Fitch Rates West Contra Costa Unified School District, CA's GO Bonds 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'A+' rating to the following West Contra Costa Unified School District (the district), CA general obligation (GO) bonds:

--$50 million GO bonds, 2010 election, 2015 series C;

--$85 million GO bonds, 2012 election, 2015 series B.

In addition, Fitch affirms its 'A+' rating on the following district bonds:

--$862.7 million GO bonds.

The Rating Outlook is Stable.

Purpose: Bond proceeds will be used to complete an elementary school and continuation high school as well as start construction on a middle school and high school. The bonds will be sold via negotiation during the week of Feb. 23. The bonds have a final maturity date of Aug. 1, 2055.

SECURITY

The bonds are payable from an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

HIGH DEBT BURDEN: The district's overall debt burden is projected to remain high given future debt issuance plans and the slow amortization rate of outstanding debt.

TRANSITIONAL STRUCTURAL IMBALANCE: Rising fixed costs and increased discretionary spending in anticipation of legislative funding enhancements are expected to result in modest operating deficits over the near-term. Rating concerns are offset to some degree by the district's currently sound unrestricted reserve and remaining financial flexibility.

BALANCED OPERATIONS, ADEQUATE RESERVES EXPECTED: Underpinning the rating is Fitch's belief that the district will manage its rising budget over the near term and transition to balanced operations and an unrestricted reserve at the board adopted policy of 6% of spending. Fitch views the use of reserves in this case as credit neutral, although an inability to maintain reserves at the specified level could pressure the rating.

MIXED ECONOMY: The local economy benefits from its proximity and access to the diversified Bay Area economy, but performance is mixed with some cities within the district continuing to experience elevated unemployment rates and below average income levels compared to surrounding areas.

CONCENTRATED, RECOVERING TAX BASE: A rebounding housing market drove the district's strong 10.7% AV increase in fiscal 2015. However, the tax base remains concentrated in its largest taxpayer, Chevron, which comprised 12.2% of the district's fiscal 2015 AV.

RATING SENSITIVITIES

SIGNIFICANT REDUCTION IN RESERVES: A larger than anticipated reduction in the district's unrestricted reserves would likely result in negative rating action.

CREDIT PROFILE

The district is located approximately 15 miles northeast of San Francisco. It covers a large area in western Contra Costa County, including the cities of Richmond, El Cerrito, Hercules, Pinole, and San Pablo, along with several unincorporated areas. The district currently operates 37 elementary schools, two K-8 schools, six junior high schools, six high schools, along with several continuation programs, adult education sites, and state-funded preschools.

The district's average daily attendance (ADA) was 28,148 in fiscal 2014, approximately 2% higher than 2011 levels. However, competition from three new charter schools and demographic trends are expected to reduce ADA to around 27,775 in fiscal 2015 with an additional decline expected in fiscal 2016.

EVOLVING FINANCIAL PROFILE

The district's financial profile is evolving as concerns regarding state funding volatility diminish and expectations for improved funding levels and more timely distribution of funds become more entrenched.

The district built-up its unrestricted reserve during the recession to offset diminished state funding and potentially significant mid-year cuts. Now that state funding appears to have improved, the district intends to gradually reduce its unrestricted reserve before stabilizing near the district's 6% minimum unrestricted fund balance level, as established through board policy.

Fitch views the 6% minimum unrestricted reserve level as adequate for the rating, but the reduced financial cushion will increase the importance of maintaining structurally balanced financial operations. In addition, it will place greater emphasis on controlling costs to retain budgetary flexibility in order to manage any future funding volatility, if it occurs.

IMPROVING REVENUES DESPITE ATTENDANCE DECLINE

The district's revenue performance is expected to continue improving despite the expected decline in ADA. The district benefits from the general improvement in state funding as well as the statewide adoption of LCFF, which provides districts with higher percentages of targeted students (English learners, foster youth, and economically disadvantaged) with additional funds. Approximately 75% of the district's student body qualifies for additional funding under LCFF.

INCREASED SPENDING PRESSURES

Increased expenditures are expected to outpace revenue growth over the near term. The district is intentionally drawing down its unrestricted reserve balance to implement programs that are expected to be funded through on-going revenues as LCFF is phased in (expected in fiscal 2021).

The projected operating deficits over the next few years are largely driven by the district's growing financial commitments. While based on conservative assumptions, the deficits are a result of the district's somewhat aggressive implementation of LCFF/LCAP requirements, rising pension and OPEB contribution amounts, labor costs, and others. However, management has identified options to delay and restructure certain programs to reduce projected expenditures in order to manage fund balance levels and preserve some financial flexibility.

HIGH DEBT BURDEN

Overall debt ratios are well above average at $7,348 per capita and 7.3% of AV. The district has successfully applied for and received waivers from the state's Board of Education to exceed bonding capacity limits, allowing the district to issue general obligation debt up to 5% of AV. While direct general obligation indebtedness is 4.1% currently, the district expects to use some of its significant remaining general obligation authorization (approximately $457.5 million) to address capital needs over the next several years.

PENSION CONTRIBUTION INCREASES

Future budgetary pressure is expected to come from increasing pension contribution amounts that will be phased in over the next several years. The district participates in CalSTRS and CalPERS to provide defined pension benefits for teachers and classified employees, respectively.

The district is expected to pay increasing contribution amounts to both systems, but particularly CalSTRS where contribution amounts are projected to increase from $9.8 in fiscal 2015 to $22.6 million in fiscal 2021. While increased costs are expected to be offset by projected increases in LCFF funding over the same timeframe, the rise in fixed costs will limit the district's discretion in utilizing the additional revenue.

SIGNIFICANT OPEB LIABILITY

The district successfully renegotiated its OPEB in fiscal 2010. Under the agreement, the district offers health insurance benefits that are capped according to several criteria, including employment start date and years of service.

The revised agreement reduced the district's unfunded actuarial accrued liability to approximately $365 million (July 1, 2012 valuation), down from $523 million at the end of fiscal 2007. Despite the reduction, the district's unfunded OPEB liability remains significant at 1.5% of fiscal 2015 AV and annual pay-go contributions (a sizable 6.4% of general fund spending in fiscal 2014) will continue to pressure the district's financial performance.

ECONOMY AND TAX BASE

The local economy is mixed with some areas outperforming others. While western Contra Costa County is well-positioned to participate in the San Francisco Bay Area's broad and diverse labor market, the unemployment rates vary significantly with the district's two largest cities, Richmond and San Pablo, still experiencing elevated unemployment rates (December 2014) of 9.4% and 11.7%, respectively. Some of the less populated areas, like Pinole and Hercules, have unemployment rates below the national average of 5.8%.

IMPROVING HOUSING MARKET; CONCENTRATED TAX BASE

The district's fiscal 2015 AV increase of 10.7% was largely driven by a significant increase in the valuations of single family homes in the area.

The tax base remains concentrated in Chevron, which owns a refinery in the city of Richmond. Chevron accounted for approximately 12.2% of total district AV in fiscal 2015. Work done to repair a fire-damaged portion of the refinery should add value to Chevron's fiscal 2016 AV, although the decline in oil prices is likely to have a negative effect. Fitch expects that housing market gains over the near term should continue to support relatively stable AV performance.

SEC SUBPOENA

Fitch is aware that the district, certain members of the district's financing team, and a board member received subpoenas from the U.S. Securities and Exchange Commission (SEC) regarding previous GO bond issuances. Management reported that requested information has been provided to the SEC. Fitch will continue to monitor the situation.

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, Zillow.com.

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=976535

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly
Director
+1 415-732-7572
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 415-732-5611
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1 212-908-1608
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly
Director
+1 415-732-7572
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 415-732-5611
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1 212-908-1608
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com