Fitch Affirms Dry Creek JESD, CA's GOs at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following rating for Dry Creek Joint Elementary School District, CA (the district):

--$45.3 million outstanding general obligation (GO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The district benefits from a solid financial cushion, a significantly improved liquidity and revenue environment, and good expenditure flexibility. Fitch does not expect manageable projected deficits to materially weaken the district's financial profile over the near term.

STABILIZING ECONOMY: The district's economy is mixed overall, with solid income and average employment metrics offset by a housing market that suffered significant deterioration during the recession. More recent signs point to a housing market and tax base recovery, with positive implications for enrollment growth.

SATISFACTORY DEBT PROFILE: Debt levels and principal amortization are moderate and the district does not offer other post-employment benefits (OPEBs). Carrying costs are also moderate, but may rise from current levels if the district issues debt to finance its capital needs over the intermediate term, as envisioned.

PRUDENT MANAGEMENT PRACTICES: The district has a well-tenured management team with atypically robust minimum fund balance policies. As with all California school districts, the district is subject to strong fiscal oversight and reporting procedures.

RATING SENSITIVITIES

STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics, including the district's sound financial management and operations. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely over the next review cycle.

CREDIT PROFILE

The district serves a community of about 55,000 in and around the City of Roseville in Sacramento and Placer counties.

MIXED ECONOMY IN RECOVERY

The district is located in an upper income bedroom community in the large and diverse Sacramento employment region. The region contains an elevated degree of concentration in government employment and was hard-hit by the recent housing-led recession. The district's AV fell by a significant 17% from fiscal years 2009-2013 before climbing briskly in fiscal years 2014 and 2015 to $5 billion currently.

The recent tax base recovery stems from real estate price appreciation and the return of new construction, which is also expected to benefit student enrollment. Enrollment has declined steadily since the recession, down 4.8% since fiscal year end 2008 to 6,789 students for fiscal 2014.

SOUND FINANCIAL OPERATIONS

The district's recent financial performance has been solid, with operating surpluses in each of the past four audited fiscal years despite fluctuating liquidity and revenue support from the state. In fiscal 2014 the district generated a $316,000 operating surplus, increasing the total and unrestricted general fund balances to healthy levels of $16.3 million (33.3% of expenditures and transfers out) and $13.9 million (28.4%), respectively.

The district is benefitting from additional Proposition 98 funding and passage of Proposition 30, which temporarily increases the state's sales and income taxes partly to support K-12 funding. These funding gains are being offset to some extent by expenditure pressures related to wages, service restorations, and benefit cost escalation; as a result, the district's multi-year projections show manageable draw-downs. However, the district has routinely out-performed its projections.

Looking ahead, continued implementation of the Local Control Funding Formula (LCFF) likely will result in somewhat reduced Proposition 98 revenues for the district compared to what it would have received under the revenue limit funding system. LCFF is a distribution system for Proposition 98 revenues, with a higher proportion of K-12 state funding being directed to districts with high concentrations of English learners, economically disadvantaged students, and foster youths (together referred to as unduplicated count). The district's unduplicated count is slightly below average at 42%.

SATISFACTORY DEBT PROFILE

Overall debt levels are moderate at roughly $2,900 per capita and 3.4% of assessed value, and principal amortizes at an average rate of 51% retired over 10 years. Capital needs are contingent on future enrollment growth and likely would be fully funded from grants and remaining capacity from an outstanding general obligation bond authorization.

The district participates in the poorly funded CalSTRS pension system, as do all districts in the state. As part of its fiscal 2015 budget, the state initiated a seven-year program of pension contribution rate hikes that is structured to fully fund the system's unfunded liability over a 32-year period. The rate hike, if enacted as currently scheduled, would substantially increase the district's contribution rates to 19.1% of wages from 8.25%. The district does not offer post-employment health benefits.

The district's carrying costs (debt service, pension ARC, and OPEB spending) are estimated by Fitch at a moderate 22% of fiscal 2014 governmental spending, and could rise further if the district issues general obligation bonds to fund various capital projects, as noted above.

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=983263

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Contacts

Fitch Ratings
Primary Analyst:
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst:
George Stimola, +1-212-908-0770
Analyst
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst:
George Stimola, +1-212-908-0770
Analyst
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com