SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following Washington Unified School District (the district), CA unlimited tax general obligation bonds (ULTGOs) at 'AA-':
--$0.5 million outstanding (Election of 1999) series B;
--$15.8 million outstanding (Election of 2004) series A;
--$1.1 million outstanding (Election of 2004) series B.
The Rating Outlook is Stable.
SECURITY
The district's GO bonds are payable from unlimited ad valorem taxes levied annually upon all property subject to taxation by the district.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The district benefits from healthy reserves, balanced financial performance, sound liquidity levels, and a moderate degree of remaining expenditure flexibility.
PRUDENT BUDGETING PRACTICES: The district is expected to modestly increase its unrestricted reserve over the next few years as significant state revenue increases are realized. Management's prudent and conservative budgeting practices offset some concern regarding future revenue volatility.
HIGH DEBT BURDEN: The district's overall debt ratios are expected to remain relatively high due to projected issuances and remaining capital needs.
SUBPAR ECONOMY: The local economy is characterized by a structurally high unemployment rate and below average income levels. Positively, recent improvement in the real estate market has increased the tax base in each of the past two years after several years of modest declines.
RATING SENSITIVITIES
UNEXPECTED STRUCTURAL IMBALANCE: An unexpected and prolonged structural imbalance that materially reduces the district's unrestricted reserve could lead to negative rating action.
CREDIT PROFILE
The district is located adjacent to Sacramento, the state capital, and encompasses the city of West Sacramento in eastern Yolo County. The unified school district provides elementary and secondary education in grades K-12 to approximately 7,100 students. District population growth has been above average since 2000 and equaled 49,630 in 2014.
SOLID FINANCIAL PROFILE
The district benefits from a solid financial profile with structurally balanced financial performance and healthy reserve levels. At the end of fiscal 2014, the district's unrestricted fund balance was $10.3 million or 15.6% of spending. Recent projections show the balance increasing modestly in fiscal 2015 to $10.6 million.
General improvements in state funding along with the statewide adoption of the Local Control Funding Formula (LCFF) have led to a significant increase in district revenues. Total revenues increased by 7.5% in fiscal 2014 and are projected to increase by an additional 14.8% in fiscal 2015. The revenue gains have helped return the district to structural balance following two consecutive years of modest operating deficits. In fiscals 2013 and 2014 the district recorded operating deficits of $2.4 million (4.2%) and approximately $178,000 (0.3%), respectively.
The district is projected to record an operating deficit of $2.2 million (3.4%) in fiscal 2015, although this reflects the district's intentional spending down of restricted reserves, including funds dedicated to the implementation of the Common Core. On an unrestricted basis, the district expects to generate an operating surplus of nearly $625,000 (0.9% of spending). The district's financial projections show continued operating surpluses through fiscal 2018 under reasonable assumptions, including relatively conservative revenue increases.
RISING PENSION CONTRIBUTIONS
Fitch views the projected contribution increases to CalSTRS and CalPERS, which provide defined pension benefits to teachers and classified employees, respectively, as manageable for the district. The cumulative increase is projected at approximately $628,000 or 0.9% of spending in fiscal 2015.
POTENTIAL BUDGETARY PRESSURES
Several factors could potentially increase budgetary pressure over the next few years--specifically, climbing pension contributions and other fixed retirement costs, significant capital needs, and wage demands by the district's unionized workforce. Tension between the district and its teachers' union became evident when recent labor negotiations reached an impasse, leaving contracts for fiscals 2015 and 2016 open. The rating reflects Fitch's expectation that the district will continue to balance its revenue and spending needs.
HIGH DEBT BURDEN
The district's total debt burden is expected to remain high with an issuance of $24.9 million in fiscal 2015 and an additional issuance of $24.9 million tentatively planned for fiscal 2017. Overall debt levels, which include overlapping tax increment debt, are projected at $9,554 per capita and 8.3% of assessed value at the end of fiscal 2015. The pace of debt retirement is average.
BELOW AVERAGE ECONOMY; RECOVERING TAX BASE
The local economy remains relatively weak with a structurally high unemployment rate of 8.1% (March 2015) and below state-average income levels. Positively, job growth in the city appears to be picking up with slightly above average gains over the past two years.
The local real estate market has also begun to recover, contributing to a 3.8% and 7.1% increase in AV in fiscals 2014 and 2015, respectively. Despite the recent gains, fiscal 2015 AV remains approximately 1.6% below the fiscal 2009 peak (reflecting the lingering impact of the housing led recession on the area). Fitch expects additional AV increases over the near term as the real estate market continues to recover and some additional development takes place within the city.
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.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987314
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987314
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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