|[September 24, 2013]
Fitch Rates West Contra Costa Unified School District, CA's GO Bonds 'A+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has assigned an 'A+' rating to the following West Contra
Costa Unified School District (the district), CA (News - Alert) general obligation (GO)
--$85 million GO bonds, Election of 2012, Series A;
--$40 million GO bonds, Election of 2010, Series B.
In addition, Fitch affirms its 'A+' rating on the following outstanding
--$776.7 million GO bonds.
The Rating Outlook is Stable.
Purpose: Bond proceeds from the election of 2012, series A, and election
of 2010, series B, bonds will finance various improvements to district
facilities and schools along with paying the cost of issuance. The bonds
are scheduled to be sold via negotiation during the week of October 7.
The bonds are secured by an unlimited ad valorem tax on all taxable
property within the district.
KEY RATING DRIVERS
HIGH DEBT BURDEN: The district's overall debt burden is projected to
remain high due to the slow amortization rate of outstanding debt and
the district's plans to issue significant amounts of additional debt
over the near term.
SOUND FINANCIAL PROFILE: The district benefits from satisfactory
reserves, improved liquidity, and solid financial performance despite a
small operating deficit in fiscal 2013 (unaudited). District revenues
are supported by a voter-approved parcel tax that extends through fiscal
LCFF IMPACT UNCERTAIN: Fitch views the impact on the district from the
state's adoption of the Local Control Funding Formula (LCFF) as being
somewhat uncertain at this point given the lack of clarity on the
state's forthcoming accountability rules. Significant restrictions may
reduce the district's financial flexibility over the short term, despite
gains in revenue from both the LCFF and the generally improved funding
BUDGETARY PRESSURES CONTINUE: Budgetary pressures are expected to
continue from rising fixed costs, including pension and other-post
employment benefits (OPEB), and new spending requirements under LCFF.
TAX-BASE CONTRACTION: The district's tax base is concentrated in its
largest taxpayer, Chevron (News - Alert). A fire at the Chevron refinery was partly
responsible for an unexpected 6% decline in the district's fiscal 2014
assessed value (AV), although general AV trends in the area are positive.
MIXED ECONOMY: The local economy benefits from its proximity and access
to the diversified Bay Area economy, but performance is mixed with some
cities within the district recovering at a quicker pace while others
continue to experience relatively high unemployment.
SIGNIFICANT REDUCTION IN RESERVES: A larger than anticipated reduction
in the district's unrestricted reserves would likely place negative
pressure on the rating.
The district is located approximately 15 miles northeast of San
Francisco. It covers a large area in western Contra Costa County,
including the cities of Richmond, El Cerrito, Hercules, Pinole, and San
Pablo, along with several unincorporated areas. The district currently
operates 36 elementary schools, two K-8 schools, six junior high
schools, six high schools, along with several continuation programs,
adult education sites, and state-funded preschools.
The district experienced several years of declining attendance, falling
by 2.8% to approximately 27,498 in fiscal 2012 compared to 28,400 in
fiscal 2007. However, attendance increased in fiscal 2013 by 1.6% to
28,401 and management projects additional modest increases over the next
SOUND FINANCIAL PROFILE
The district recorded operating surpluses (after transfers) in fiscals
2012 and 2011 of $6 million (2.2% of spending) and $9.4 million (3.7%),
respectively. However, the district's solid financial performance is
expected to weaken modestly in fiscal 2013 (unaudited) with a $5.9
million operating deficit (2.2% of spending).
The district's reserves are satisfactory and projected to remain at
similar levels in fiscal 2013 (unaudited) despite the deficit. From
fiscal 2010 to fiscal 2012, the district's unrestricted fund balance
increased significantly, rising to $36.5 million, or a solid 13.6% of
spending, in fiscal 2012 from $21.34 million (8% of spending) in fiscal
2010. Unaudited results for fiscal 2013 show only a modest $1.8 million
decline in the unrestricted reserve, leaving the district's financial
cushion at a still satisfactory $34.7 million or 13% of spending.
District management expects to receive approximately $6.5 million more
in revenue in fiscal 2014 under LCFF than assumed under the old funding
formula. Additional funding increases are expected over the LCFF's
projected eight-year implementation. While the additional revenue may
provide a sgnificant benefit to the district, forthcoming
accountability rules (expected in January 2014) regarding how some of
the funds may be used could potentially reduce the district's financial
flexibility over the near term and may require significant structural
Under LCFF a district receives an unrestricted 'base' funding amount
with additional revenue provided through 'supplemental' and
'concentration' funding based on the district's unduplicated count of
English learners, low-income, and foster youth in its student body. The
district will receive all three sources of funding with 67.5% of its
student body qualifying in at least one of the targeted categories.
The district's financial performance in fiscal 2014 will be partly
driven by the state's accountability rules regarding the permissible use
of LCFF 'supplemental' and 'concentration' funding. Under a scenario
with significant restrictions, the district's base funding may be
insufficient to cover all of its expenses that do not qualify for
restricted funding. If this were to happen, the district would likely
need to reduce its unrestricted fund balance by a larger than currently
anticipated amount. Conversely, fewer restrictions on the additional
funds may position the district to outperform financially over the next
few years as LCFF is further implemented.
HIGH DEBT BURDEN
Net overall debt ratios are well above average at $7,539 per capita and
8.2% of AV. The district has successfully applied for and received
waivers from the state's Board of Education to exceed bonding capacity
limits, allowing the district to issue general obligation debt up to 5%
of AV. While direct general obligation indebtedness is 4.1% currently,
the district expects to use some of its significant remaining general
obligation authorization (approximately $593 million following this
issuance) to address capital needs over the next several years.
SIGNIFICANT OPEB LIABILITY
The district successfully renegotiated its OPEB in fiscal 2010. Under
the agreement, the district offers health insurance benefits that are
capped according to several criteria, including employment start date
and years of service.
The revised agreement reduced the district's unfunded actuarial accrued
liability to approximately $385 million as of fiscal year end 2012, down
from $523 million at the end of fiscal 2007. Despite the reduction, the
district's unfunded OPEB liability remains significant at 1.7% of fiscal
2012 AV and rising annual pay-go contributions (a sizable 7.0% of
general fund spending in fiscal 2012) will continue to pressure the
district's financial position.
The district participates in CalSTRS to provide defined-benefit pension
benefits to teachers. The district pays an annual contribution that is
established by statute and has not been upwardly adjusted for some time
despite substantial investment losses over the past decade. As a result,
the system's estimated fiscal 2013 funded ratio is a weak 66% based on a
7.5% discount rate. Fitch uses a more conservative 7% discount rate that
indicates the system is only 63.5% funded.
The legislature is considering various proposals from CalSTRS to adjust
future contribution rates. It is unclear what course the legislature
will take at this time, but Fitch anticipates future contribution rates
will rise and such increases could be substantial, potentially
presenting another source of future budgetary pressure. Total pension
payments in fiscal 2012, which included both CalSTRS and CalPERs
contributions, equaled $12.8 million or 4.7% of general fund spending.
ECONOMY AND TAX BASE
The local economy is recovering but at an uneven rate. While western
Contra Costa County is well-positioned to participate in the Bay Area's
broad and diverse labor market, the unemployment rates in the area are
mixed. The two largest cities in the district, Richmond and San Pablo,
recorded high unemployment rates of 12.5% and 15.6%, respectively, in
July 2013. Some of the less populated areas, like Pinole and Hercules,
have unemployment rates at 5.5% or below.
CONCENTRATED TAX BASE; FISCAL 2014 CONTRACTION
The district's tax base appeared to be stabilizing in fiscals 2012 and
2013 with gains of 1.1% and 6.6%, respectively, after experiencing a
cumulative 20% contraction over the previous two years. However, the
district's AV lost 6% of its value in fiscal 2014 despite general
improvement in the housing market throughout the area.
The AV reduction was largely due to declines experienced by the city of
Richmond, which were partly driven by a significant fire at the Chevron
refinery in 2013. Chevron, the district's largest taxpayer, comprises
approximately 13% of the district's total AV. Fitch does not expect
significant AV losses to continue over the near term given the generally
positive trend in the area and the event-driven nature of the refinery's
Chevron recently entered into an agreement with the city of Richmond and
the Contra Costa County Assessor that would settle outstanding AV
appeals. The agreement calls for the Appeals Board to approve Chevron's
fiscal 2011 AV and reduce the fiscal 2012 AV to $3.3 billion from $3.9
billion. While the settlement results in an overpayment by Chevron of $8
million in property tax for fiscal 2012, Chevron has agreed to forgo a
refund of the overpayment. The agreement also specifies a process for
Chevron and the county assessor to meet and confer regarding the annual
assessment prior to elevating any disagreement to the Appeals Board.
Fitch views the settlement positively as it eliminates the need for the
district to refund already received property taxes.
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, 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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