SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA+' rating on the following Novato Unified School District, CA (the district) general obligation (GO) bonds:
--$27.9 million Election of 2001, series 2005;
--$36.9 million Election of 2001, series 2006.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The district's financial profile reflects sound general fund balances, generally stable financial performance despite two years of deficit spending in fiscal years (FYs) 2012 and 2013, good general fund liquidity, and conservative budgeting practices.
IMPROVED STATE REVENUE PROSPECTS: The November 2012 approval of Proposition 30 by California voters (increasing income and sales taxes temporarily to fund education) removes the threat of midyear funding cuts for the district. In addition, improved state finances are boosting school funding in fiscal 2014 and will help restore revenues that were deferred during the recent downturn.
REVENUE DIVERSITY AND EXPENDITURE FLEXIBILITY: The district benefits from an above average level of local funding that includes a parcel tax and retains a moderate degree of expenditure flexibility. The district anticipates surplus general fund operations going forward.
MODERATE DEBT BURDEN; GROWING PENSION LIABILITIES: The district's overall debt burden is moderately high, with the prospect of additional GO debt being issued. Carrying costs are currently low but will likely increase due to rising debt repayments and pension contributions.
RESILIENT ECONOMY: The regional economy benefits from its participation in the broad and diverse San Francisco Bay Area economy and features above average wealth levels and a below average unemployment rate.
TAX BASE REBOUNDING: The district's diverse tax base contracted modestly during the recession, but has begun to rebound in fiscal 2014.
The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices, particularly with regard to its general fund balances. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The district is located in northern Marin County, approximately 30 miles north of San Francisco. The district serves approximately 70 square miles, including the city of Novato (84.5% of the district) and some unincorporated areas (15.5%). The district operates 15 schools with an estimated average daily attendance of 7,505.
The local economy benefits from its participation in the broad and diverse economy of the San Francisco Bay Area. The district's population is wealthy and highly educated, with per capita income levels and median household income at nearly 156% and 155%, respectively, of the national averages. In June 2013, the unemployment rates in Marin County and the city of Novato were 5.1% and 6% respectively, well below the national rate of 7.6%.
The district's tax base is primarily residential (82% of taxable assessed valuation [TAV]) and features a diverse level of ownership with the top 10 taxpayers comprising only 6.5% of TAV. Following a peak TAV of $10.4 billion in fiscal 2009, the tax base contracted by a cumulative 5.9% during fiscal years 2010-2013. This TAV decline has been reversed partially by a 3.5% rebound in fiscal 2014.
STRONG FINANCIAL PROFILE
Despite a net operating deficit after transfers of $1.3 million, the district ended fiscal 2012 with a strong unrestricted general fund balance of $13.1 million or 20% of spending. The net operating deficit was largely caused by the transfer of monies from the general fund back to the deferred maintenance fund, reversing a fiscal 2010 transfer which had provided categorical funding flexibility at a time when the district needed such flexibility to balance its general fund operations.
The district expects a further net operating deficit after transfers of $1.5 million in fiscal 2013 as a result of needing time to make staffing changes to accommodate the end of federal ARRA funding. Offering an early retirement incentive program, paid for by fiscal 2013 fund balance, has helped the district achieve the necessary adjustments. The district expects to end fiscal 2013 with a still strong unrestricted general fund budget of approximately $12.4 million or in excess of 17% of spending.
The district's budgeted net operating surplus after transfers of $1.2 million in fiscal 2014 has been consumed by a 3% employee remuneration increase for fiscal 2014 that was settled at the same time as the fiscal 2014 budget was being approved by the school board. The school board approved the budget with full information about the cost impact of the labor agreements which will be reflected in the September 2013 budget update. The district still projects that it will generate a general fund surplus in fiscal 2014 due to otherwise conservative budgeting, and its multiyear projections show continued positive operations, with resulting growth in general fund balances, through fiscal 2016.
REVENUE DIVERSITY AND EXPENDITURE FLEXIBILITY
The district's good financial position reflects both revenue and expenditure factors. The district's revenue base benefits from steadily rising student enrollment and an above average amount of local funding for a California school district. The district received $11.8 million or 18.4% of its total fiscal 2012 general fund revenues from local sources other than property taxes. In fiscal 2013, a parcel tax, which expires at the end of fiscal 2015, contributed $4.3 million, while donations generated a further $2.6 million. The district is planning to seek voter approval for parcel tax renewal in early 2014.
The district has taken several actions to reduce spending, including closing one school site, reducing staffing levels, and capping health and welfare benefits. The district retains a moderate amount of expenditure flexibility related to class sizes, number of school and paid teacher days, and program offerings. It is unlikely to need to use any of these given improved state education funding.
The passage of Proposition 30 by California voters in November 2012 removes the threat of additional cuts and increased funding levels under Proposition 98 appear likely for fiscal 2014 and beyond. In addition, the district is benefitting in FY 2014 from implementation of the state's new local control funding formula which provides $1.7 million in additional funding.
MODERATE DEBT PROFILE; GROWING PENSION LIABILITIES
Overall debt ratios are moderately high on a per capita basis ($4,164) and midrange as a percentage of TAV (2.5% in fiscal 2012). Outstanding principal amortizes at an average rate with approximately 58% retired within 10 years. The district is considering a GO bond ballot measure for either the November 2014 or 2015 elections to fund new facilities, existing facility upgrades, and technology. The district has not yet determined the size of such a bond issuance.
The district's annual carrying costs comprising debt repayment, required pension contributions, and other post-employment benefit (OPEB) pay-as-you-go costs represented a low 12.9% of its fiscal 2012 total governmental expenditures, less capital. The district's obligations to retirees are likely to pose an increasing burden due to participation in the poorly funded California State Teachers' Retirement System (CalSTRS). The district also participates in the California Public Employees' Retirement System (CalPERS). Contribution rates for CalPERS are actuarially based, but those for CalSTRS are set by statute and have been below the level required to amortize the system's unfunded liability for some time.
The CalSTRS system reported a somewhat weak funded ratio of 69.3% for fiscal 2012. Fitch estimates that funded ratio to be 65.7% based on its more conservative 7% rate of return assumption. Fitch expects school districts' CalSTRS contribution rates to rise over the coming years, perhaps significantly, if the state legislature begins to address the system's growing unfunded liabilities. CalPERS rates will also rise significantly but are a smaller portion of the district's total pension obligation.
The defined benefit healthcare plan administered by the district caps the district's contributions for eligible retirees at $200 per month until age 65. The retirees contribute the balance of the healthcare plan costs. The district's pay-as-you-go funding contributions in FYs 2009-2012 were larger than the actuarially required amounts. As a result of these two factors, the next OPEB actuarial study (due in September 2013) is expected to indicate the continuance of a manageable unfunded accrued actuarial liability (it was $0.8 million in FY 2010).
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, 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