TMCnet News

Fitch Rates Campbell UHSD, CA's GOs 'AA+'; Outlook Stable
[September 17, 2014]

Fitch Rates Campbell UHSD, CA's GOs 'AA+'; Outlook Stable


SAN FRANCISCO --(Business Wire)--

Fitch Ratings has assigned an 'AA+' rating to Campbell Union High School District, California's general obligation bonds (GOs), as noted below:

--$35 million GO refunding bonds series 2014.

The bonds will sell via negotiated sale on or about Oct. 7. Proceeds will be used to refund outstanding GOs for net present value savings.

In addition, Fitch affirms the following ratings at 'AA+':

--$111.3 million outstanding GOs.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The 'AA+' rating reflects the district's strong financial position, with a solid financial cushion, prudent management practices, and several years of mostly surplus audited operations. Management anticipates a degree of fund balance spend-down in future years on one-time purposes, though Fitch expects the district's financial cushion to remain satisfactory for the rating category.

RELATIVELY DIVERSE REVENUE BASE: The district benefits from property tax revenues in excess of the state-guaranteed minimum, revenues from a recently renewed parcel tax, and lease revenues, all of which have remained stable throughout the economic downturn.

STRONG LOCAL ECONOMY: The local economy benefits from solid long-term fundamentals, such as high income and educational attainment levels, its central position within the large and diverse San Francisco Bay Area employment market, and a diverse and mature tax base that was resilient through most of the recession.

ADEQUATE DEBT PROFILE: The district's debt profile is weighed down by slow principal amortization and participation in the poorly funded CalSTRS pension system, as is the case for all school districts in the state. These weaknesses are mitigated by a moderate debt burden, and limited capital needs with no planned debt issuances.

GOOD MANAGEMENT PRACTICES: Labor contracts include automatic wage reduction triggers, management has successfully obtained surplus revenue streams from site leasing and a recent parcel tax extension, and the district is subject to strong financial reporting and distress procedures.

RATING SENSITIVITIES

STRUCTURAL BALANCE: Reliance on non-recurring sources to fund ongoing operations, to more than a moderate extent or for an extended period, would likely result in a negative rating action.

CREDIT PROFILE

The district serves a population of 223,000 in western Santa Clara County, including portions of the cities of Campbell, Santa Clara, Saratoga, Monte Sereno, Los Gatos, and San Jose. Campbell is a somewhat affluent bedroom community to San Jose and the San Francisco Peninsula, and San Jose represents a large employment and residential market with outsized concentration in the economically cyclical high-tech industry.

A STRONG, STABLE LOCAL ECONOMY

The district's local economy exhibits strength, maturity, and resilience. Income levels are well above average, poverty rates are low, and the population has been relatively stable, reflecting the degree to which the district area is built out. Student attendance has fallen modestly through the years, however, due to adverse demographic trends which are now beginning to shift towards growth. The historically negative trend did not impact most of the district's revenues which, atypically for a California district, are based primarily on assessed valuation (AV) levels and not student enrollment. As a result, declining enrollment can improve the district's financial position through lower expenditure requirements. Conversely, recent growth trends could generate moderate expenditure pressures without offsetting revenues that nonetheless seem manageable given the district's strong financial operations.

The well-diversified tax base proved resilient during the housing-led recession, falling just 2.4% peak to trough from fiscal years 2010-2012. The tax base subsequently has grown to a new peak, with fiscal 2015 AV up a robust 21% from the trough in fiscal 2012. Year-over-year home price gains and some in-fill development bode well for further growth over the short term.



STRONG FINANCIAL POSITION

The district's financial position is strong, as exhibited by solid fund balances, a diverse stream of revenue sources not typically available to most school districts, and good expenditure flexibility.


Audited fiscal 2013 general fund operations produced a $1.9 million surplus, raising the total and unrestricted fund balances to strong levels of $20.2 million (29.6% of expenditures and transfers out) and $17.6 million (25.9%), respectively. Estimated operating results for fiscal 2014 show a manageable $1.2 million operating deficit, lowering the total and unrestricted balances to still strong levels. The adopted budget for fiscal 2015 includes a manageable $1.3 million operating deficit, and multi-year projections point to similar-sized deficits through fiscal 2017. If actual operations performed as forecasted, the district would still enjoy sound general fund reserve levels at the end of the forecast period.

The district's financial cushion is supplemented by roughly $8 million of capital reserves that are located outside of the audited general fund balance. The capital reserve is board-designated to be allocated to the re-opening of an un-used high school.

Expenditure flexibility for the district is good overall given relatively low class sizes, capacity to implement a limited number of furlough days based on current paid teacher days, and wage reduction trigger language contained within labor contracts.

Some use of reserves for operations has been signaled by management for some time, as the district's unreserved general fund balance grew from 6.2% of spending in fiscal 2008 to 25% in fiscal 2010. The district's 'AA+' rating reflects Fitch's expectation that future fund balance drawdowns will be measured and used primarily for one-time purposes, ultimately leaving a satisfactory financial cushion for the rating level. However, if operations rely on non-recurring sources to more than a moderate extent, Fitch will likely take negative rating action.

DIVERSE, GROWING REVENUE BASE

The district benefits from three revenue streams not available to most California school districts. The district's largest supplemental revenue source is its voter-approved parcel tax. The district has benefited from a parcel tax since at least 2004, and the current one was renewed in November 2013 for an eight-year period. The tax is fixed per parcel with no inflation adjustment and generates $4.8 million annually. The district has a solid history of voter support for the tax, with the November ballot measure supported by an impressive 77% of voters.

Second, the district's wealthy and diverse tax base generates more local property taxes for the district than what the state would guarantee, causing it to be a 'community supported district'. These surplus revenues are retained by the district and add $3.8 million annually, though the district has tended to fall in and out of community supported district status over the years due to fluctuating state funding, enrollment, and AV.

The district's smallest supplemental revenue source consists of lease revenues for an unused high school site. This source generates roughly $2 million annually and must be used for capital purposes.

ADEQUATE DEBT PROFILE

The debt burden is moderate, with net debt equal to $4,810 per capita, or 2.9% of AV. However, principal amortization is slow, with just 16% and 38% of debt retired over five and 10 years, respectively. Capital needs currently are limited and the district has no planned debt issuances. However, the district has begun a capital needs assessment, which likely will identify new capital programs that could be funded as early as fiscal 2016.

Carrying costs (debt, other post-employment benefits, and pension costs as a percentage of non-capital total governmental spending) are moderate at 19%, but may rise significantly due to CalSTRS pension contribution rate hikes in future years. The district participates in the poorly funded CalSTRS pension system, as do all districts in the state. As part of its fiscal 2015 budget, the state initiated a seven-year program of pension contribution rate hikes that is structured to fully fund the system's unfunded liability over a 32 year period. The rate hike, if enacted as currently scheduled, would substantially increase the district's contribution rates to 19.1% of wages from 8.25%. The district's audited CalSTRS expenditures in fiscal 2013 equaled 3.6% of general fund expenditures and transfers out. If the district had hypothetically paid at the full phase-in contribution rate of 19.1%, the cost would have increased to 8.4%.

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

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=875174

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.


[ Back To TMCnet.com's Homepage ]