Fitch Affirms Hueneme SD, CA's GO Bonds at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following Hueneme School District, California's general obligation (GO) bonds at 'AA-':

--$1 million Election of 1997, series B;

--$1.1 million Election of 2000, series B;

--$15.9 million Election of 2004, series A & B.

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

SOUND FINANCIAL PROFILE; FUNDING BOOST: The district continues to maintain structural balance and a sound general fund reserve level. The district is poised to receive increases in state revenues pursuant to the state's new local control funding formula.

LIMITED LOCAL ECONOMY: The local economy is somewhat limited with its focus on military and agricultural concerns, and exhibits below average wealth. The housing market is recovering after showing substantial weakness.

AFFORDABLE LONG TERM LIABILITIES: Overall debt ratios are low to moderate. Despite expected debt issuance in the medium term and participation in poorly funded state pension plans, debt service and pension carrying costs are expected to continue to be affordable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's conservative financial management practices achieving structural balance and maintaining sound fund balance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in Ventura County in coastal southern California north of Los Angeles County. It covers approximately eight square miles, including a portion of the city of Port Hueneme, a limited portion of Oxnard, and adjacent unincorporated area. The district provides elementary school education to over 8,000 students.

LIMITED, RECOVERING LOCAL ECONOMY

The local economy centers on agriculture, a deep water port, and two naval bases.

The district's median household income is around state and national averages, but its per capita income is substantially below average, equivalent to 66% and 70% of state and national levels respectively, suggesting larger family sizes. Ventura county unemployment rate (as a proxy) has been trending down due to rising employment since 2009. November 2013 unemployment stood at 7.2% in November 2013, compared to 8.3% in California, and 6.6% nationwide. The education attainment rates are substantially below national average.

The district's assessed values (AV) dropped 12% between fiscal 2008 and 2013. However, accordingly to Zillow, Port Hueneme house price experienced a significant drop of more than 50% during the recession, a magnitude that was typical for the region. Since 2012, the city's house price has recovered by more than 30%, resulting in a modest recovery in AV (3.7% gain) in fiscal 2014.

SOUND FINANCIAL PROFILE; IMPROVED FUNDING PROSPECTS

The district has a solid track record of producing small operating surpluses despite a volatile funding environment, incurring only two operating deficits (after transfers) since fiscal 2006; in fiscal years 2010 and 2013. At the end of fiscal 2013, unrestricted general fund reserve stood at a healthy 14.2% ($9 million) of expenditures.

California's new local control funding formula (LCFF) is expected to bring substantial revenues to the district, as 86% of its students qualify for supplemental funding. The district expects to receive between $4 million to $20 million additional revenue from the state each year from fiscal 2014 to 2016, resulting in representing 6%-32% increases in funding compared to fiscal 2013.

Fitch believes actual revenue increases will not likely reach the high end of the range indicated by the district in the out-years since the assumptions used by the state guidelines are deemed to be aggressive by Fitch. Nevertheless, the district is on track to receive substantially more revenues due to its large number of targeted students, especially at a time when enrolment is projected to increase slightly as the economy recovers.

The district has been successful in controlling costs, as salary schedule was kept at the 2007 level until fiscal 2013, and various labor concessions were achieved during the recession. In light of better revenue prospects, the district gave a one-time bonus to employees in fiscal 2013. The bonus resulted in a reasonable, one-time use of general fund reserves ($693,345).

On balance, the district does not expect significant increases in reserve levels despite revenue prospect improvements. The additional revenues will likely support program enhancements and realign personnel expenses. The district gave salary increases in fiscal 2014, and plans on reducing class sizes by gradually adding teachers to the classrooms. However, the district is not constrained by LCFF to maintain certain small class sizes, and has satisfactory expenditure flexibility.

The district's reliance on state revenues and the delay in state revenue distribution resulted in increased reliance on tax and revenue anticipation notes (TRANs). Annual TRANs issuance peaked in recent history in fiscal 2013 at roughly 20% of revenues ($12.3 million) before the state started to pay down deferrals. The district anticipates a $4 million TRANs issuance this June totaling 6% of revenues. Fitch expects continued TRANs issuance until state deferrals are completely paid off.

LOW TO MODERATE DEBT; CONCERN OVER CALSTRS

The district's overall debt is low to moderate at $1,686 per capita, or 2.9% of AV. All of the district's direct debt is in the form of GO bonds. The district obtained a $19.6 million GO authorization in 2012 and issued $4 million out of that authorization in 2013. Additional issuance is likely in the medium term, but should not alter the district's debt profile.

The district participates in CalPERS for classified staff and the poorly funded CalSTRS pension system for teachers, as do all schools in the state. CalSTRS contribution rates are set by statute and have not been increased to reflect the weak investment return environment over the past several years. The system's funded ratio has fallen to a low 67% or an estimated 63.5% when adjusted by Fitch to reflect a 7% investment return. Future contribution rates will need to rise substantially from current levels and Fitch believes districts would likely bear at least part of the burden.

The district's other post-employment benefit (OPEB) liability is low at $20.7 million, or less than 0.1% of district AV. Fiscal 2013 total debt service, pension and OPEB carrying costs are equivalent to an affordable 8.6% of total governmental spending. Carrying costs are expected to remain affordable despite the potential increase in pension costs.

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, and Zillow.

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=822464

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Analyst
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
+1-415-732-5611
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Yueping Liu
Analyst
+1-415-732-5629
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
+1-415-732-5611
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com