|[August 14, 2014]
Fitch Affirms Capistrano USD SFID No. 1, CA's GOs at 'AA-'; Outlook Revised to Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on the following Capistrano
Unified School District School Facilities improvement District No. 1,
California (the SFID) general obligation (GO) bonds:
--$10.8 million series 1999B.
In addition, Fitch affirms the implied GO rating of 'AA-' on the
Capistrano Unified School District, CA (News - Alert) (the district).
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by an unlimited ad valorem property tax on all
taxable property in the SFID.
KEY RATING DRIVERS
IMPROVED FINANCIAL POSITION: The Outlook revision to Stable reflects
improving general fund financial performance due to permanent spending
cuts and increasing state funding, resulting in slowly recovering
RISING REVENUE RESTORES STRUCTURAL BALANCE: District revenues are
concentrated in state-provided funding, which is increasing due to the
economic recovery and passage of temporary taxes. Along with spending
cuts, rising revenues have reversed a trend of operating deficits that
reduced the district's reserves to low levels. The district's plan to
gradually increase reserves is key to maintaining the current rating.
VERY STRONG ECONOMY; STABLE, DIVERSE TAX BASE: The district serves
several affluent suburbs in southern, coastal Orange (News - Alert) County. The SFID's
well-diversified assessed value (AV) has completely recovered from minor
declines during housing downturn and continues to grow at a healthy pace.
STRONG LONG-TERM LIABILITY PROFILE: The SFID's overall debt burden
equals just 0.4% of AV. Post-employment costs and liabilities are
relatively low, despite pressures from a poorly funded state teacher's
FAILURE TO REBUILD RESERVES: The current positive revenue environment
supports continued growth in fund balance. The existing rating assumes
the district continues to add to its reserves and a reversal of the
recent additions to fund balance could lead to negative rating action.
SUSTAINED STRONG RESERVES: Sustained strong reserve levels could
materially improve financial flexibility and could lead to an upgrade.
Capistrano Unified is Orange County's second largest district with about
50,300 students, serving the communities of San Juan Capistrano, Aliso
Viejo, Dana Point, Laguna Niguel, Rancho Santa Margarita and San
Clemente. The SFID was created to fund capital improvements in the more
established parts of the school district and includes about 90% of area,
as well as two-thirds of its AV.
IMPROVED REVENUE PROSPECTS
State funding provides a large portion of district revenues, and
prospects for stable to growing revenue have improved recently with the
general improvement in state economy as well as the passage of temporary
taxes for education in 2012. In addition, the state's new local control
funding formula (LCFF) directs resources to English language learners
and low income students, and provides more local control. While the
targeted portion of the district's student demographics is low, state
funding is still expected to bolster district revenues in fiscal years
2015 and 2016 as LCFF is fully implemented.
PRESSURED FINANCES SHOW IMPROVEMENT
The district's pressured finances have weighed on the rating in recent
years. However, after four years of operating deficits, the district
posted a $3.8 million surplus in fiscal 2013, which was largely driven
by one-time and ongoing expenditure reductions.
The district projects a surplus of over $9 million fiscal 2014, driven
by continued expenditure management and higher revenue, of which at
least $3.3 million is expected to be added to unresricted general fund
balance. An addition of this amount would raise unrestricted reserve
levels from $18 million (4.9% of general fund spending) in fiscal 2013
to $21.3 million (6.2% of general fund spending) in fiscal 2014. While
improved, Fitch still views this raised level of unrestricted fund
balance as low, and expects the district to continue to add to its fund
balance over the medium term.
BALANCED FISCAL 2015 BUDGET
In addition to using growing revenues to add to reserves, the district
has also begun to restore some of the cuts implemented over the past
several years. These include reducing class sizes and increasing overall
staffing. The district's fiscal 2015 budget is balanced, net of one-time
restricted spending related to the receipt and disbursement of grant
revenues, without the use of one-time fixes such as furloughs and
temporary salary rollbacks.
GROWING POLICYMAKING CONSENSUS
A new management team and new board appear to have achieved greater
policymaking consensus than in previous years, as evidenced by unanimous
board approval of both the fiscal 2015 budget and the appointment of the
new superintendent. Labor relations have also improved, as evidenced by
agreements for wage freezes and temporary salary rollbacks in fiscal
VERY STRONG ECONOMY; TAX BASE
The district benefits from a very strong economic base which includes
several affluent coastal suburbs. Incomes vary across the district, but
median household incomes are at least 150% of the national median. The
district also participates in a large and diverse regional economy that
is recovering from a deep downturn, but is fundamentally strong. The
workforce is highly educated, and local freeways provide good access to
jobs centers. The school district's service area includes cities with
significantly lower unemployment rates than the county, state and
nation, including San Juan Capistrano at 4.6% and Santa Margarita at
3.3% in June 2014.
The SFID's $45.5 billion tax base is well-established and largely
residential. AV was relatively stable during the recession; the SFID
experienced just two years of small declines in AV in 2010 and 2011,
followed by stability thereafter. The tax base is diversified with the
top 10 tax payers representing just 3.9% of the SFID's AV.
HEALTHY DEBT PROFILE
The SFID's debt profile is healthy with just $818 debt per capita and
debt is a very low 0.4% of AV. Total carrying costs of debt service,
pensions and other post-employment benefits (OPEB) are quite low at just
7.8% of governmental spending, though retiree costs are expected to rise
as the state addresses underfunding of the teacher's pension system
(CALSTRS). OPEB liabilities are negligible, with an unfunded accrued
actuarial liability of just $49.7 million, or 0.1% of fiscal 2014 AV.
Contribution rates for non-teacher pensions - to CalPERS - are
actuarially based, but those for CalSTRS are set by statute and have
been below the level required to amortize the system's unfunded
liability for some time. CalSTRS reported a funded ratio of 67.2% for
the fiscal year ended June 30, 2013. Fitch estimates the funded ratio to
be a low 63.7% based on a more conservative 7% rate of return
assumption. CalSTRS contribution rates are expected to rise
significantly over the coming years as the state addresses the system's
unfunded liabilities. However, due to the district's low carrying costs,
contribution increases are not expected to pressure district's finances.
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, and Zillow.
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:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
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