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Fitch Affirms Mojave USD, CA's COPs at 'A' & School Facilities Improvement District #1 GOs at 'A+'Fitch Ratings has affirmed the following ratings for Mojave Unified School District, CA (News - Alert) (the district): --$5.9 million certificates of participation (COPs) at 'A'; --Implied general obligation (GO) rating at 'A+'. In addition, Fitch affirms the following Mojave Unified School Facilities Improvement District #1 (SFID #1) rating: --$30.2 million GO bonds at 'A+'. The Rating Outlook is Stable. SECURITY Payment of principal and interest for the COPs is secured solely from lease payments by the district to the Public Property Financing Corporation of California, subject to annual appropriation. Bondholders have a leasehold security interest in the California City Middle School. The GO bonds are secured by an unlimited ad valorem property tax of the SFID. KEY RATING DRIVERS RECENT FINANCIAL WEAKNESS, IMPROVEMENT ANTICIPATED: After several years of structural imbalance, positive operating results are expected for fiscal 2016 based on favorable revenue and enrollment projections. CONCENTRATED LOCAL ECONOMY: The limited economy is heavily dependent on the wind, prison, and military industries; socioeconomic indicators are below average. The housing market has begun to improve, augmenting the local tax base, following several years of recessionary declines. MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are moderate. Carrying costs remain manageable but continue to grow given outstanding capital appreciation bonds (CABs) and the poorly funded state pension plans in which the district participates. SFID ON (News - Alert) PAR WITH DISTRICT GO RATING: The GO rating for SFID No. 1 is on parity with the district's implied ULTGO rating due to its size (more than one-third of the total district), its recent growth trends, and its limited functions as a financing vehicle. APPROPRIATION RISK: The 'A' rating on the COPs reflects the district's general creditworthiness, the inherent appropriation risk, and the essentiality of the leased asset under the lien. RATING SENSITIVITIES FINANCIAL AND ECONOMIC PRESSURES: Consistently healthy reserve levels have historically offset other credit weaknesses, including structural budgetary imbalance. Further draws on reserves beyond the current fiscal year would indicate an inability or unwillingness to balance operations and would likely result in a negative rating action. CREDIT PROFILE The district serves about 2,700 students in eastern Kern County (Fitch implied GO rating 'A+'), which is about 110 miles northeast of Los Angeles County. SFID #1 encompasses about a third of the district by assessed value (AV). ADEQUATE RESERVES, DESPITE DEFICITS The district's financial profile is expected to stabilize in fiscal 2016 due to an improving state funding picture and enrollment gains. This anticipated improvement follows a period of weak enrollment and revenue performance, during which the district drew on reserves without reducing expenditures. Despite five consecutive annual draws, reserve levels remain satisfactory, with the fiscal 2014 unrestricted general fund balance at $3.7 million or 14% of general fund spending. This total is down from a high 49.4% of spending in fiscal 2010. The district is benefitting from the implementation of the Local Control Funding Formula, which results in the re-distribution of Proposition 98 revenues, with a higher proportion of K-12 state funding being directed to districts with high concentrations of English learners, the economically disadvantaged, and foster youths (together referred to as targeted students). These funding gains are being offset to some extent by expenditure pressures related to wages, service restorations, and benefit cost escalation. As a result, fiscal 2015 is currently expected to close with a draw of approximately $750,000 from unrestricted fund balance, decreasing unrestricted reserves to a still-adequate 11% of projected fiscal 2015 expenditures. Management reports that this figure excludes opportunities for additional personnel savings through year end. The district's unduplicated count of targeted students is high at 80%, which is expected to result in future revenue growth. As a result, the district projects operating surpluses (after transfers) for fiscals 2016 and 2017 and addition to reserves. Fitch considers the restoration of balanced operations and stabilization of fund balances essential to maintenance of the district's current rating. IMPROVING ENROLLMENT PICTURE Following several years of declining enrollment, management reports that enrollment stabilized in fiscal 2013 and recorded modest growth the past two years. Maintaining enrollment is important, as state operational funding is based on average daily attendance. District enrollment has historically been vulnerable to changes in top employers, with declines linked to past employment contraction. With recent economic improvement, enrollment increased approximately 80 students in the past year. A prison in SFID #1 lost its sole contract in fiscal 2010, driving a reported 8.2% loss in enrollment through fiscal 2012. The prison has recently resumed full operations under state control, potentially improving enrollment prospects. Another top employer, Edwards Air Force base, has stabilized following federal budgetary concerns. Management reports that 5%-10% of the district residents work at Edwards Air Force Base. CONCENTRATED ECONOMY; BELOW AVERAGE SOCIOECONOMICS The local economy is concentrated in the alternative energy, military, and mining sectors. Significant expansion in wind and solar energy investment has spurred significant tax base growth in recent years, following a steep recessionary decline. SFID #1's AV grew by a strong 35% in fiscal 2014 to $1.19 billion, nearly recovering recessionary losses. Total district AV, on the other hand, saw a 50% increase in fiscal 2014 and another 5.4% in fiscal 2015 due to a large influx of wind farms into SFID #2. Fiscal 2015 district AV totals $4.24 billion. Recent approval for additional solar installations in SFID #1 may lead to further AV gains. Socioeconomics are below average. Median household income in 2014 was 71.3% and 82.1% of state and national averages, respectively. Kern County unemployment has remained stubbornly high at 11% in February 2015, down from 12.3% a year ago but still significantly higher than state (6.8) and national (5.8) averages. Operations at the state prison and the addition of jobs to support gold mining operations are expected to support further employment growth in the near term. MANAGEABLE LONG-TERM LIABILITIES Carrying costs for debt service, pension and other post-employment benefit (OPEB) costs are elevated and are expected to climb further given increasing retiree benefit costs as well as outstanding CAB debt service. Total carrying costs for fiscal 2014, including debt service, pension ARC, and OPEB costs, equal 24.4% of governmental fund spending. Overall SFID #1 debt levels are a moderate 2.6% of fiscal 2014 AV. Overall district debt levels are lower at 1.3% of fiscal 2015 AV and $2,881 per capita. Amortization of outstanding SFID debt is below average, with 42% of principal retired in 10 years, while amortization of total district debt is above average, with 64% of principal retired in 10 years. The CABs represent 12% of principal outstanding. District management reports no significant future capital needs. The district participates in the California Teachers Retirement System (CalSTRS) and the California Public Employees Retirement System (CalPERS), which report funded ratios of 67.2% and 83.1%, respectively. Fitch estimates the funded ratios of both CalSTRS and CalPERS to be somewhat lower, at 63.7% and 78.8%, respectively, assuming a more conservative 7% investment rate of return. 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. 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 16.5% of wages from 8.25% currently. 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. 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=983447 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 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. |
