Fitch Affirms Windsor USD, CA's GOs at 'A+'; Negative Outlook

SAN FRANCISCO--()--Fitch Ratings has affirmed Windsor Unified School District, CA's (the district's) general obligation bonds (GOs) as follows:

--$29 million outstanding GOs at 'A+'.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by an unlimited property tax on all taxable property within the district.

KEY RATING DRIVERS

BUDGETARY DEFICIT; EXPIRATION OF CUTS: The Negative Outlook indicates Fitch's concerns about the district's ability to close a large budgeted deficit. Thin reserves heighten the risk of the potential inability to achieve consistently balanced operations.

COST PRESSURES: The district failed to come to agreement with labor on fiscal 2015 employment contracts and may face pressure to increase compensation going forward. Combined cost pressures from compensation, pension underfunding, and deferred capital needs may be difficult to accommodate within existing resources even with increased state funding.

SOLID ECONOMY: The local economy benefits from its location within the large and diverse Santa Rosa employment region. Local income and unemployment characteristics are better than state and national averages.

MIXED DEBT PROFILE: The district is exposed to a weakly funded California State Teachers' Retirement System (CalSTRS) with increasing contribution rates, as are all California school districts, and has significant capital needs with minimal tax rate capacity to fund them with GO bonds.

RATING SENSITIVITIES

BALANCED OPERATIONS: An inability to control expenditures, balance general fund operations, and maintain a satisfactory level of reserves moving forward would likely result in a downgrade.

CREDIT PROFILE

The district serves a student population of about 5,300 in the town of Windsor, a portion of Healdsburg, and unincorporated Sonoma County. The district area has a population of approximately 50,000 residents and is located 10 miles north of Santa Rosa. Management expects flat to slightly increasing enrollment in the near term.

FINANCIAL OPERATIONS REMAIN UNBALANCED

The district's financial operations are still vulnerable, despite noteworthy improvement in revenues and significant expenditure reductions. The district posted a $865,000 operating deficit in fiscal 2013, lowering the unrestricted balance to a modest 4.4%.

The district's financial performance stabilized in fiscal 2014 due in part to a one-year Memorandum of Understanding (MOU) with labor that included furlough days, increased class sizes, and sharing of health care premium costs. Management-estimated year-end results for fiscal 2014 include a $1.9 million general fund surplus compared to a $200,000 surplus anticipated at the time of the fiscal 2015 budget adoption. According to management, the variance is mostly due to unspent carryover including $1.6 million in restricted funds that were budgeted but not spent.

The major expenditure reductions implemented in fiscal 2014 as part of the MOU expired in fiscal 2015 with a resulting $1.7 million budget impact. Consequently, the fiscal 2015 budget includes a $1.2 million deficit. Out year projections include basically balanced operations in fiscals 2016 and 2017, respectively, and unrestricted ending fund balances of approximately 5% of spending.

BUDGETARY PRESSURES

Although the district's projections incorporate the expiration of the cost saving measures, they do not assume any wage hikes, which have yet to be negotiated. According to the district, labor negotiations are to begin shortly and would impact fiscal 2016 and thereafter. It is also unclear to what extent the board may want to continue restoring service levels moving forward.

The district is assuming growth in certain state revenue streams over its forecast period, which is consistent with the state's funding intentions. However, state revenues derive from sources that can be difficult to predict and have historically been volatile. If future funding levels fail to match expectations, the district may need to re-introduce certain service level and wage reductions.

REMOVAL OF FISCAL ADVISOR

The Sonoma County Office of Education (COE) assigned a fiscal advisor (FA) with stay and rescind powers in late fiscal 2013 as a result of concerns over the district's financial health. The FA assisted district management with helping to restore its financial operations and identifying and addressing internal control weaknesses. The FA is no longer advising the district. She did not use her stay and rescind powers to block any board decisions. Although the district has addressed many of the internal control issues, management will need to ensure that standards continue to be implemented and adhered to.

STRAINED DEBT PROFILE

The district's debt profile is weighed by its participation in CalSTRS and possibly significant capital needs. Pension contribution rates are set by the legislature and were recently increased significantly over the next seven years to address significant investment losses.

The district has no remaining outstanding GO authorization and limited remaining tax rate capacity. However, $37 million would be available under the tax rate limit if voters approved a referendum for additional bonds. Fitch is concerned the district may need to issue lease-backed financing, which would crowd out programmatic resources, although management does not have plans for any such issuances and has yet to explore the district's financing options. Fitch is also concerned that the district is currently unable to estimate its capital needs although facilities plans completed several years ago indicated significant requirements due to population growth, limited remaining school capacity, and the district's reliance on portable classrooms.

Other debt profile characteristics are average. The district's debt amortization is moderate, with 55% of debt maturing 10 years, despite the use of CABs. The district' carrying costs (other post-employment benefits, pension, and debt service costs as a percentage of total governmental expenditures) are manageable at 14.4%, but are likely to rise moving forward given expectations of increased pension contribution rates and possible capital spending. The overall debt burden is midrange at 3.4% of assessed values (AV).

SOLID ECONOMY

The town's median household income levels are strong at, respectively, 126% and 146% of state and national averages. June unemployment registered a low 4.7%, down year over year and lower than state and national averages. The town's tax base is well diversified, but was negatively impacted by the housing-led recession. The district's AV fell a significant cumulative 9% from fiscal years 2008-2013 due largely to falling home values following a period of rapid housing growth and price appreciation. However, they have since rebounded 13% to peak levels.

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.

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=913515

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1 415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1 415-732-7577
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com