Fitch Affirms Cottonwood Union School District, CA's GO Bonds at 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A+' rating on the following Cottonwood Union School District (the district), CA's general obligation (GO) bonds.

--$1.5 million GO bonds, election of 2003, series A.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOUND OPERATING PERFORMANCE: Significant expenditure reductions have preserved positive financial margins despite sharp revenue declines over the past few years. An improved funding outlook and continued constraint in spending are projected to keep the budget in balance in fiscal 2014.

HEALTHY RESERVES: The district's unrestricted balance has increased modestly over the past several years with a fiscal 2013 ending balance of $2.7 million or a healthy 40.7% of spending.

LIMITED ECONOMY: The local economy is somewhat limited with a concentration in agriculture and lumber. County unemployment rates remain high.

STABILIZING TAX BASE: The district's taxable assessed value (AV) increased modestly in fiscal 2014 after four consecutive years of moderate declines. While total AV remains well below its prerecession high, reported improvement in the local real estate market should support AV stability over the near term.

MANAGEABLE LONG-TERM LIABILITIES: The district's debt burden is expected to remain low with no additional debt plans. Positively, the district is implementing a plan to fully fund its other post-employment benefit (OPEB) plan over the next nine years.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district serves approximately 8,500 residents in a small portion of Anderson and unincorporated Shasta County. The district operates two elementary schools after closing a third site in fiscal 2013 for financial reasons. Management reports that the remaining two school sites have sufficient capacity for current student levels and potential modest future growth, if any.

Enrollment for the district continues to trend negatively as a result of competition from local charter schools and generally weak economic conditions. In fiscal 2013, the district's average daily attendance was 898, which is approximately 7.5% below the fiscal 2010 figure.

SOUND FINANCIAL PROFILE

The district maintains a sound financial profile with generally positive operating results, healthy reserves, and satisfactory liquidity levels. At the end of fiscal 2013, the district's unrestricted reserve was approximately $2.7 million or 40.7% of spending.

The district recorded positive operating margins annually since fiscal 2010, including a $653,000 operating surplus (10% of spending) in fiscal 2013. Financial performance has remained solid in large part due to management's demonstrated willingness and ability to cut spending to offset revenue declines from both falling enrollment and volatile state spending. For example, in fiscal 2013 the district closed one of its three school sites, reduced its workforce, scaled back transportation services, and eliminated school days. Audited expenditures in the year were 13.5% below fiscal 2012 levels.

Operations are expected to remain balanced in fiscal 2014 with management projecting a surplus of $132,000. While the district continues to deal with the gradual decline in enrollment, funding is projected to increase due to the general improvement in the state's finances, statewide passage of temporary tax increases (2012), and the state's adoption of the Local Control Funding Formula.

LIMITED ECONOMY; STABILIZING TAX BASE

The district's service area serves as a bedroom community for Redding, and the local economy is limited with a focus on agriculture, lumber, and tourism. Economic data on the unincorporated area is not available; however, economic indicators for Shasta County are somewhat weak. The unemployment rate dropped a significant 2.6% year over year, but remained elevated at 9.6% in October 2013. Wealth levels for the district are modestly below average with per capita and median household income at 91% and 95%, respectively, of the national average.

The district's tax base may be stabilizing after four consecutive years of moderate to modest declines. In fiscal 2014, total AV increased 2.2% as the residential real estate market reportedly improved.

MANAGEABLE LONG-TERM LIABILITIES

While information on overlapping debt is not available, the district's direct debt load stands at 0.4% of AV and is not expected to increase due to a lack of debt issuance plans. Direct debt amortizes at a rapid rate with 76% of principal retired within 10 years.

The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. Funding for CalSTRS is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. In addition, the district offers OPEB and had an unfunded OPEB liability of approximately $1 million. The district has begun implementing a plan to fully fund the OPEB liability over the next nine years, which Fitch views favorably.

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, 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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820158

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, +1 415-732-7572
Associate Director
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Scott Monroe, +1 415-732-5618
Director
or
Committee Chairperson
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, +1 415-732-7572
Associate Director
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Scott Monroe, +1 415-732-5618
Director
or
Committee Chairperson
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com