Fitch Affirms Fort Bragg USD, CA's GO Bonds at 'AA-'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings takes the following action on Fort Bragg Unified School District, CA (the district):

--$5.1 million unlimited tax general obligation (GO) bonds series 2003 affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

LIMITED ECONOMY: The district is geographically isolated and the area's economy is limited. Most economic indicators are below state and national averages.

SOUND FINANCIAL POSITION: The district has maintained healthy reserves despite recent revenue declines stemming from cuts in state per-pupil funding and reduced enrollment. carrying costs for long-term obligations are affordable and capital needs are limited.

STRUCTURAL CHALLENGES: The district faces a projected operating deficit in 2013 and management hopes to restore structural balance in 2014 through a combination of expenditure reductions and state revenue increases. Fitch believes continued enrollment declines will remain a budget pressure.

REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of Proposition 30 by California voters (increasing income and sales taxes temporarily to fund education) removes the threat of mid-year funding cuts for the district. In addition, improved state finances appear likely to boost school funding in fiscal 2014 and help restore revenues that were deferred during the recent recession.

RATING SENSITIVITIES

ONGOING DEFICITS: An inability to restore structural balance, resulting in operating deficits beyond fiscal 2013, would increase downward pressure on the rating.

CREDIT PROFILE

The district encompasses approximately 450 square miles in and around the city of Fort Bragg located on the north coast of California in Mendocino County, approximately 165 miles north of San Francisco. The district serves approximately 1,800 K-12 students.

LIMITED ECONOMY WITH CONTINUED WEAKNESS

The district is isolated from major population centers and continues to face long-term economic challenges following the closure of the local Georgia-Pacific lumber mill in 2002, and the related decline of the regional forest products industry. Tourism has provided some opportunities for economic growth, but population and employment levels have been stagnant in recent years.

Countywide unemployment rates have generally tracked statewide averages and, at 10.0% for 2012, unemployment was well above the national rate of 8.1%. Year-over-year employment growth for the county was positive in the first half of 2012 followed by declines during the second half of the year, indicative of continuing employment challenges. District income and wealth indicators are weak at 65% to 85% of state and national averages.

Taxable assessed valuation (TAV) was relatively unaffected by the national housing boom and subsequent declines have been muted. TAV dropped by 4.2% between 2010 and 2012 while the local housing market continues to struggle. December 2012 home values reported by Zillow showed a 3.4% year-over-year decline as compared to a 9.3% increase for the state as a whole. Tax base concentration is minimal as the top 10 taxpayers account for a low 7% of TAV.

SOUND FINANCIAL POSITION; LONG-TERM CHALLENGES

The district finished fiscal 2011 with an operating deficit equal to 1.7% of general fund spending and completed fiscal 2012 with a small operating surplus. Management had previously projected shortfalls in both years due to declining revenues. Staff attrition contributed to the district's better than expected performance, and unrestricted fund balances remained healthy at 15.8% of general fund spending ($2.8 million) at the end of 2012.

Projected deficits for fiscals 2013 and 2014 would reduce unrestricted fund balances to a still adequate 9.6% of general fund spending, but do not incorporate potential expenditure reductions or likely funding increases in the latter year. Fitch expects district operations to stabilize by fiscal 2014 as management continues to adjust spending levels and state funding improves.

Enrollment declines have been a contributing factor to the district's recent structural imbalance and present a long-term challenge for management. A majority of the district's revenues are apportioned on a per-pupil basis, resulting in ongoing revenue losses as student populations decline.

REDUCED RISKS FROM STATE DISTRESS

The district's efforts to restore structural balance will be aided by recent improvements in state funding prospects. The passage of Proposition 30 by California voters in November 2012 removes the threat of new cuts in the current fiscal year, and increased funding levels under Proposition 98 appear likely for fiscal 2014 and beyond. Fitch believes district finances will continue to be challenged despite these improvements, but risks related to the state's finances appear greatly reduced as compared to one year ago.

MODERATE DEBT LEVELS; SLOW AMORTIZATION

Overall debt levels for the district are moderate at 3.9% of TAV and $4,294 per capita. Amortization is very slow due to the district's past issuance of 40-year capital appreciation bonds. Approximately 22% of outstanding principal and interest accreted through maturity will be repaid over the next 10 years. Capital needs are expected to be minimal following completion of current modernization projects, somewhat offsetting concerns about the slow amortization of the district's debt.

The district participates in two state-sponsored employee pension plans and is likely to 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. Carrying costs for debt service and retirement benefits are affordable at 12.4% of non-capital governmental spending in 2012.

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 and Zillow.com.

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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