|[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.
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
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.
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.
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
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
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
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
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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