SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following Imperial Community College District (the district), California's debt:
--$0.7 million of certificates of participation (COP), series 2004 at 'A-'.
The Rating Outlook is Stable.
SECURITY
The certificates are secured by lease payments from the district to California School Boards Association Finance Corporation for use of certain essential assets, subject to annual appropriation by the district and abatement risk.
KEY RATING DRIVERS
FINANCIAL OPERATIONS STILL UNDER STRESS: Despite recent enrolment recoveries and revenue gains, fiscal 2014 will produce the third consecutive year of operating deficits, and draw reserves down to a level close to 6%.
IMPROVING FUNDING ENVIRONMENT; CONTINUED COST CONTROL: Funding prospects are enhanced due to passage of Proposition 30 and state revenue improvements. Conservative estimates indicate that with continued cost control, structural balance over the near term is now more likely.
WEAK, NARROW ECONOMY: The area's economy is dominated by agriculture, though the tax base has diversified some into renewable energy. The unemployment rate has been above 25% for the past five years, and income levels are substantially below average.
MODERATE DEBT: District debt ratios are moderate with affordable carrying costs. The debt profile is weighed down by slow amortization and participation in poorly funded CalSTRS.
RATING SENSITIVITIES
STRUCTURAL BALANCE: A failure to realign ongoing expenditures to match ongoing revenues could result in a negative rating action.
CREDIT PROFILE
The district serves a vast, rural area in the desert on California's southeastern border with Mexico and Arizona, and is the only community college in Imperial County, California (population of 177,000). The main campus is about 200 miles southeast of Los Angeles and 120 miles east of San Diego.
WEAK ECONOMY, MODEST AV CONCENTRATION
The area has developed a significant renewable energy sector in addition to its traditional farming economy. However the local economy remains very weak. The county's unemployment rate has been consistently extremely high, even reaching 29.9% in 2010. With recent employment gains, the unemployment rate (23.8% in Nov 2013) is still multiples higher than the state (8.3%) and national (6.6%) levels. Per capita incomes are equivalent to just over half of the state average (at 56%), and 59% of national average, while educational attainment rates are significantly below average nationally.
The housing market shows continued weakness despite recent improvements. Using the El Centro metro area (the county seat) as a proxy, its house price index increased 11.4% over the last year, but is still almost 50% below its 2006 peak. The district's assessed value (AV) fared better than the housing market overall. Two years of AV recovery have brought fiscal 2014 AV back to the pre-recession high achieved in fiscal 2009. Some of this performance is due to investments in geothermal power operations.
Expansion in geothermal power operations has moderately concentrated the district's AV in the top two taxpayers. These two energy producers have a combined AV equivalent to 8.9% of the district as of fiscal 2013.
CONSTRAINED FINANCIAL OPERATIONS
With 80% of its unrestricted general fund revenues coming from the state, the district is highly dependent on state decisions about the number of full time equivalent students funded and the level of funding per student. During the last five years, state budget decisions and declining enrolment contributed to a 13% revenue decline from fiscal 2009 to 2013.
At the same time, expenditure flexibility is limited. With almost 90% of the district's general fund expenditures concentrated in personnel costs, almost 40% tenured academic staff and three unions, management has a limited toolkit to respond quickly to an adverse funding environment. Despite various cost cutting efforts (reducing full time equivalent employees by 14%, elimination of certain programs, service reductions and reorganizations), the district incurred four general fund operating deficits in the last five years, reducing its unrestricted general fund balance to 7% from 13%.
Dependence on state funding coupled with state funding deferrals caused the district to need tax and revenue anticipation notes (TRANs) of up to $10 million per year. Since the state began repaying deferrals, the district expects a smaller TRAN of $4.7 million for fiscal 2015.
FUNDING PROSPECT IMPROVEMENTS, CONTINUED COST CONTROL
With the passage of Proposition 30 in November 2012, improved state economy and finances, and rebounding enrolment (9% increase year-over-year), the district is projecting an 8% increase in total general fund revenues for fiscal 2014 compared to 2013. Further improvement in state funding and enrolment is expected for 2015 and possibly beyond.
Meanwhile, the district continues to exercise expenditure control. The district solicited assistance from the Fiscal Crisis and Management Assistance Team (FCMAT) to identify financial inefficiencies in fiscal 2012, and is in the process of implementing FCMAT's recommendations. Among many fiscal policy changes, the district increased its reserve target to 16% from 6%, and started multi-year financial planning. Early retirement incentives continue to be offered, class sizes have been raised, and salary schedule and other faculty contract terms have been modified.
While the district is still operating with a very thin margin and a rigid expenditure structure, it is now better positioned to return to structural balance. Fitch expects that improved funding, potential structural change in expenditures, and continued conservative financial management will likely bring the district back to break-even in the next two years.
MODERATE DEBT; CONCERN OVER CALSTRS
The district's overall debt is moderate at $2,570 per capita, or 4.5% of AV. After refinancing bond anticipation notes in March 2014, most of the district's direct debt is in the form of GO bonds with very slow payout. The district still has over $50 million unused authorization from 2010. Moderate additional issuance of the district's $50 million in remaining GO authorization is likely in the medium term, but should not alter the district's debt profile.
The district also participates in CalPERS for classified staff and the poorly funded CalSTRS pension system for teachers, as do all K-14 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 was $33.5 million, or 46% of annual governmental spending as of fiscal 2011 when the last actuarial report was conducted. Fiscal 2013 total debt service, pension and OPEB carrying costs are equivalent to an affordable 10.3% 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, financial advisor, 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=824491
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