|[March 24, 2014]
Fitch Affirms San Francisco Community College District's (CA) GOs at 'BBB+'; Outlook Negative
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has taken the following action on San Francisco Community
College District, CA's (News - Alert) (the district) general obligation (GO) bonds:
--$26.8 million 2002 GO bonds (election of 2001, series A) affirmed at
The Rating Outlook remains Negative.
The bonds are a general obligation of the district. The board of
supervisors of the city and county of San Francisco (the city) is
obligated to levy and collect ad valorem taxes upon all property within
the district subject to taxation, without limitation as to rate or
amount, to pay debt service on the bonds.
KEY RATING DRIVERS
ACCREDITATION CHALLENGES UNRESOLVED: The Negative Outlook reflects
uncertainty over the district's future operations following the July
2013 decision to terminate its accreditation by the Western Association
of Schools and Colleges' Accrediting Commission for Community and Junior
Colleges (ACCJC). The district has appealed this decision and
third-party lawsuits may also prove obstacles to its implementation. A
lawsuit filed by San Francisco's city attorney resulted in a preliminary
injunction against implementation.
SIGNIFICANT MANAGEMENT IMPROVEMENTS: The district has made substantial
progress with administrative and financial reforms over the past 18
months in response to deficiencies cited by ACCJC. Further progress will
be required to insure the district's long-term success, but reforms
achieved to date provide a strong foundation for such efforts.
STATE INVOLVEMENT POSITIVE: Fitch's rating assumes district operations
are likely to continue regardless of the ACCJC's pending action. The
state has played a key role in supporting district reforms, and Fitch
expects state involvement to increase if the district's accreditation is
POTENTIAL 2015 FUNDING LOSS: The district faces a substantial reduction
in state revenue for fiscal 2015 due to recent enrollment declines.
Proposed state legislation would stabilize funding in 2015 and beyond,
but the district could face substantial expenditure reductions if
enrollment declines are not reversed. The district's contingency plan to
balance its budget in the event this legislation is not adopted
mitigates some of this funding risk.
STRONG ECONOMY AND TAX BASE: The district is coterminous with the city,
and property taxes pledged to its bonds are supported by San Francisco's
exceptionally strong economy and resilient tax base. Wealth and income
levels remain high, employment growth is robust, and taxable assessed
values (TAV) have experienced steady growth.
MIXED LONG TERM LIABILITIES: Overall debt is high on a per capita basis,
but Fitch considers it affordable given the district's wealth levels and
strong tax base. Carrying costs for debt service and retirement benefits
are moderate but likely to rise, particularly due to chronic
underfunding of the California State Teachers' Retirement System
OPERATIONAL DISRUPTION: Failure to complete an orderly transition in the
event of accreditation loss would leave the district unable to continue
as a going concern, and likely result in a multi-notch downgrade.
FINANCIAL DETERIORATION: A material reduction in apportionment revenues,
if unmatched by expenditure cuts, would likely require a drawdown in
reserves and result in additional downwards rating pressure,
irrespective of the district's accreditation status.
The district serves approximately 85,000 students across nine campuses.
Students are drawn primarily from the city, whose general obligations
Fitch rates 'AA' with a Stable Outlook.
ACCREDITATION CHALLENGES UNRESOLVED
The district faces continued operational uncertainty following ACCJC's
July 2013 action to terminate its accreditation effective July 31, 2014,
an outcome previously considered unlikely by district management.
Implementation of this action is subject to appeal, at which point the
district may introduce new information for ACCJC's consideration. Such
new information would likely include accreditation-related reforms over
the past 18 months, which were not formally considered in the July 2013
Implementation of any termination action by the ACCJC could be
complicated by any one of several active legal and political challenges
to its authority. A preliminary injunction against termination of the
district's accreditation was granted in San Francisco Superior Court in
January 2014, in response to a suit by the city's elected attorney. A
trial is not anticipated before fall 2014. Until the suit is resolved,
the injunction protects the district against any funding changes
resulting from accreditation loss. A second lawsuit by a district labor
union has similarly challenged the ACCJC's authority to terminate the
district's accreditation. The ACCJC also faces challenge from the U.S.
Department of Education, which has questioned the accrediting
organization's compliance in several areas related to its sanctioning of
A loss of accreditation would make the district ineligible to receive
state apportionment revenues and federal student aid, but it retains
several options for continuing operations under this scenario.
Management believes the district could maintain non-credit programs in
the absence of accreditation, which would preserve approximately 42% of
current funding. District operations would be scaled back severely under
such a scenario. The district would likely seek re-accreditation for
eligible programs, a process that could take two or more years.
The post-accreditation termination operations of the Compton Community
College District (Compton CCD) in southern California are a potential
model for the district if ACCJC's decision is upheld. Following the loss
of its accreditation in 2005, Compton CCD received a loan from the state
to support its continued operations and entered into a partnership with
a fully accredited neighboring community college. It continues to serve
local students and meet debt service obligations on issuances both prior
to and following its loss of accreditation. Fitch expects that the
district's legal status would be similarly unimpaired by the loss of
STATE INVOLVEMENT POSITIVE
State oversight of the district to date has included the appointment of
a special trustee in place of its elected board as well as two in-depth
management reviews by the state's Fiscal Crisis & Management Assistance
Team. In addition, the California Community Colleges Chancellor's Office
has sponsored legislation to stabilize funding for the district over the
next four years. Fitch believes that the state retains a strong interest
in preserving district services and expects state involvement to
increase if the district's accreditation is withdrawn.
SIGNIFICANT MANAGEMENT IMPROVEMENTS
The district has made substantial improvements to its operations over
the past 18 months despite its continued accreditation challenges. A new
management team includes a special trustee appointed by the state
chancellor for community colleges. The special trustee serves in place
of the district's elected board and has broad authority to implement
changes in district operations. In addition, the district has recently
hired a new local chancellor and several vice chancellors with extensive
experience managing community colleges, including those with
accreditation challenges. These and other recent appointments respond
directly to ACCJC's prior criticisms of the district's insufficient
administrative resources, and support broader efforts to improve its
compliance with accreditation standards.
The district has addressed ongoing financial challenges with an
eight-year plan for fiscal stability. The plan would increase the
district's board-designated reserves to 8% from 2% of expenditures and
also commits the district to new investments for deferred maintenance
and technology improvements, as well as increased funding for other
post-employment benefits (OPEBs). Expenditure controls have been aided
by a 5% salary reduction implemented in mid-fiscal 2013, with 1%
restored pursuant to new two-year contracts with all major bargaining
POTENTIAL 2015 FUNDING LOSS
The district experienced a sharp drop-off in enrollment in fiscal 2012
amidst extensive media coverage of its accreditation challenges. This
decline could result in a revenue reduction of up to $18 million in
fiscal 2015, equivalent to approximately 10% of unrestricted general
fund revenue in 2013. Proposed state legislation to be considered in
spring 2014 would delay this reduction (while the district's
accreditation challenges continue) and appears to have strong prospects
for adoption. The district is also in the process of improving outreach
and marketing to restore enrollment levels and is developing expenditure
reduction options as part of its fiscal 2015 budget development process.
The potential loss of funding in 2015 stands in contrast to generally
improving revenue prospects for the state's community colleges,
including the district. Funding levels for fiscal 2013 and beyond have
been aided by strengthened state finances as well as temporary state and
local tax measures. Proposition 30, approved by California voters in
2012, is expected to raise approximately $6 billion in new revenues
annually through fiscal 2017, with smaller revenue gains through fiscal
2019. The new taxes and higher collections from existing taxes
contribute to a proposed 8% increase in state funding for community
colleges in fiscal 2015. In addition, San Francisco voters approved a
temporary parcel tax that will provide an estimated $16 million in
annual revenues for the district over the next eight years. The
district's financial position remains challenged due to past reductions
in state apportionments and a history of short-term decision-making that
have diminished reserves, but appears likely to improve if recent
progress can be sustained.
STRONG ECONOMY AND TAX BASE
TAV levels rose by 4.5% in fiscal 2014 and maintained a 3.2% compounded
annual growth rate over the past five years. Employment growth has been
similarly robust and the city's unemployment rate fell to a very low
4.8% in December 2013, well below state and national averages. Wealth
and income levels are high.
MIXED LONG TERM LIABILITIES
Overall debt of $6,384 per capita is high, but moderate relative to the
size of the city's tax base. Amortization of the district's debt is
average, and management has no plans for further borrowing as the
district approaches the end of a large debt-funded expansion program,
approved by voters in 2001 and 2005.
Carrying costs for debt service and retirement benefits are currently
moderate but likely to rise over the medium term to address substantial
CalSTRS liabilities, which nearly quadrupled between 2008 and 2013. Such
actions would require state legislative approval, and impacts on CalSTRS
employers such as the district remain uncertain. Given the large cost of
addressing past underfunding, however, Fitch expects that the burden
will be shared among participating employers as well as the state.
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 Financial Crisis & Management Assistance
Team/California School Information Services and the Accrediting
Commission for Community and Junior Colleges/Western Association of
Schools and Colleges.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
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