Fitch Affirms Ravenswood CSD SFFA, CA's Rev Bonds at 'A'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed Ravenswood City School District School Facilities Financing Authority, California's bonds as follows:

--$10.9 million outstanding revenue bonds, series 2006 (Ravenswood City School District General Obligation (GO) Bond Program) at 'A'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by unlimited ad valorem property taxes on all taxable property within the Ravenswood City School District (the district).

KEY RATING DRIVERS

CHANGE IN FINANCIAL STRATEGY: The Outlook Revision to Stable reflects the district's decision to utilize a substantial portion of its reserves for operating needs. This shift in strategy away from structural budget balance and the preservation of a sound financial cushion is out of line with Fitch's prior expectations.

FINANCES WEAKENED OVER NEAR-TERM: The district projects using over three quarters of its general fund reserves through fiscal years 2014 and 2015, resulting in fund balance levels that Fitch views as low. However, Fitch believes the imbalance will be resolved in fiscal year 2016.

IMPROVED REVENUE PROSPECTS: State funding, which Fitch views as volatile and difficult to predict, provides the majority of district revenues. Revenue growth prospects are better with the general improvement of the state's finances and economy, and the 2012 voter approval of temporary tax increases under Proposition 30. Based on the district's student demographics, a new local control funding formula (LCFF) will bolster general fund revenues for the district. Fitch expects this revenue increase to help to resolve the district's current structural imbalance beyond fiscal year 2015.

WEAK ECONOMY: The local economy is characterized by a very high unemployment rate and low income levels. Recent taxable assessed value (TAV) gains are reflective of an improved housing market, although TAV remains below peak levels.

FAVORABLE DEBT PROFILE: Overall debt levels are low and carrying costs, including debt service and retirement benefits, are affordable. Pension costs will likely rise over the next several years, subject to future state legislative action, to address substantial unfunded liabilities.

RATING SENSITIVITIES

Unexpected and material deterioration of the district's financial operations and/or fund balance may result in negative rating action.

CREDIT PROFILE

The district, which is located in the San Francisco Bay Area, serves a population of about 36,000 in the cities of East Palo Alto and an eastern portion of Menlo Park. Approximately 3,500 K-through-8th grade students are enrolled in the district's eight schools and one child development center.

STRATEGY SHIFT; WEAKENED NEAR-TERM FINANCES

The district's decision to utilize a substantial portion of its reserves for operating needs marks a shift financial strategy that is inconsistent with Fitch's prior expectations that the district would maintain a structurally balanced budget and sound general fund reserves. The deficits in fiscal years 2014 and 2015 are driven by a combination of increased one-time expenditures -- including the hiring of consultants and provision of leadership training related to the implementation of the common core curriculum whose cost significantly exceeds the grant revenue received by the state -- increased on-going expenditures, and a loss of federal stimulus money.

The district forecasts utilizing a combined $6.4 million of general fund balance in fiscal years 2014 and 2015, as of the district's most recent 2nd interim report. This usage would take general fund balance from $8.3 million (or 22.4% of spending) at fiscal year-end 2013 to $1.8 million (or a low 4.5% of spending) at fiscal year-end 2015. While the 4.5% general fund balance level would represent a reduction below the district's target of 6%, Fitch believes that the district's multi-year projections include some degree of conservatism that will allow the district to maintain fund balance levels above their target.

IMPROVED REVENUE PROSPECTS AID INTERMEDIATE-TERM FINANCES

State funding provides the majority of district revenues, and growth prospects have improved recently with the general improvement in state finances. Because over 95% of the district's student body has been targeted for LCFF funding, the district stands to benefit substantially if the governor's fiscal 2015 budget is adopted as proposed. If adopted, the district expects sizable revenue growth to correct their general fund structural imbalance by fiscal year 2016. While Fitch believes this projection to be reasonable, Fitch also believes that some of the additional LCFF funding over the multi-year period will likely be consumed by wage increases, capital spending, and other spending not included in the 2nd interim report.

WEAKER ECONOMY

The local economy is characterized by below average economic indicators. District per capita income is 65% and 61% of the national and state levels respectively. TAV posted 3.8% growth in fiscal year 2014 following multiple years of declines. The improvement is reflective of the recovering local housing market, but fiscal year 2014 TAV remains 14.4% below the peak level recorded in 2009. District enrollment has been relatively flat over the past five years, and the district expects stable-to-modest growth over the next five year period. Fitch believes this expectation to be reasonable given the improving local housing market and favorable economic trends within the district, including the relocation of the Facebook headquarters into the district's boundaries in 2012.

The unemployment rate for the city of East Palo Alto was high at 11.2% in December 2013, compared to the national and state averages of 6.5% and 7.9%, respectively. This represented an improvement from the 14.4% recorded a year prior, as robust employment growth outpaced the modest expansion in the labor force over the same time period.

FAVORABLE DEBT PROFILE

The district's total debt burden is low at 1.7% of TAV and $1,615 per capita. Amortization is rapid, with all outstanding debt repaid within the next ten years. The district is currently developing a master facilities plan and, depending on the capital needs defined by the plan, will consider issuing further debt in 2015. Given the district's remaining $32 million in additional GO authorization, further debt issuance in the near term is not expected to result in debt levels above the low-to-moderate range.

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 the California State Teachers Retirement System (CalSTRS) is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. In addition, the district offers other post-employment benefits (OPEB) and had an unfunded OPEB liability of approximately $6 million (0.2% of fiscal year 2014 TAV), a figure Fitch views as low, as of the most recent valuation on July 1, 2012. Carrying costs for debt service and retirement benefits are currently low to moderate (11.2% of governmental expenditures in fiscal 2013) but are likely to rise over the next several years.

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=826769

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, +1-212-908-0686
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Monroe, +1-415-732-5618
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, +1-212-908-0686
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Monroe, +1-415-732-5618
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com