SAN FRANCISCO--()--Fitch Ratings affirms the 'AA-' rating on the following Santa Maria Joint Union High School District, California (the district) general obligation (GO) bonds:
--$1.68 million series A (election of 2000).
The Rating Outlook is Stable.
The bonds are secured by unlimited ad valorem property taxes on all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: The district maintains sound general fund reserves and strong cash balances despite recent draws on general fund balance and its dependency on volatile state funding.
PRUDENT FINANCIAL MANAGEMENT: The district has a history of strong financial management and retains satisfactory expenditure flexibility. Fitch expects the district to make necessary expenditure cuts if funding does not increase as proposed in the governor's budget.
LIMITED, STABLE ECONOMY: The agriculture-centered local economy is enjoying increased activity and a housing market recovery, evidenced by three years of rising assessed values (AV). Wealth levels are below average.
STRONG DEBT PROFILE: The district's overall debt burden is low, and the planned GO borrowing will not materially alter its strong debt profile. Pension and other post-employment benefits (OPEB) obligations are manageable, though expected to increase.
FAILURE TO MAINTAIN RESERVES: A failure to resolve the district's remaining structural budget imbalance or a significant decline in reserves from the current level would put downward pressure on the rating.
The district is located primarily in Santa Barbara County, and encompasses the cities of Santa Maria, Guadalupe, Los Alamos and Orcutt as well as unincorporated areas of Santa Barbara and San Louis Obispo counties. The district serves 7,100 students and a population of 143,000 within 553 square miles. Facilities consist of three high schools, a district support center and one continuation high school.
STATE FUNDING VULNERABILITIES, PRUDENT FINANCIAL MANAGEMENT
The district maintained sound reserve levels above 10% of spending throughout the recession, while its main source of revenue, state funding, declined significantly. The district relied on increased federal funding, categorical flexibility, limited layoffs, attrition, and moderate use of reserves to balance budgets in recent years.
Fiscal 2012 produced a $1.2 million net operating deficit after transfers, and according to the fiscal 2013 first interim report, the district will end the year with a similar structural deficit. Management expects the resulting ending general fund balance to remain above 10%, despite the draw on reserves.
The district's liquidity position has historically been very good; however, continued state funding deferrals may lead to short-term cash flow borrowing in fiscal 2014.
The district has the flexibility to increase class sizes and reduce the number of school and/or teacher days, if required. 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 recession. Fitch expects the district's financial conservatism, commitment to maintaining satisfactory reserve levels, and remaining expenditure flexibility to result in continued strong financial position.
LIMITED, STABLE ECONOMY
Santa Maria is a bedroom community serving nearby local labor markets and employers such as Vandenberg Air Force Base. The city has long been associated with agriculture, and is part of Santa Barbara Wine Country, but in recent years its economy has diversified. The city now has a large petroleum industry presence, as well as aerospace, manufacturing and technology sectors. The local economy has continued to attract new businesses and investments.
AV declined modestly in 2009 and 2010, but has since recovered. Fiscal 2013 AV is 1% above its pre-recession peak.
The city's unemployment rate has consistently been above the state level, most recently at 12% in December 2012. Another indicator of the weak local economy is the district's low median household income, which is 12.5% below California average.
The district experienced a slight decline in student enrolment in recent years despite strong population growth over the last decade. However, enrolment is now projected to be stable and may go up in the future based upon increased student numbers at the feeder district.
LOW DEBT LEVELS
The district expects to issue GO bonds in the current fiscal year 2013 which will meet all major capital needs. The district's overall debt level is still low at $1,450 per capita (1.8% of AV), including the planned debt issuance. Amortization of direct debt is moderate with 61% scheduled for retirement within 10 years.
Total fiscal 2013 debt service, pension and other post-employment benefit carrying costs is equivalent to an affordable 12% of total governmental funds spending, less capital projects. Though currently affordable, pension costs are expected to rise.
The district participates in the poorly funded CalSTRS pension system for teachers, as do all schools in the state. CalSTRS contribution rates are set by statute and they have not been increased to reflect the weak investment return environment over the past several years. The system's Fitch-adjusted (assumes 7% investment return) funded ratio has fallen to a low 65.7%, as a result, and future contribution rates likely will need to rise substantially from current levels. It remains undecided which stakeholders would face increased contribution rates and how such increases would be implemented.
The district's unfunded OPEB liabilities are moderate at $12.5 million, or 0.1% of market value, though recent changes in health care offerings should limit the growth in health care spending and reduce the liability somewhat.
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, 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