SAN FRANCISCO--()--Fitch Ratings assigns a rating of 'AA' to the following Santa Clarita Community College District (the district) bonds:
--Approximately $65 million 2013 general obligation (GO) bonds.
The bonds are scheduled to price on Feb. 27, 2013 via negotiated sale. Proceeds will be used to advance refund outstanding GO debt for interest savings.
In addition, Fitch takes the following rating actions:
--$109.6 million outstanding GO bonds affirmed at 'AA';
--$20.4 million outstanding certificates of participation (COPs) affirmed at 'AA-'.
The Rating Outlook remains Negative.
The GO bonds are general obligations of the district, payable solely from the proceeds of ad valorem taxes, without limitation as to rate or amount.
The COPS are limited obligations secured by lease rental payments for the use of certain district properties, subject to abatement. They are additionally supported by the district's covenant to budget and appropriate lease payments.
KEY RATING DRIVERS
IMPROVED LONG-TERM PROSPECTS: The district's long-term financial prospects have improved following the November 2012 adoption of Proposition 30 and the elimination of threatened mid-year reductions in state funding. In addition, improvements in state revenues are likely to result in funding increases for fiscal 2014 after several years of steep cuts for California community colleges.
SHORTER-TERM CHALLENGES REMAIN: The district has budgeted for continued deficit spending in fiscal 2013 following a 2012 deficit that reduced fund balance by nearly one-third. In addition, unrestricted cash balances remain weak following several years of state cuts and revenue deferrals. The Negative Outlook reflects continued risks to district finances from past funding cuts despite improved long-term prospects.
STRONG ECONOMIC BASE: The district benefits from its access to and participation in the broad Los Angeles regional economy and appears to be on the path to recovery. District residents and households exhibit above-average wealth and incomes relative to the county, state, and nation.
AFFORDABLE DEBT; SLOW AMORTIZATION: Overlapping debt levels are moderate but amortization is slow due to the district's extensive use of long-dated capital appreciation bonds (CABs).
MAINTENANCE OF OPERATING BALANCE: Management's inability to maintain operating balance would increase downward pressure on the rating. Conversely, continuing improvements in revenues and fund balance would support a revision of the Outlook to Stable.
The district is located in northern Los Angeles County along Interstate 5, approximately 35 miles from downtown Los Angeles, and includes the city of Santa Clarita and adjacent unincorporated areas.
IMPROVED LONG-TERM PROSPECTS
The district's long-term financial prospects are much improved following recent voter actions and expected growth in state funding for fiscal 2014 and beyond. Proposition 30, which was approved by California voters in November 2012, increases state sales and income taxes on a temporary basis and removes the threat of mid-year cuts for fiscal 2013. In addition, state revenue growth appears likely to increase K-14 funding guarantees under Proposition 98, and the governor has included such higher funding levels in his proposed budget for fiscal 2014.
These developments represent a sharp turnaround in the district's financial prospects as compared to one year ago. A threatened mid-year cut of $4.6 million in fiscal 2013 if Proposition 30 had not passed was eliminated, and the potential of additional cuts for fiscal 2014 was replaced with proposed funding increases. These actions appear likely to improve the district's financial stability over the longer-term, and to support renewed enrollment growth following several years of declines.
SHORTER-TERM CHALLENGES REMAIN
The district's finances remain vulnerable following several years of funding reductions, despite improved long-term prospects. Unrestricted general fund revenues fell by 10.8% in fiscal 2012 and fund balance dropped by nearly one-third, to 11.6% of unrestricted revenues ($8.9 million). In addition, unrestricted cash and investments fell sharply following mid-year funding cuts, and were equivalent to a low 1.1% of operating expenses ($1.4 million) at the end of fiscal 2012. A conservatively projected deficit of $1.3 million for fiscal 2013, despite the passage of Proposition 30, would further reduce the district's financial flexibility. In response to these strains the district is now planning its first ever cash-flow borrowing for fiscal 2013, which is currently sized at $9 million (7% of 2012 operating expenses).
STRONG ECONOMIC BASE
The tax base of the district is largely residential and has withstood the recent housing crisis better than many outlying communities in southern California. After a long period of steady growth fueled by residential development, district taxable assessed valuation (TAV) fell by 8% between 2009 and 2013. Year-over-year home value increases of 4.5% through December 2012, as reported by Zillow, point to the likely reversal of this trend, as the residential real estate market continues to improve. Several large-scale residential developments underway or in the planning stages are also expected to boost the district's population and TAV over the next few years.
Wealth and income indicators for Santa Clarita are well above county, state, and national averages, while poverty levels are much lower. Unemployment rates have historically compared favorably to state and national averages and peaked at a relatively low 7.8% in 2010. As of December 2012 the unemployment rate for Santa Clarita was 6.2%, as compared to 9.7% and 7.6%, respectively, for the state and nation. Employment growth has been inconsistent over the past year despite declining unemployment, with year-over-year employment declines in six of the past 12 months.
MANAGEABLE DEBT LEVELS; SLOW AMORTIZATION
Overlapping debt levels for the district are moderate at 3.2% of TAV, but amortization is very slow due to the district's extensive use of long-dated capital appreciation bonds on prior GO issuances. Approximately 21% of outstanding principal and principal accreted through maturity is scheduled for repayment within the next 10 years. The district will retain $45 million in GO authorization following this transaction but has no immediate plans for further issuance.
The district is a participant in two state-sponsored defined benefit pension plans and will likely face ongoing increases in contribution rates to address current low funding levels. Funding for CalSTRS is a particular concern, as current contribution rates are substantially below the level required to amortize existing obligations. OPEB costs are funded on a pay-as-you-go-basis, resulting in a growing liability for these commitments, but the district's unfunded liability was relatively low at $6.7 million as of 2012. Carrying costs for long-term obligations, including debt service and contributions towards retirement benefits, were affordable at 12.6% of 2012 operating expenditures.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 Global Insight, Zillow.com, 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
U.S. Local Government Tax-Supported Rating Criteria