SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has taken the following action on San Francisco Community College District, CA's (the district) general obligation (GO) bonds:
--$25.4 million 2002 GO bonds (election of 2001, series A) upgraded to 'A' from 'BBB+'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The bonds are a general obligation of the district. The board of supervisors of the city and county of San Francisco (the city) is obligated to levy and collect ad valorem taxes upon all property within the district subject to taxation, without limitation as to rate or amount, to pay debt service on the bonds.
KEY RATING DRIVERS
ACCREDITATION PRESSURES EASING: The upgrade to 'A' and revised Rating Outlook reflects material improvements in the district's accreditation status and increased stability of its operations. In January 2015 the Western Association of Schools and Colleges' Accrediting Commission for Community and Junior Colleges (ACCJC) granted the district restoration status, providing two additional years to regain full accreditation.
CONTINUED MANAGEMENT IMPROVEMENTS: The district continues to implement administrative and financial reforms in response to deficiencies cited by ACCJC. Further progress will be required to insure the district's long-term success, but reforms achieved to date provide a strong foundation for such efforts.
FUNDING LOSS DEFERRED: The district is benefiting from state legislation enacted in mid-2014 that stabilizes funding despite recent enrollment declines. The legislation phases in anticipated reductions to per-pupil revenues, which provides the district with additional time to pursue offsetting enrollment gains and expenditure reductions.
STATE INVOLVEMENT POSITIVE: Fitch's rating considers the state's key role in supporting district reforms and stabilizing operations, as demonstrated by the appointment of a special trustee and adoption of district-specific legislation.
STRONG ECONOMY AND TAX BASE: The district is coterminous with the city and property taxes pledged to its bonds are supported by San Francisco's (the city, GO bonds rated 'AA' by Fitch with a Positive Outlook) exceptionally strong economy and resilient tax base. Wealth and income levels remain high, employment growth is robust, and taxable assessed values (TAV) have experienced steady growth.
MIXED LONG-TERM LIABILITIES: Overall debt is high on a per capita basis, but Fitch considers it affordable given the district's wealth levels and strong tax base. Carrying costs for debt service and retirement benefits are moderate but likely to rise due to pending pension contribution increases.
RATING SENSITIVITIES
FINANCIAL DETERIORATION: A reversal of the district's recent financial progress would result in downward rating pressure.
RENEWED ACCREDITATION CHALLENGES: The district's inability to make further progress in the restoration of its accreditation would result in downward rating pressure.
CREDIT PROFILE
The district serves approximately 85,000 students across 11 locations. Students are drawn primarily from the city.
ACCREDITATION PRESSURES EASING
In January 2015 the ACCJC granted the district restoration status, removing the near-term threat of accreditation loss and providing the district with two additional years to come into full compliance with accreditation standards. As part of the restoration process the district will face a new review by the ACCJC in January 2017, at which point it will need to demonstrate its full compliance with accreditation standards, or again face the possibility of termination. The district will be the first to test ACCJC's restoration process, which was announced in June 2014 amidst intense political pressure upon the accrediting body. Fitch expects that the district's recent operational and financial improvements will be acknowledged in such future reviews, reducing the potential for accreditation loss and related operational disruptions.
A loss of accreditation, while increasingly less likely, would make the district ineligible to receive state apportionment revenues and federal student aid. Management believes the district could maintain non-credit programs in the absence of accreditation, which would preserve approximately 40% of current funding. District operations would be scaled back severely under such a scenario, and re-accreditation could take two or more years.
CONTINUED OPERATIONAL IMPROVEMENTS
The district continues to make substantial improvements to its operations and finances in response to weaknesses cited by ACCJC. The district's strategy is guided by a rolling eight-year financial plan, initially adopted in 2014. The plan calls for raising the district's board-designated reserves, investing in deferred maintenance and technology improvements, and increasing funding for other post-employment benefits (OPEBs). The district achieved plan targets in fiscal 2014 and appears likely to repeat these results in fiscal 2015. In addition, the district negotiated 5% salary reductions with all bargaining units in mid-2013 and shifted a share of OPEB costs to employees beginning in fiscal 2016.
The district's net asset position remains negative despite these reforms, largely due to substantial long-term liabilities, including bonded debt. Total general fund balances reported to the state on a non-GAAP basis provide clearer evidence of recent financial progress. Year-end fund balance of $21.8 million in the district's unrestricted general fund was equivalent to 13.7% of spending in fiscal 2014, as compared to 9.2% in fiscal 2012.
Administrative reforms have also been central to the district's improved accreditation prospects. The district's management team includes a special trustee appointed by the state chancellor for community colleges who currently serves in place of the district's elected board, with broad authority to implement changes in district operations. In recognition of recent progress, the state has committed to restore the authority of the district's elected board in mid-2015, but the special trustee will remain in place with stay and rescind powers indefinitely. In addition, the district continues to operate with a new local chancellor and several vice chancellors with extensive experience managing community colleges, including institutions with accreditation challenges. These and other recent appointments respond directly to ACCJC's prior criticisms of the district's insufficient administrative resources, and support broader efforts to improve its compliance with accreditation standards.
FUNDING LOSS DEFERRED
The district's enrollment has declined by 25% over the past three years amidst extensive media coverage of its accreditation challenges and increasing employment opportunities in the strong local economy. Senate Bill 860, adopted in mid-2014, provides the district with stabilization funding for three years, effectively maintaining state apportionments at fiscal 2013 enrollment levels. The district is using this additional time to enhance outreach and marketing to potential students, and to plan for further expenditure reductions should such efforts fail to restore enrollment to earlier levels.
The potential decline in enrollment-based funding stands in contrast to generally improving revenue prospects for the state's community colleges, including the district. The Governor's budget for fiscal 2016 appropriates additional funding for employment-focused community college courses that is expected to provide the district with $10 million in additional annual revenues. In addition, K-14 schools throughout the state have seen steady gains in Proposition 98 funding with improved state revenue collections. The district faces longer-term challenges from the expiration of temporary state and local tax measures in 2019 and 2021, respectively, but revenue prospects appear stable to positive for the next several years.
STATE INVOLVEMENT POSITIVE
State oversight of the district to date has included the appointment of a special trustee in place of its elected board, in-depth management reviews by the state's Fiscal Crisis & Management Assistance Team, and the sponsorship of legislation by the California Community Colleges Chancellor's Office to stabilize funding. These actions reflect the state's strong interest in supporting the ongoing operations of the district, which Fitch considers a credit positive.
STRONG ECONOMY AND TAX BASE
TAV levels rose by 5.4% in fiscal 2015 and maintained a 3.6% compounded annual growth rate over the past five years. Employment growth has been similarly robust and the city's unemployment rate fell to a low 3.8% in December 2014, well below state and national averages. Wealth and income levels remain high.
MIXED LONG-TERM LIABILITIES
Overall debt of $6,483 per capita is high, but moderate relative to the size of the city's tax base at 3% of TAV. Amortization of the district's debt is average, and management has no plans for further new money borrowing as the district approaches the end of a large debt-funded expansion program, approved by voters in 2001 and 2005. Carrying costs for debt service and retirement benefits are currently moderate at 20% of expenditures but likely to rise over the next several years due to planned pension contribution rate increases.
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 Financial Crisis & Management Assistance Team/California School Information Services and the Accrediting Commission for Community and Junior Colleges/Western Association of Schools and Colleges.
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=981699
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.