Fitch Affirms Ross Valley SD, CA's GO Bonds at AA+; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Ross Valley School District, California's (the district) bonds as follows:

--Approximately $43.7 million outstanding general obligation (GO) bonds at 'AA+.'

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 POSITION: The district's fairly diverse revenue base, enrollment growth, and solid management practices enabled it to offset recent state funding cuts and maintain high general fund balance levels. One-time expenditures related to common core implementation are projected to reduce reserves in fiscal year 2014, but levels are expected to remain sound.

IMPROVED REVENUE PROSPECTS: Prospects for state funding are better with the general improvement of the state's finances and economy, as well as the 2012 voter approval of temporary tax increases under Proposition 30. A new local control funding formula (LCFF) stands to bolster general fund revenues for the district.

SOLID AND STABLE LOCAL ECONOMY: The local economy is strong. Wealth levels are high, unemployment is low, and the housing market has shown an impressive degree of resilience in spite of the economic downturn.

MODERATE DEBT PROFILE: Overall debt levels are moderate; however, debt amortization is slow. Carrying costs, including debt service and retirement benefits, are affordable. Pension costs will likely rise over the next several years as the state begins to address substantial unfunded liabilities.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the district's diverse revenues and sound fund balance levels. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district is located about 20 miles north of downtown San Francisco and serves a population of 23,800 in the cities of San Anselmo and Fairfax, as well as unincorporated areas of Marin County. The district's enrollment in fiscal year 2014 was 2,299.

DIVERSE REVENUES; SOUND FINANCES

The district's financial position is solid, with sound fund balances, good liquidity, and a relatively diverse revenue stream for a California school district. The district receives approximately $3.5 million from a parcel tax, $250,000 from lease revenues and about $600,000-$800,000 annually in grants from a local foundation. This combined $4.6 million in revenues equals nearly a quarter of total fiscal year 2014 revenues, providing the district with materially enhanced resources relative to most other California school districts and is a key driver of the above average rating.

The district experienced a relatively muted negative impact from recent state funding cuts, which were largely offset by the increased funding related to strong enrollment growth (3.6% annualized growth from fiscal year 2008 to fiscal year 2014).

General fund operations in fiscal year 2013 resulted in a $228,000 net surplus, raising the unrestricted and total general fund balances to solid levels of $4.2 million (21.4% of fiscal year 2013 spending) and $4.6 million (23.1%), respectively. Based on the district's fiscal year 2014 second interim report, the district anticipates utilizing about $1.7 million in general fund balance on one-time expenses related to the implementation of the common core curriculum and some deferred maintenance. If the district draws on reserves in this amount, the unrestricted general fund balance would be lowered to $2.9 million (12.6% of fiscal year 2014 spending). Given the low volatility of its revenue base, Fitch believes that this forecast level of reserves remains consistent with the current rating. The district expects essentially balanced operations in fiscal years 2015 and 2016, per the district's fiscal year 2014 second interim report.

IMPROVED REVENUE PROSPECTS

State funding provides a moderate portion of district revenues, and prospects for stable to growing revenue have improved recently with the general improvement in state finances and economy. While the targeted portion of the district's student demographics is low, state funding is still expected to bolster district revenues in fiscal years 2015 and 2016 upon implementation of LCFF if the governor's fiscal 2015 budget is adopted as proposed.

STRONG ECONOMY

The cities of San Anselmo and Fairfax serve as bedroom communities to San Francisco and benefit from their locations within the large and diverse Bay Area employment market. The local economy is very strong with regional per capita income levels nearly twice the national average. The county's low 4.7% March 2014 unemployment rate is well below the state and national rates of 8.4% and 6.8%, respectively.

The local tax base is mainly residential, with the top 10 property taxpayers making up just 2.3% of fiscal year 2014 assessed valuation (AV). AV has been extremely resilient, growing at a sound average annual rate of 1.7% from fiscal years 2009-2014 and posting only one small AV decline from fiscal years 2010 to 2011. The local housing market has demonstrated an impressive amount of resilience. Median single family home prices within the district, as measured by the Zillow Home Value Index, have nearly recovered all recessionary losses as of March 2014.

MODERATE DEBT PROFILE

The elevated debt per capita in fiscal year 2014 of $4,584 and more moderate debt to market value of 2.4% are reflective of the district's somewhat wealthy tax base. Amortization is slow, with 35% of debt of retired within 10 years. Capital needs are moderate and largely related to school expansion to address recent enrollment growth. These improvements were initially funded by a bond anticipation note, which is expected to be refunded by the district's remaining $11 million in 2010 GO authorization. Management believes facility capacity will be adequate for the foreseeable future after completion of these projects. Fitch does not expect the district's debt profile to change over the near term.

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. The governor has recently proposed incremental increases to school district contribution rates and Fitch believes that increased rates will be adopted in some form.

The district offers other post-employment benefits (OPEB) but its unfunded OPEB liability is very low at approximately $1.5 million (0.03% of fiscal year 2014 TAV) as of the most recent valuation on June 30, 2013. Carrying costs for debt service and retirement benefits are manageable (11.9% of governmental expenditures in fiscal year 2013) but are likely to rise over the next several years given pension funding pressures.

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=832202

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher
Analyst
+1 212-908-0686
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stephen Walsh
Director
+1 415-732-7573
or
Committee Chairperson
Karen Ribble
Senior Direct
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher
Analyst
+1 212-908-0686
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stephen Walsh
Director
+1 415-732-7573
or
Committee Chairperson
Karen Ribble
Senior Direct
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com