SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the following La Honda-Pescadero Unified School District, California's (the district) bonds:
--$2 million 2015 general obligation (GO) refunding bonds.
In addition, Fitch affirms the following ratings:
--$5.6 million outstanding GO bonds at 'A'.
The Rating Outlook is Positive.
SECURITY
The bonds are supported by an unlimited ad valorem pledge on all taxable properties within the district.
KEY RATING DRIVERS
ADEQUATE FINANCIAL FLEXIBILITY: The district's financial position remains healthy following the resolution of outstanding legal claims and voters' 2013 approval of a parcel tax extension. The district continues to spend down a portion of its substantial reserve balance, as previously planned, but Fitch expects financial flexibility to remain adequate.
RISING REVENUES: As a basic aid district, general fund revenues derive primarily from local property taxes, which have experienced steady growth. The district's basic aid status also insulates it from funding volatility associated with state budget pressures.
LIMITED ECONOMY: Development opportunities within the district's boundaries are limited, and population has declined in recent years. Nonetheless, median household incomes are well above state and national averages and per capita market values are high.
MIXED DEBT PROFILE: Overall debt levels are moderate. Carrying costs for debt service and retiree benefits are affordable, but likely to increase over the next several years due to escalating pension contribution requirements.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: Continued structurally balanced operations, in combination with maintenance of adequate reserves, would likely result in an upgrade of the district's rating. A decline in reserves below adequate levels would result in downward rating pressure.
CREDIT PROFILE
The district serves approximately 350 students across two communities within a 16 square-mile portion of unincorporated San Mateo County. La Honda is a residential enclave within commuting distance of Silicon Valley employment centers, while Pescadero is a somewhat isolated agricultural community on the San Mateo coast. Much of the land within the district's boundaries is protected open space, limiting opportunities for new development.
HEALTHY FINANCIAL POSITION
The district recorded operating surpluses for five consecutive years through fiscal 2013, increasing the unrestricted general fund balance to $2.1 million, equivalent to 45% of spending. The district has sought to reduce reserve levels in subsequent years, and expects the unrestricted general fund balance to fall to $1.5 million, or 27% of spending, by the end of fiscal 2015. Management has sought to limit deficit spending to one-time only purposes such as capital. Fitch's Positive Outlook for the district reflects the expectation that reserve levels will remain adequate following this period of adjustment.
INCREASING TAX REVENUES
An improved revenue picture has been a key factor in the district's strong results. Fiscal 2014 revenues were impacted by the loss of a federal grant, since renewed, but over the longer term revenue growth has followed the growth of the district's small but healthy tax base.
As a basic aid district, the district receives more in local property taxes than it would otherwise be entitled to from state per-pupil revenues, allowing it to forego most state funding. These arrangements insulate the district's revenues from state funding volatility, a major challenge for most K-12 districts in the state during the last recession. Taxable assessed values (TAV) in the district remained stable during the downturn and have increased steadily in its aftermath.
In addition to ad valorem property taxes, the district receives approximately $200,000 per year in local parcel taxes. In 2013 district voters approved an extension of this tax for seven years, through fiscal 2021.
The district's financial position has been strengthened by the resolution of outstanding legal claims relating to an earlier construction project. In fiscal 2013 the district recovered $2.2 million from involved parties and in 2014 used a portion to repay an outstanding loan from the county office of education.
The district has faced expenditure pressures over the last several years and has enhanced teacher compensation steadily to improve competitiveness with surrounding districts. Low class-size ratios provide the district with the flexibility to address potential operating imbalances through larger classes, but steadily growing revenues have made such steps unnecessary to date.
LIMITED ECONOMIC DEVELOPMENT POTENTIAL
Limited opportunities for economic development exist within district boundaries. Much of the district's land area is protected open space and most employment is based in agriculture or tourism. Population has declined in recent years, as has school enrollment. Nonetheless, wealth and income levels remain elevated due to the district's proximity to San Francisco Bay Area population centers and the desirability of its coastal location. Median household incomes for the district are 50% above the state average and assessed value per capita is a high $198,000.
MIXED DEBT PROFILE
The district's overlapping debt burden is moderate on a per capita basis at $2,922, and low relative to TAV at 1.5%. Amortization will remain below average following this transaction with 36% of outstanding debt retired within the next 10 years.
The district retains $9 million in GO authorization from a 2006 election and plans to issue a portion within the next two years. Fitch expects overlapping debt levels to remain moderate following any new issuance.
The district participates in two state-sponsored employee pension plans and faces increasing contribution requirements to address moderately underfunded positions. Carrying costs for debt service and retirement benefits were affordable at 15% of governmental expenditures in fiscal 2014, but will likely climb over the next several years.
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 and 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=982599
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