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TMCNet:  Fitch Affirms Carmel Unified School District, CA's GOs at 'AAA'; Outlook Stable

[April 02, 2014]

Fitch Affirms Carmel Unified School District, CA's GOs at 'AAA'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'AAA' rating on outstanding unlimited tax general obligations (ULTGO) bonds of the Carmel Unified School District (the district) as follows:

--Approximately $2.0 million general obligation (GO) bonds, series 2002;

--Approximately $9.7 million general obligation (GO) bonds, series 2006;

--Approximately $10.4 million GO bonds, series 2008.

The Rating Outlook is Stable

SECURITY

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

KEY RATING DRIVERS

WEALTHY ECONOMIC PROFILE: The district's local economy is anchored in high-end tourism and characterized by low unemployment and very high wealth levels.

BASIC AID DISTRICT: As a basic aid district, its locally-generated revenues are well in excess of the state's minimum funding guarantee. As such it is insulated from state funding volatility.

STRONG FINANCIAL POSITION: The district's finances remain very strong despite some use of reserves to fund both operations and one-time capital projects.

TAX BASE CONTINUES TO GROW: Taxable assessed value (TAV) declined in only one fiscal year 2011 before returning to growth in fiscal year 2012. Growth in fiscal 2014 brought TAV to a new high. The district expects continued growth of 3 - 4% annually, consistent with current and historical trends.

MODERATE DEBT LEVELS: The district's overall debt burden is expected to remain moderate. Pension costs will likely rise over the next several years, subject to future state legislative action, to address substantial unfunded liabilities.

RATING SENSITIVITIES

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

Carmel Unified School District serves the beach community of Carmel and unincorporated portions of Pebble Beach, Carmel Valley, and Big Sur. The district is located 54 miles south of San Jose in northern Monterey County. As of 2014, the district serves a population of 23,000 and had enrollment of 2,356.

STRONG FINANCIAL POSITION

The district's financial position remains very strong, despite multiple years of general fund draws that have mostly been driven by one-time capital projects. Four consecutive years of general fund draws are projected to lower unrestricted general fund balance from $23.3 million, or 59% of general fund spending, in fiscal year 2011 to $11.9 million, or 26% of spending, in fiscal year 2014.

The district's second interim report conservatively estimates total ending balance in fiscal year 2016 of about $11.4 million, or a still very strong 25.8% of spending. This represents fund balance draw-downs of about $10.2 million in fiscal year 2014 and $512k in fiscal year 2015. The large draw in fiscal year 2014 is driven by a $7.3 million transfer out of capital and deferred maintenance funds. The district expects to balance general fund operations without non-recurring sources in fiscal year 2016, which Fitch considers reasonable given the district's conservative revenue growth projections and large degree of unutilized expenditure flexibility.

BASIC AID DISTRICT

The district is one of few school districts in California to qualify for basic aid, whre locally generated tax revenue per student exceeds what the state guarantees per revenue limit. Unlike the majority of school districts in the state, the district's primary revenue source is property tax revenue, which makes them less vulnerable to state funding changes but more vulnerable to TAV changes. Locally generated tax revenue in fiscal year 2013 was nearly 66% higher than what would have been guaranteed to the district under the state's revenue limit formula.

WEALTHY LOCAL ECONOMY

Monterey County employment is concentrated among the tourism, governmental, and agricultural sectors, and the Carmel area is especially dependent on leisure and tourism. While county and state unemployment rates are high (11.0% and 7.9% respectively for December 2013), district area rates are much lower. According to state data, Carmel's February, 2014 unemployment rate was 2.4%. TAV per capita in the district is a very high $571k in fiscal year 2014. Per capita money income within the district is over twice the state and national averages.

The district's TAV declined by about 5% in fiscal year 2011.

Valuation returned to growth in fiscal year 2012 and has experienced 7.6% total TAV growth from the decline in fiscal year 2011 through fiscal year 2014, and reached a new high in fiscal year 2014. The district expects 3 - 4% TAV growth per year over the near-term, a projection that is based on the assessor's estimates. Fitch believes that these projections are reasonable given the district's active housing market and historical/current trends.

MODERATE DEBT BURDEN

The high debt per capita in fiscal year 2014 of $7,169 reflects a large seasonal (and thus non-resident) population. Debt to market value is low at 1.3% and is more reflective of the district's overall leverage. The district amortizes debt at an average pace, with 54% of debt retired within the next 10 years. The district is currently assessing capital needs, which appear to be manageable and would most likely be funded through combination of pay-go and local grants. Fitch does not expect the district's debt profile to change over the near-term.

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. The district offers other post-employment benefits (OPEB) but its unfunded OPEB liability is very low at approximately $12.1 million (0.1% of fiscal year 2014 TAV) as of the most recent valuation on June 1, 2013. Carrying costs for debt service and retirement benefits are manageable (11.9% of governmental expenditures in fiscal 2013) but are likely to rise over the next several years given pension funding pressures.

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=826015

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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