SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Moreland School District (the district), CA unlimited tax general obligation bonds (ULTGOs) at 'AA+':
--$19.3 million, series 2002B, 2002C, 2002D, and 2004E.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The district's GO bonds are payable from unlimited ad valorem taxes to be levied annually upon all property subject to taxation by the district.
KEY RATING DRIVERS
REDUCED RESERVES: The Negative Outlook reflects the use of reserves to support operations over the past few years, leading to a significant reduction in the district's unrestricted fund balance. The unrestricted reserve was equal to 7.5% of spending at the end of fiscal 2014, down sharply from 18.2% at the end of fiscal 2012.
PARTIAL RESERVE RESTORATION EXPECTED: The district's current financial forecast shows a return to surplus operations and build-up of reserves to previously high levels over the next three years. However, Fitch believes the district will underperform projections to some degree as no compensation increases are currently included. The 'AA+' rating reflects Fitch's expectation that continued enrollment growth and rising revenues will outpace expenditures to support modest growth in the district's financial cushion.
DYNAMIC BUT CYCLICAL ECONOMY: The district benefits from the dynamic, technology-led Silicon Valley economy. Income levels are well above average and the unemployment rate is relatively low, however, the local economy remains somewhat cyclical due to its concentration in high technology sectors.
RESILIENT TAX BASE: The district's tax base has remained relatively stable despite the economy's somewhat cyclical nature with steady annual growth since at least fiscal 2008.
ELEVATED DEBT LEVELS: Overlapping debt ratios for the district are expected to remain moderate to high with an additional debt issuance expected in the near future and average amortization rates of outstanding debt.
RATING SENSITIVITIES
INABILITY TO RESTORE RESERVES: The rating is likely to be downgraded if the district is unable to constrain expenditures, including labor costs, and grow its financial cushion over the near term.
CREDIT PROFILE
Moreland School District is an elementary school district located in Santa Clara County, serving an estimated
population of 48,366 in Campbell, Saratoga and western San Jose. The district has experienced steady enrollment growth over the past several years with the fiscal 2014 average daily attendance of 4,561 approximately 11.8% above fiscal 2011 figures.
SIGNIFICANT EROSION OF RESERVES
The district's historically sound reserve levels have declined significantly over the past several years as the district spent down a large portion of the balance to support programs and avoid sharp expenditure reductions. At the end of fiscal 2014, the district's unrestricted reserve was $3.3 million (7.5% of spending), less than half the $7.3 million balance held at the end of fiscal 2012.
The district's estimated actuals for fiscal 2015 reflect a stabilization of the unrestricted balance with a projected increase of approximately $34,000. The recent stability is driven by rising revenues, which have increased by a cumulative 17% from fiscal 2013-2015 (estimated) due to general improvements in state funding, increasing enrollment, and the statewide adoption of the Local Control Funding Formula. Prior to restoring financial balance in fiscal 2015, the district recorded three consecutive years with operating deficits.
Current financial projections show the district starting to rebuild its unrestricted reserve starting in fiscal 2016. However, the projections do not include salary increases, which are currently in the negotiation process. A significant increase in labor costs would reduce the projected surplus and likely keep the district's unrestricted reserve well below historical levels.
The district's revenue base currently benefits from a voter approved parcel tax and revenues derived from the leasing of surplus property. The parcel tax amounted to $1.1 million in fiscal 2014 or approximately 2.6% of revenue. The tax expires in 2017 although management is considering approaching voters for a renewal prior to expiration. The district generated $5.8 million or 13.8% of fiscal 2014 revenue from leasing surplus property.
ELEVATED DEBT LEVELS
The district's overlapping debt ratios are moderate at 3.96% of assessed value (AV) and high at $5,356 per capita. An additional planned issuance of approximately $15 million in August 2015 along with a refunding of approximately $15 million in general obligation bond anticipation notes in calendar year 2016 are not expected to materially affect the district's debt levels.
Positively, the district retained approximately $18 million in restricted cash for capital needs. The funds, which are not included in the general fund, were received from the sale of district owned property. While not available to meet general operating expenses, the funds provide the district with ample liquidity and sufficient resources, along with its bond proceeds, to meet its expected capital needs.
Other long-term liabilities are expected to be manageable for the district. Contribution increases for both CalPERS and CalSTRS, which provide defined pension benefits for the district, will increase annually over the next few years and have been factored into management's financial projections. While the contribution increases will reduce funds available for other needs, the district is expected to have sufficient financial capacity to meet the payments along with its other commitments without needing to significantly reduce expenditures.
DYNAMIC BUT CYCLICAL ECONOMY
The district is a Silicon Valley bedroom community with high income levels and a resilient tax base, although the technology-led economy remains cyclical. Median household income and per capita income are high at 158% and 145%, respectively, of national averages. The unemployment rate is relatively low at 4.6% (March 2015).
The district's tax base is non-concentrated and resilient, having grown throughout the most recent recession. AV increased by a cumulative 17.9% from fiscal 2012-2015.
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=987756
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987756
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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