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Fitch Affirms Lakeport USD, CA's GO Bonds at 'A+'; Outlook Revised to Stable
[November 12, 2014]

Fitch Affirms Lakeport USD, CA's GO Bonds at 'A+'; Outlook Revised to Stable


SAN FRANCISCO --(Business Wire)--

Fitch Ratings affirms the following Lakeport Unified School District, California's (the district) general obligation (GO) bonds:

--$2.6 million series 2002 GO bonds at 'A+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

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

KEY RATING DRIVERS

PROJECTED FINANCIAL IMPROVEMENT: The Outlook revision to Stable reflects the district's expected improvement in financial performance with projected operating surpluses from fiscal 2015-2017 as revenue gains from improved state funding and the local control funding formula (LCFF) outpace known expenses. Labor costs will be a key factor in determining how actual performance compares to budgetary expectations, although Fitch expects structurally balanced financial operations over the next couple of years.

REDUCED FUND BALANCE: The district's unrestricted fund balance declined significantly over the past three years as funds were used to address deferred maintenance needs and operating deficits. The unrestricted balance at the end of fiscal 2014 was an adequate 12.7% of spending.

ADDITIONAL DEBT EXPECTED: The district's low overall debt burden is expected to rise in the near term as the district issues up to $17 million in GO bonds that were recently approved by voters. Fitch does not expect the additional debt to affect the rating as overall debt levels are projected to be mid-range.

LIMITED ECONOMY: The local economy is limited with a still elevated unemployment rate and below-average income levels. The tax base is relatively stable despite modest declines in assessed value (AV) in fiscals 2014 and 2015.

RATING SENSITIVITIES:

CHANGES IN UNRESTRICTED BALANCE: Negative rating action is possible if the unrestricted general fund balance falls significantly below fiscal 2014 levels.

CREDIT PROFILE

Lakeport Unified School District serves about 1,450 students within 120 square miles in western Lake County including the Town of Lakeport and the western portion of Clear Lake. The district is approximately 120 miles north of San Francisco.

PROJECTED IMPROVEMENT IN FINANCIAL PERFORMANCE

The district is budgeting for surplus operations in fiscal 2015. The budgetary surplus of approximately $117,000 (0.9%) includes an expected 3.9% increase in operating revenues, which is largely driven by increased state funding, along with a 1.4% decrease in expenditures due primarily to less spending on deferred maintenance and the retirements of several long-term employees. However, Fitch notes that salary negotiations with labor groups are ongoing for fiscal 2015, the outcome of which may skew actual results to the negative compared to budgetary estimates.

Projected financial results for fiscals 2016 and 2017 show increasing surplus amounts that restore the district's unrestricted fund balance to sound levels. These projections assume continued improvement in state funding and no salary increases beyond what is currently negotiated. Significant changes in either of these areas could affect financial results and will be focal points of future reviews.

DECLINING AVERAGE DAILY ATTENDANCE

The district has a multiyear trend of decreasing average daily attendance (ADA). Fiscal 2014 ADA was 1,424, which is 8.7% below fiscal 2009 levels. While revenue levels are currently expected to increase for the district given the state's improved financial position and LFF, the decreasing number of students limits the amount of revenue growth. Management expects ADA levels to stabilize in fiscal 2015 due to increased enrollment thus far in the school year and changes made to the district's accounting for special education students.



REDUCED FINANCIAL RESERVE

The district's unrestricted fund balance declined significantly over the past several years. The cumulative $887,000 decline was largely due to spending on deferred maintenance, some of which is viewed as one-time in nature. These needs included technology upgrades, a bus purchase, and the renovation of a gym, among other projects. Management reports that the more significant and costly projects are now complete and additional draws on reserves for capital and deferred maintenance needs are not anticipated.


The district recorded a deficit of $589,000 (4.6% of spending) in fiscal 2014. At the end of fiscal 2014, the unrestricted balance amounted to $1.6 million or 12.7% of spending compared to $2.5 million (21.3%) in fiscal 2011.

SIGNIFICANT DEBT ISSUANCE EXPECTED

Voters approved $17 million in GO bond authorization for the district in the November elections with the proceeds dedicated to addressing technology and facility upgrades among other investments. District management expects to move forward with the projects in the near future.

The additional $17 million in GO debt will raise the district's overall debt levels to midrange (approximately 3.1% of AV) from low (1.6%). While the timing and structure of the debt is uncertain, Fitch does not expect the additional issuance to have a material impact on the rating.

MANAGEABLE PENSION AND OPEB LIABILITIES

The district participates in two statewide pension plans: CalPERS for classified staff and CalSTRS for teachers. Increased contribution rates for both plans have been announced, with the expected change for the district amounting to an additional cumulative increase of $84,000 (0.7% of fiscal 2013 spending) from fiscal 2015-2017. Fitch views the increase as manageable and notes that the additional expenditures are included in the district's financial projections.

The district offers other post-employment benefits (OPEB) and funds its liability on a pay-as-you-go basis. Total contributions in fiscal 2014 amounted to $71,000 or 0.5% of general fund spending. The unfunded actuarial accrued liability is $679,000 or a relatively low 0.1% of AV.

LIMITED ECONOMY; STABLE TAX BASE

Located about 120 miles north of San Francisco, the local economy is limited, and partly driven by tourism and recreation. The largest employers in Lakeport include school districts, the county, hospitals and resorts.

Median household income of the district is below average at 71% of the state level and 82% of the national level. The unemployment rate for Lake County is structurally high and remained an elevated 9.7% in July 2014.

The district's tax base is relatively stable. Fiscal 2015 AV decreased a modest 0.6% from fiscal 2014 levels but remained 4.3% above fiscal 2008 levels.

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.

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=921735

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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