SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following Eastside Union School District (the district), California general obligation (GO) bond ratings:
--$6 million series 2002 and 2003 at 'A-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by unlimited ad valorem property taxes on property within the district.
KEY RATING DRIVERS
LIMITED LOCAL ECONOMY: The local economy is characterized by high unemployment, low wealth levels, and a limited tax base that is rebounding from significant taxable assessed valuation (TAV) declines during the recession.
STABILIZING FINANCIAL POSITION: Unaudited results for fiscal 2014 indicate that the general fund has returned to structural balance and largely conservative multiyear projections indicate surplus general fund operations going forward.
EXPENDITURE FLEXIBILITY COULD OFFSET LABOR PRESSURES: Policymakers' reluctance to make difficult expenditure cuts during the recession has left them with a variety of available options for permanent expenditure reductions if needed in light of guaranteed step and lane increases for eligible employees and likely other remuneration pressures.
MANAGEABLE DEBT PROFILE: Fitch expects the district's carrying costs related to debt repayment, actuarially required annual pension contributions, and other post-employment benefit (OPEB) pay-as-you-go costs to remain low. While there will be upward pressure on annual pension contribution costs, the district has begun to reserve funds specifically to offset its unfunded OPEB actuarial accrued liability.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the district's return to general fund structural balance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The district serves approximately 3,400 students in grades K-8 in northern Los Angeles County. The district's population is approximately 25,000 and it includes unincorporated rural areas of the county and a portion of the city of Lancaster.
LIMITED LOCAL ECONOMY
Lancaster's unemployment rate remains well above state and national averages at 11.6% in June. However, it has declined from 14.5% a year prior as employment opportunities have grown at a faster rate than the local labor force. The district's socio-economic characteristics remain well below state and national levels. The housing downturn hit the region particularly hard; TAV fell 25.5% between fiscal years 2009 to 2012. However, almost half of this TAV loss has since been recovered with a 12.5% TAV increase during fiscal years 2013 to 2015. This recovery is being helped by construction of new single family houses and multifamily units.
STABILIZING FINANCIAL POSITION
The district entered the recession with a sizable financial cushion and maintained healthy reserves through fiscal 2011 due to federal stimulus dollars and state categorical funding flexibility. However, the district failed to reduce ongoing expenditures to match reduced ongoing revenues. As a result, the district ended fiscal years 2011 and 2012 with large net deficits after transfers of $1.2 million and $1.6 million. The district ended fiscal 2013 with a much smaller net deficit of $297,000 after it rescinded layoffs because of the prospect of increased state funding from the state's new local control funding formula (LCFF) and temporary taxation increases.
These net deficits resulted in the district ending fiscal 2013 with a much reduced unrestricted general fund balance of $1.1 million or 4.4% of spending. While this was in excess of the state's 3% minimum general fund balance requirement, it was considerably less than the district's $3 million unrestricted general fund balance in fiscal 2011 (11.7% of spending).
This significant erosion of financial flexibility appears to have abated in fiscal 2014 with an unaudited net operating surplus after transfers of $103,000. This very small surplus (0.4% of spending) will increase the unrestricted general fund balance slightly to a projected 4.6% of spending.
The general fund's projected move back into structural balance and anticipated positive operations over the next few years has been made possible by increased state funding and LCFF funding allocations, and by the district's growing student population. Under LCFF, which permanently changes the way in which state funding for school districts is allocated, the district receives significant supplemental and concentration grants because a very high 89.2% of its students are economically disadvantaged, English learners, or are in foster care. The successful opening of a new elementary school in 2014 has helped attract new families to the district, as has standardization of the district's procedures for inter-district applicants.
Out-year projections indicate robust surplus operations in fiscal years 2015 to 2017, which could result in the unrestricted general fund growing to a projected 25.2% of spending. Fitch considers the district will be challenged to meet these projections as they do not assume personnel cost increases beyond guaranteed step and lane increases for eligible employees.
Nevertheless, Fitch would view higher unrestricted general fund balances as a credit positive since they would help offset the district's below-average socioeconomic characteristics, recovering tax base, personnel remuneration pressures, increased operational costs related to the new school, and weak general fund liquidity. For liquidity, the district continues to rely on TRANs issuances ($3 million in fiscal 2015) and borrowable cash in funds outside of the general fund.
EXPENDITURE FLEXIBILITY COULD OFFSET LABOR PRESSURES
Fitch notes the district has considerable expenditure options to balance future-year budgets if the need arises and policymakers choose to do so. Options include: reducing instructional days; increasing class sizes; implementing furlough days and/or pay cuts; and reducing the number of senior administrative positions.
The district's current year labor contracts expire on June 30, 2015. Contract-related costs for fiscal 2015 include some rigidities such as guaranteed step and lane increases for eligible employees. However, the contracts also include salary reopeners and do not contain required out-year payments, no-layoff or no-furlough provisions, binding arbitration requirements, or mandatory consideration of regional compensation in salary and wage adjustments. In addition to the costs of guaranteed step and column increases, the district funded a 2.5% salary increase effective on Jan. 1, 2014 and a 1% increase to the district-paid health and welfare cap in fiscal 2015.
Further remuneration increases will be dependent on the outcome of labor negotiations commencing in November. The district's budget forecast assumes no salary or benefit increases except for guaranteed step and lane increases for eligible employees, which Fitch regards as a non-conservative assumption in otherwise conservative multiyear projections.
MANAGEABLE DEBT PROFILE
The district's debt burden is low, partially offsetting concerns about the limited local economy. Data on overlapping debt are not available, but direct debt as a percentage of TAV is a very low $644 per capita or 1.1% of TAV. Debt amortization is swift with approximately 89% of principal repaid over the next 10 years. The majority of the district's direct debt is in the form of general obligation bonds secured by unlimited ad valorem property taxes.
The district's total carrying costs for debt service, actuarially required annual pension contributions, and OPEB pay-as-you-go costs are expected to remain low. In fiscal 2013, they were 7.3% of the district's total governmental spending. The district's annual pension contributions to both CalPERS and CalSTRS are expected to increase going forward. In order to start reducing its unfunded OPEB actuarial accrued liability ($7.6 million or 0.5% of TAV in fiscal 2015), the district has created an OPEB reserve which is budgeted to grow to $593,000 in fiscal 2015, and by $250,000 each year thereafter from operating budget contributions.
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, Zillow.com, and 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=902254
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