and nation, including San Juan
Capistrano at 5.4% and Santa Margarita at 3.9% in June 2013.
STRONG TAX BASE
The SFID's $45.5 billion tax base is well-established and largely
residential. Properties have been more stable in the district than in
most California jurisdictions. The SFID experienced just two years of
small declines in AV in 2010 and 2011, followed by stability in 2013, a
1.1% increase 2013 and a 3.1% gain for fiscal 2014. Taxpayer
concentration is not a concern with the top 10 tax payers representing
just 3.9% of the SFID's AV.
HEALTHY DEBT PROFILE
The district's debt profile is healthy with total carrying costs of debt
service, pensions and other post-employment benefits (OPEB) quite low at
just 8.3% of governmental funds spending excluding capital spending.
Sparing use of bonded debt and limited OPEB liabilities largely offset
concerns about the state pension plans.
The district has no plans to increase the SFID's very low direct debt
per capita of about $351. Total overlapping and net direct debt is
estimated to be about $1,148. Both numbers are quite small relative to
AV. Amortization is healthy with 34% of the district's bonds repaid in
five years, 67% in 10 years, and 100% within 20 years.
The district's obligations to retirees are manageable but 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.
CalSTRS reported an inadequate funded ratio of 69.3% for the fiscal year
ended June 30, 2012. Fitch estimates the funded ratio to be 65.7% based
on a 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 addresses the
system's growing unfunded liabilities.
OPEB liabilities are modest with an unfunded accrued actuarial liability
of just $49.7 million, or 0.6% of AV at July 1, 2011.
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 the 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:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
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