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TMCNet:  Fitch Affirms Capistrano USD SFID No. 1, CA's GOs at 'AA-'; Outlook Revised to Stable

[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.

SECURITY

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 reserves.

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 retirement fund.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 2014.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=851714

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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