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TMCNet:  Fitch Affirms La Honda-Pescadero USD, CA's GOs at 'A'; Outlook to Positive

[May 13, 2014]

Fitch Affirms La Honda-Pescadero USD, CA's GOs at 'A'; Outlook to Positive

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed La Honda (News - Alert)-Pescadero Unified School District, California's (the district) bonds as follows:

--$5.8 million outstanding general obligation (GO) bonds at 'A'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

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

KEY RATING DRIVERS

IMPROVED FINANCIAL FLEXIBILITY: The Positive Outlook is based on the district's improved financial flexibility following several consecutive years of operating surpluses and increased reserves, as well as the resolution of outstanding legal claims and voters' recent approval of a parcel tax extension.

RISING REVENUES: As a basic aid district, general fund revenues derive primarily from local property taxes, which have experienced steady growth. The district's basic aid status also insulates it from funding volatility associated with state budget pressures.

LIMITED ECONOMY: Development opportunities within the district's boundaries are limited, and population growth has been negative in recent years. Nonetheless, median household incomes are well above state and national averages and per capita market values are high.

MIXED DEBT PROFILE: The district benefits from a low debt burden and amortization is above average, in part due to the planned repayment of a county loan in the current fiscal year. Further borrowing is constrained, however, by debt service on the district's outstanding bonds, which is close to statutory limits.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Continued structurally balanced operations, in combination with maintenance of adequate reserves, would likely result in an upgrade of the district's rating.

CREDIT PROFILE

The district serves approximately 350 students across two communities within a 16 square-mile portion of unincorporated San Mateo County. La Honda is a residential enclave within commuting distance of Silicon Valley employment centers while Pescadero is a somewhat isolated agricultural community on the San Mateo coast. Much of the land within the district's boundaries is protected open space, limiting opportunities for new development.

IMPROVED FINANCIAL POSITION

The district has recorded operating surpluses in each of the past five fiscal years and unrestricted fund balances have risen to a high 45% of general fund spending, or $2 million at the end of fiscal 2013. While management plans some spend-down of this amount over the next several years to offset expiring federal funding, Fitch expects reserve levels to remain adequate. Rising revenue levels, in combination with stable costs, have contributed to the district's strong recent results. The district has held general fund expenditures to an average 0.5% annual increase over the past five years while revenues have grown by a corresponding 2.5%.

The district's financial position has also been strengthened by the resolution of outstanding legal claims relating to an erlier construction project. In fiscal 2013 the district recovered $2.2 million from involved parties and management plans to use a portion of these funds to repay an outstanding loan from the county office of education in the current fiscal year.

RISING REVENUES

As a basic aid district, the district receives more local property tax than it would otherwise be entitled to from state per-pupil revenues, allowing it to forego most state funding. These arrangements insulate the district's revenues from state funding volatility, a major challenge for most other K-12 districts in the state over the past few years. The district has also benefited from a strong tax base. Taxable assessed values (TAV) increased throughout the recent downturn, contributing to steadily rising revenues.

In addition to ad valorem property taxes, the district receives approximately $200,000 per year in local parcel taxes. District voters recently approved an extension of this tax for seven years, through fiscal 2021.

LIMITED ECONOMY

The district offers limited opportunities for economic development. Much of the district's land area is protected open space and most employment is based in agriculture or tourism. Population growth has been negative in recent years as have school enrollment levels. Nonetheless, wealth and income levels remain high due to the district's proximity to San Francisco Bay Area population centers and the desirability of its coastal location. Median household incomes for the district are twice the state average and assessed value per capita is a high $194,000.

MIXED DEBT PROFILE

The district's overlapping debt burden is moderate on a per capita basis at $3,289, and low relative to TAV at 1.8%. Amortization is above average with 63% of outstanding debt retired within the next 10 years, in part due to the planned repayment of a county office of education loan in the current fiscal year.

The district retains $9 million in GO authorization from a 2006 election but has been unable to issue new debt due to statutory tax rate limits at issuance of $60 per $100,000 of TAV per year. The district's tax rate on outstanding debt from the 2006 election is currently at $52 per $100,000. Some combination of TAV growth and restructuring of existing debt would likely be necessary before the district could issue new GO debt.

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 CalSTRS is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. Carrying costs for debt service and retirement benefits are currently affordable at 12% 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.

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

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=829947

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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