Fitch Affirms Taft City SD, California's GOs at 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following Taft City School District, California's (the district) general obligation bonds (GOs) at 'A+':

--$1.3 million election of 2001 GOs series 2001A.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SATISFACTORY FINANCIAL OPERATIONS: General fund operations have produced three consecutive years of balanced-to-surplus operations, the financial cushion is currently sound, expenditure flexibility is good, and liquidity is ample despite state funding deferrals.

FINANCIAL VULNERABILITIES REMAIN: Financial operations are exposed to a challenged state funding environment in spite of recent improvements. Also, CalSTRS costs likely will rise in the near term, and policymakers will have to implement significant expenditure reductions to close forecasted out-year deficits.

WEAK ECONOMY: The local economy and tax base is highly concentrated in the oil and gas sector, and also is characterized by weak income and poverty levels and high regional unemployment.

ADEQUATE DEBT PROFILE: The district's debt profile is weighed by slow amortization, high other-post employment benefit (OPEB) costs and, like all California schools, participation in the poorly funded CalSTRS pension plan. However, the debt burden is moderate, and capital needs are manageable.

GOOD MANAGEMENT PRACTICES: Management prudently has implemented significant expenditure reductions to maintain a sound financial cushion, and management's fund balance target level exceeds the state minimum. Like all California schools, the district is subject to strong financial reporting, forecasting, and oversight provisions.

RATING SENSITIVITY

A material deterioration in the district's financial profile due to cost pressures could negatively pressure the rating; Fitch does not anticipate such an occurrence over the review cycle. Upward movement in the rating is unlikely given the weak and concentrated local economy.

CREDIT PROFILE

The district is located 40 miles southwest of Bakersfield in Kern County and serves a population of 19,400 in Taft City. The local economy is dominated by oil and gas enterprises, which make up over three quarters of the district's highly concentrated tax base.

WEAK LOCAL ECONOMY

Economic indicators are weak overall. October 2012 unemployment registered a high 12.2%, well above the state and national rates of 9.8% and 7.5%, respectively. However, employment levels have improved in each of the past three years. Median household income levels are low and poverty rates are high.

The district's assessed value (AV) levels have generally fared well despite the weak local economy due to commodity price gains in recent years. AV fell a substantial 15.7% in fiscal 2010, but recovered to record levels the next year, and increased moderately in both fiscal years 2012 and 2013. Despite this strong performance, Fitch expects AV levels to be susceptible to the volatility of the energy sector moving forward.

Fitch's concerns about AV volatility are mitigated by the state's Proposition 98 funding formula. This formula mandates a minimum per pupil level of district funding. To the extent that local tax base contraction results in lost local property tax revenues, the state is obligated to replace those revenues up to the minimum funding level. However, state revenues have been subject to significant deferrals in recent years that the state has only recently begun to pay back.

GOOD FINANCIAL PERFORMANCE TO DATE

The district has implemented significant expenditure reductions in recent years, resulting in the maintenance and growth of its financial cushion. This improvement has occurred in spite of the district's exposure to the declining and uncertain state funding environment. Fiscal 2012 general fund operations were nearly breakeven, with large ending total and unrestricted fund balances of $7.5 million (41% of expenditures and transfers out) and $7 million (38%), respectively. The fund balances include about $3.3 million in an OPEB reserve.

State revenues are subject to significant deferrals, but the district's large financial cushion provides it with ample liquidity and no need to date to issue cash flow notes.

FINANCIAL VULNERABILITIES REMAIN

The district will have to continue managing through a period of financial vulnerability. Management anticipates a $500,000 general fund drawdown in fiscal 2013 due to declining federal revenues and the end of a multi-year state capital reimbursement. The drawdown would lower the unrestricted general fund balance to a still sound $3 million (16.4%), excluding the district's OPEB reserve.

In future years the district will also have to contend with likely increasing CalSTRS pension contributions, a large OPEB liability, and pent-up salary pressures after years of wage freezes. Fitch believes the district has a moderate amount of remaining expenditure flexibility to offset these cost pressures, if necessary.

Out-year projections show the district's operating deficit widening to $1.2 million-$1.5 million through fiscal 2015, although the district typically budgets conservatively and historically has out-performed its projections. Fitch expects management will sufficiently narrow its projected deficits to maintain a sound financial profile through expenditure reductions and anticipated revenue enhancements (based on improving state revenue projections and the governor's budget proposal to increase K-12 funding beginning in fiscal 2014).

ADEQUATE DEBT PROFILE

The district's debt profile is weighed by slow amortization resulting from the district's significant use of capital appreciation bonds, as well as participation in poorly funded CalSTRS and a large OPEB liability. These weaknesses are somewhat mitigated by a manageable capital plan with moderate GO issuances planned through fiscal 2017, and an affordable debt burden.

SOUND MANAGEMENT PRACTICES

The financial management team is tenured and has exhibited a willingness and ability to reduce spending as necessary to maintain an adequate financial cushion. Like all California schools, the district is required to publish a large amount of forward-looking financial data multiple times per year. The district does not have a formal minimum fund balance policy, but management's fund balance target of at least 5% of spending exceeds the state-required 3%. The existence of an OPEB reserve provides an additional level of cushion and a significant source of liquidity.

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.

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

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Friday
Analyst
+1-212-908-0384
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Friday
Analyst
+1-212-908-0384
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com