SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings for Berryessa Union School District, CA (the district):
--$8.6 million unlimited tax general obligation (GO) bonds (Election of 1999) series A, B and C at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by an unlimited ad valorem property tax on all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: The district maintained healthy reserves throughout the last recession and fund balances remain strong despite recent enrollment declines.
LIMITED REVENUE CONTROL: The district relies on state per-pupil funding for most of its support, like other K-12 school districts in California. District voters have shown their support for higher taxes by approving a local parcel tax and multiple GO bond authorizations, but the district has few other options for increasing revenues.
ADEQUATE EXPENDITURE FLEXIBILITY: The district managed funding shortfalls during the last recession through a combination of class size increases, furloughs, and the suspension of cost-of-living increases. Fitch expects that such options would be adequate to address any potential future revenue losses, but could be limited by statutory requirements and labor pressures.
SOLID ECONOMIC PERFORMANCE: The district benefits from its location within the city of San Jose (GOs rated 'AA+' by Fitch) and the large and diverse San Francisco Bay Area employment market. The recent strong performance of the region's high-technology sector has contributed to steady gains in assessed valuation (AV) and employment, while household income levels remain well above state and national averages.
MANAGEABLE LONG-TERM OBLIGATIONS: Carrying costs for debt and employee retirement benefits are affordable and a recent bond authorization should be sufficient to address existing capital needs.
RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, such as the district's strong underlying tax base and economy, and sound financial position. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The district is located in the heart of Silicon Valley, northeast of downtown San Jose, serving approximately 7,700 K-8 students in its 10 elementary and three middle schools.
SOUND FINANCIAL POSITION
The district maintained a sound financial position throughout the last recession despite ongoing enrollment losses. Unrestricted fund balance was equal to 18% of general fund spending at the end of fiscal 2014, well above the state's 3% reserve requirement for similarly sized districts. Management anticipates some spend-down of reserves over the next several years to address one-time needs, but the district has historically outperformed such forecasts. Fitch expects reserves to remain adequate based on the district's history of conservative budgeting and positive operating margins.
LIMITED REVENUE CONTROL
The district has limited control over its revenues and receives most funds from the state based on per-pupil apportionment. Annual enrollment declines of about 1% since 2009 have pressured district revenues in recent years, but management now anticipates a reversal of this trend based on new development within district boundaries. Voters have shown strong support for the district by approving a local parcel tax that accounts for approximately 3% of revenues, as well as multiple bond authorizations for capital improvements.
ADEQUATE EXPENDITURE FLEXIBILITY
The district has addressed reduced revenues due to enrollment declines largely through attrition, and managed shortfalls during the recession through a combination of class-size increases, furloughs, and the suspension of cost-of-living increases. Fitch expects that the district would utilize similar strategies in the event of future revenue losses. Statutory limits on class sizes and the length of the school year would likely limit the scale of potential expenditure reductions, as could opposition from labor. The district has been pressured in recent years to provide wage increases due to a strong local economy and competition for teachers, constraining its ability to limit growth in labor costs.
SOLID ECONOMIC PERFORMANCE
The district's San Jose employment base contracted significantly during the recession, but is now in its fifth year of expansion. Employment levels have experienced 58 consecutive months of year-over-year gains, and 2014 growth of 3.1% was almost twice the national average. The city's unemployment rate was 4.8% in February 2015, representing robust growth in both employment and the labor force.
The district's tax base shows little concentration and has performed strongly, rising a cumulative 20% over the past five years. Year-over-year home price gains of 12.5% as of March 2015, as reported by Zillow, appear likely to support additional growth in coming years. Income levels remain strong, with median household income at 155% and 179% of state and national levels, respectively.
MANAGEABLE LONG-TERM OBLIGATIONS
Overall debt levels for the district are moderate at 3.7% of TAV and $4,352 per capita, while amortization is below average at 42% in 10 years. Local voters approved a $77 million GO bond authorization in November 2014 for capital facilities and the district recently issued $40 million in new money debt.
The district participates in two state-sponsored employee pension plans and faces ongoing increases in contribution rates intended to improve actuarial funding levels. Other post-employment benefits are funded on a pay-go basis, resulting in a growing liability. Carrying costs for debt service and retirement benefits were affordable at 18% of governmental expenditures in fiscal 2014 but will face pressure from rising pension costs 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=983328
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