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TMCNet:  Fitch Affirms Brentwood Union School District, CA's GOs at 'AA-'; Outlook Stable

[March 05, 2014]

Fitch Affirms Brentwood Union School District, CA's GOs at 'AA-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'AA-' rating on outstanding unlimited tax general obligations (ULTGO) bonds of the Brentwood Union School District (the district) as follows:

--$3.7 million series 1997C;

--$20.5 million series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The district has maintained healthy reserves though prudent management practices despite prior years' revenue pressures stemming from cuts in state per-pupil funding. The district has retained adequate liquidity and a solid fund balance cushion.

ELEVATED LONG-TERM OBLIGATIONS: Overall debt levels are high; however, carrying costs for debt service and employee retirement benefits are affordable. Pension costs will likely rise over the next several years, subject to future state legislative action, to address substantial unfunded liabilities.

MIXED ECONOMIC FACTORS: The local economy is characterized by above-average wealth levels and an unemployment rate below the state average. The housing market, which experienced a severe cumulative 32% contraction in assessed value (AV) from fiscal years 2008 to 2013, remains stressed despite some recent growth.

IMPROVED REVENUE PROSPECTS: State funding, which Fitch views as volatile and difficult to predict, provides the majority of district revenues. Revenue growth prospects have improved recently with the general improvement of the state's finances and economy, and the 2012 voter approval of temporary tax increases under Proposition 30.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial position. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Brentwood Union School District is a K-8 school district in eastern Contra Costa County that serves a population of about 55,000 within the city of Brentwood and limited portions of the cities of Antioch and Oakley. The district is located approximately 41 miles east of San Francisco.

STRONG FINANCIAL PROFILE

The district has weathered recent general fund revenue declines over the past several fiscal periods, due primarily to management's prudent budgeting practices and proactive spending reductions. Management implemented approximately $8 million in cuts from fiscal years 2009 to 2012, including reduced work days, increased class sizes, and salary freezes. The district retains a moderate degree of spending flexibility with options to reduce spending by shortening the school year, further increasing class sizes, and implementing other reductions, however, due to a stabilizing revenue environment, Fitch does not anticipate the district to utilize this flexibility.

General fund balance draws in fiscal years 2013 and projected 2014 of $1.6 million and $2 million, respectively, have been related to declining federal stimulus money, an increase in teacher salaries, and several one-time expenditures including the opening of a new elementary school. The fund balance draw in fiscal year 2014 is projected to bring unrestricted general fund balance down to $11.5 million or 18.3% of spending ($12.2 million or 19.3% when adjusted to include funds that were recently consolidated per GASB 54), which is still considered a solid cushion and is well above the district's general fund balance policy to maintain no less than a low 4.25%.

IMPROVED REVENUE PROSPECTS

State funding provides the majority of district revenues, and growth prospects have improved recently with the general improvemnt in state finances. The district originally projected general fund deficit spending in fiscal years 2015 and 2016, however, a larger than anticipated increase in proposed Local Control Funding Formula (LCFF) gap funding is expected to offset the deficit spending and the district now projects balanced net operating margins in these years if the governor's budget is adopted as proposed. Fitch believes that the district likely faces a number of pent-up cost pressures from the recently constrained years (such as wage, class sizes, and eliminated programs) which are expected to absorb a portion of this future revenue growth.

ABOVE-AVERAGE ECONOMIC INDICATORS

Brentwood largely serves as a bedroom community to the Contra Costa County and greater Bay Area labor markets. Unemployment rates in the city declined to 5.6% in December 2013, well below the county (6.4%), state (7.9%), and US (6.5%) rates and on par with the unemployment rate of the San Francisco MSA (5.6%). Wealth levels in the city are above average with per capita and median household income at 107% and 142% of the state average, respectively.

SLOWLY RECOVERING HOUSING MARKET

The district has experienced a very sharp contraction in AV, with a cumulative decline of 32% in AV from fiscal years 2008 to 2013. Fiscal year 2014 marked the first year of AV growth since before the recession, due to increased housing development activity and improved home prices. However, AV remains over 26% below peak levels. The tax base remains diversified with the top 10 taxpayers comprising 5.7% of AV.

HIGH DEBT BURDEN

The overall debt burden for the district is high at $6,597 per capita and 5.8% of AV. Amortization is moderate with 63% of principal repaid in 10 years. The district's direct debt largely consists of property tax-secured general obligation bonds and includes a very small portion of variable-rate capital lease obligations. The district's capital needs include building an additional middle school, for which the district has recently purchased land. No additional debt is expected to be issued by the district over the next several years.

Rapid population growth in the area over the past twenty years has led to substantial annual increases in enrollment and debt issuance for new school construction. The district operates eight elementary schools and three middle schools, most of which have been constructed within the past twenty years. The rate of population and enrollment growth was reduced significantly with the decline in the local housing market. The district currently projects that enrollment will remain plateaued over the near-term, but is in the midst of a demographic study to determine whether the increased housing market activity will translate into higher enrollment. The district anticipates the study to be completed by May 2014.

The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. Funding for the California State Teachers Retirement System (CalSTRS) is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. In addition, the district offers other post-employment benefits (OPEB) and had an unfunded OPEB liability of approximately $5.7 million (0.1% of TAV), a figure Fitch views as very low, as of the most recent valuation on 7/1/2011. Carrying costs for debt service and retirement benefits are currently low (12.2% of governmental expenditures in 2013) but are likely to rise over the next several years.

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822649

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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