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Fitch Affirms Livingston Union School District, CA ULTGOs at 'AA-'; Outlook StableFitch Ratings has affirmed the following Livingston Union School District, CA's (News - Alert) (the district) unlimited tax general obligation (ULTGO) bonds: --$4.1 million (Election of 2005) series A at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited ad valorem tax on all taxable property within the district. KEY RATING DRIVERS SOUND FINANCIAL PROFILE: The district benefits from healthy general fund balances (although eroded in recent years), internal borrowable resources, and somewhat flexible labor contracts. SOCIOECONOMIC CONSTRAINTS: The district's financial strength and low debt burden are important offsets to the below-average socioeconomic characteristics of this primarily agricultural community. REBOUNDING TAX BASE: The tax base has more than recovered from its recessionary losses and continues to be dominated by two long-term agricultural firms that are making local infrastructure investments. LOW DEBT BURDEN: The district's debt burden is low and its annual carrying costs are manageable. RATING SENSITIVITIES SOUND FINANCIALS OFFSET WEAK SOCIOECONOMICS: The district's strong general fund balances and low debt burden offset its weak socioeconomic profile. The Stable Outlook reflects Fitch's expectation that material general fund balance declines and/or debt burden increases are unlikely over the coming review cycle. CREDIT PROFILE The 93 square mile district is located in northern Merced County, approximately 110 miles southeast of San Francisco, and includes the city of Livingston and adjacent unincorporated areas of the county. It operates one child development center, three elementary schools, and one middle school, with total enrollment of about 2,600 students. REDUCED BUT STILL HEALTHY RESERVES The district ended fiscal 2014 with a sizable unrestricted general fund balance of $6.2 million or 30.8% of spending. While large, this amount represents a significant erosion since fiscal 2009 when the district ended with an undesignated/unreserved general fund balance of $12.3 million or 56.6% of spending. During fiscal years 2010-2013, the district generated substantial net operating deficits after transfers due to state funding cutbacks and continuation of previous program levels. The district returned to structural balance in fiscal 2014 with a net operating surplus after transfers of $613,000. The improvement was due to a combination of operational cutbacks and increased funding through the state's local control funding formula (LCFF). The district's high percentage of students who are English language learners, low income, or in foster care (90%) is resulting in significant funding growth; this trend is expected to continue. Given that expectation, the district is projecting balanced general fund operations through fiscal 2017. CONSIDERABLE FINANCIAL FLEXIBILITY The district is heavily dependent on state funding for operations (>85%) due to its student demographics. In the event of an unexpected revenue downturn, the district would be able to reduce its expenditures on non-core supplemental services being funded by LCFF for its targeted students. Such supplemental services include enrichment programs, instructional coaches and support staff, summer programs, and professional development activities. The district has a particularly strong general fund policy, requiring a reserve for economic uncertainty of 17%-20% in the unassigned general fund balance. The policy target, which the district consistently exceeds, comfortably exceeds the state-mandated minimum 3% general fund balance. In addition to its strong general fund balances, the district also has approximately $8.1 millio in other reserves that could be borrowed for general fund operations, providing an additional layer of flexibility. On the expenditure side, the district's labor agreements are typically flexible with regard to class sizes, salary reopeners, furloughs, layoffs, and any requirement to consider regional compensation. However, Fitch notes that the district's labor negotiations can be protracted and that state mediation has been scheduled for the fiscal 2015 contract negotiations with certificated staff. SOCIOECONOMIC CONSTRAINTS District wealth levels are well below state and national averages. Also, county educational attainment levels are weak with only 54% of the population graduating from high school and 8.7% receiving a bachelor's degree. The county's high 12.3% unemployment rate in November 2014 was down from 13.3% a year prior, but continues to perform very poorly relative to the state and national unemployment rates of 7.1% and 5.5%, respectively. On a positive note, most of the county's employment sectors are expanding, increasing county employment opportunities in excess of its labor force growth. REBOUNDING TAX BASE The district's tax and employment base is concentrated heavily in one winemaker (E. & J. Gallo Winery) and one poultry producer (Foster Poultry Farms), which have provided stability historically but also create vulnerability. Both firms have demonstrated their commitment to the area through significant infrastructure investments, as evidenced by E. & J. Gallo Winery's $300 million multiyear expansion of its Livingston plant; the expansion started to appear on the property tax roll in fiscal 2014. After a cumulative taxable assessed valuation (TAV) decline of 11% from fiscal years 2009-2012, TAV has experienced a strong 37.7% rebound in fiscal years 2013-2015, with further growth expected. TAV is benefitting from both commercial expansion (new retail businesses), rebounding house prices, and expected new residential development. LOW DEBT BURDEN Updated overall debt data are unavailable, but the district's direct debt level is a very low $516 per capita or 0.6% of TAV. Management reports no plans to issue the $5 million in remaining bond authorization from the 2005 election. Principal amortization is rapid, with approximately 78% of the outstanding debt retiring in 10 years. The district participates in two state pension plans, the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS). The district regularly contributes 100% of the required pension contributions. CalPERS contributions are actuarial, but the CalSTRS contributions are statutory and have been below the actuarially required contribution for several years. This practice is contributing to the CalSTRS's low funding level and creating significant contribution increases for several years going forward. The district anticipates that its general fund will absorb these contribution cost increases. The district has been increasing its other post-employment benefit (OPEB) pay-as-you-go contributions, which has reduced the rate of growth in its $4.1 million unfunded actuarial accrued liability (based on its July 1, 2013 actuarial valuation). The district plans to continue contributing on a pay-as-you-go basis. The district's overall carrying costs for debt repayment, annually required pension system contributions, and OPEB pay-as-you-go costs were a manageable 13.8% of all governmental spending in fiscal 2014. 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, and 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=979930 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. |
