|[June 20, 2014]
Fitch Affirms El Rancho USD CA's GOs at 'A'; Removes Rating Watch Negative
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has affirmed El Rancho Unified School District,
California's general obligation bonds (GOs) at 'A' and has removed the
Rating Watch Negative on the bonds listed below:
--$13.8 million GOs (election of 2003) series 2003A, 2004, 2005, 2007.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax on all taxable
properties in the district.
KEY RATING DRIVERS
IMPROVED FINANCIAL OUTLOOK: Removal of the Rating Watch Negative
reflects the district's materially improved financial position,
including significant expenditure reductions and rising revenues that
are expected to result in structural balance beginning in fiscal 2015.
POSITIVE CERTIFICATION: The Los Angeles County Office of Education (the
COE) rescinded the fiscal advisor (FA) it assigned to assist the
district in managing its finances and positively certified the
district's 2nd interim financial report, reflecting material improvement
of the district's fiscal outlook.
FINANCIAL CHALLENGES REMAIN: Although the district's financial profile
has improved, fund balances are expected to hover just above the 3%
required minimum at fiscal years end 2014 and 2015, and policymakers
will need to exercise spending restraint in an environment marked by
numerous expenditure pressures.
MIXED ECONOMIC PROFILE: The local economy benefits from its location
within the extremely large and diverse Los Angeles employment market,
however economic indicators are mixed.
ADEQUATE DEBT PROFILE: Carrying costs are low and capital needs are
manageable, but debt amortization is slow, the district participates in
the state's weakly funded pension plan that will likely experience
significant contribution rate increases, and the district is paying OPEB
on a pay-go basis, as is common among California school districts.
FINANCIAL PERFORMANCE IS KEY: Material deterioration or sustainable
improvement of the district's fiscal position may lead to a negative or
positive rating action, respectively.
The district educates a student population of about 9,300 in the city of
Pico Rivera, approximately 25 miles southeast of downtown Los Angeles.
IMPROVED FINANCIAL POSITION
In January the COE negatively certified the district's 1st interim
financial report, suggesting the district may not meet its financial
obligations by fiscal year end 2014, including maintenance of a minimum
3% general fund balance. The district also assigned an FA to assist the
district in convalescing the district's strained fiscal position.
Since then the district's financial position has improved markedly due
to board approval of $3.6 million of expenditure reductions, and
significant projected revenue enhancements as the state K-12 funding
environment continues to improve. As a result, the district is
projecting balanced to surplus operations beginning in fiscal 2015.
The COE formerly forecast negative and falling fund balances beginning
in fiscal 2015. The district's improved financial projections have led
the COE to positively certify the district's 2nd interim report,
suggesting the district will meet its financial obligations over a
three-year forecast period. The COE also rescinded its FA.
FINANCIAL CHALLENGES REMAIN
The district's financial projections are sinificantly improved compared
to earlier in the year, but management will have to contend with several
expenditure pressures. These pressures include continued declining
enrollment (offsetting some gains from rising per pupil funding levels),
expiring labor concessions in fiscal 2015, likely rising CalSTRS costs,
and pent-up wage, service, and deferred maintenance pressures. Fitch
expects these spending pressures will significantly narrow out-year
projected surpluses. Further, fiscal 2014 is still projected to result
in a deficit, lowering the unrestricted fund balance to just $2.5
million (3.0% of expenditures and transfers out). These pressures are
incorporated in the district's below average 'A' rating.
MIXED ECONOMIC CHARACTERISTICS
The local economy benefits from its location within the extremely large
and diverse Los Angeles employment market. Despite this advantage,
economic indicators are mixed. April unemployment of 7.1% was below the
state and regional averages of 7.3% and 7.6%, respectively, but above
the nation's 5.9% level. The tax base is well diversified, and performed
adequately in the housing-led recession in part due to its maturity. Per
capita income levels are quite low at just 63% and 66% of state and
national averages, respectively. However, household income levels are
close to state and national levels, reflective of the area's large
household sizes or more workers per household.
ADEQUATE DEBT PROFILE
The district's total net debt burden is moderate at $2,597 per capita,
or 4.2% of AV. Amortization is somewhat below average with 18% and 39%
of debt maturing over five and 10 years, respectively. Amortization
slows even further when accrued capitalized interest is treated as
principal among the district's capital appreciation bonds. Carrying
costs for debt service, pension and other post-employment benefits
(OPEB) are low at 10.4% of governmental fund spending, but likely will
rise moving forward due to anticipated OPEB and pension cost increases
and potential GO issuances.
The district is preparing a master capital facilities plan that could
lead to significant capital improvements over the coming years. The
district retains $6 million of unspent bond proceeds and $43 million of
remaining GO authorization to meet such needs.
The district participates in weakly funded CalSTRS, as do all school
districts in the state. CalSTRS' 2012 funded level was just 67% and
falls to an estimated 63.5% when Fitch adjusts the system's 7.5%
discount rate to a standardized 7%. CalSTRS contribution rates are set
by the legislature and have not been increased in recent years to
address significant investment losses.
The governor recently proposed significant pension contribution rate
increases over a multi-year period to eventually pay the full annual
required contribution. If approved by the legislature, this plan could
result in substantial new spending requirements, though it would place
the pension plan on a more sustainable financial footing.
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:
--'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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