SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Mesa Union School District (the district) general obligation (GO) bonds:
--$3.6 million, series 2008 and 2011 refunding at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax levied on all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The district has maintained satisfactory unreserved general fund balances despite recent deficit operations. General fund balances are projected to increase given improved state education funding and more limited expenditure growth.
STUDENT ENROLLMENT FLEXIBILITY: The district enjoys high demand from non-district students which allows it to modify student enrollment numbers as necessary, giving it somewhat more ability to stabilize revenues than most school districts.
MODERATE DEBT PROFILE: The district's moderate debt burden is characterized by average amortization, no further debt issuance plans, and affordable carrying costs with rising pension contributions.
STRONG LOCAL ECONOMY: The district's economy features a small but stable population and above-average socioeconomic characteristics. The tax base has performed strongly, but is exposed to greater volatility since a local oil and gas company expanded.
RATING SENSITIVITIES
FINANCIAL PERFORMANCE: The rating is sensitive to the district's ability to maintain a stable financial profile, which is assisted by its ability to continue attracting students from outside its boundaries.
CREDIT PROFILE
The district covers nearly 29 square miles of Ventura County, approximately seven miles northeast of Oxnard. The majority of the district, approximately 60% of its taxable assessed value (TAV), is unincorporated, with portions of Camarillo and San Buenaventura comprising the rest of the service area. The district operates one K-8 school with approximately 650 students.
SOUND FINANCIAL PROFILE
The district retains a sound financial profile with satisfactory reserves, easily exceeding its 5% unreserved general fund policy. The district ended fiscal 2014 with an unrestricted general fund balance of almost $1.5 million. While this is a small dollar amount, in line with the district's size, it represented a substantial 31.3% of spending. Despite the mandated expenditure of common core funding, the district estimates ending fiscal 2015 with a similarly sized unrestricted general fund balance.
During fiscals 2010-2013 the district experienced structural imbalance in its general fund as it drew down small amounts of its reserves each year as part of its response to declining state education funding. It adopted this strategy in tandem with increasing student enrollment-related revenues and reducing some expenditures.
Improved state education funding under the local control funding formula (LCFF) helped resolve this structural imbalance in fiscal 2014, and is expected to help the district maintain general fund structural balance going forward. The district is projecting net operating surpluses in each of fiscals 2016-2018, with the unrestricted general fund balance projected to grow to approximately $2 million.
Financial planning has been facilitated by two-year labor contracts which provided 3% salary increases in each of fiscals 2015 and 2016, and no changes to the district's soft benefits cap. No salary reopeners are permitted for fiscal 2016.
STUDENT ENROLLMENT FLEXIBILITY
As part of its strategy to mitigate declining per pupil state revenue during the recession, the district increased its student enrollment by accepting more students living outside its boundaries. By increasing the number of attending students and maintaining the same number of classes, the district was able to generate additional revenue without incurring significant additional expenses. Consequently, the district's student enrollment increased to 665 in fiscal 2013, up from 584 in fiscal 2009 (13.9% increase). This was possible due to the high demand from students located outside the district boundaries.
In fiscals 2014 and 2015, student enrollment declined. The district decided to curb interdistrict transfers in order to facilitate consistent cohorts between grade levels, avoid split grades within classrooms, and maintain desirable teacher/pupil ratios. In fiscal 2016, the district has accepted 16 new interdistrict transfers, which has restored student enrollment to 638. The district anticipates maintaining student enrollment around 641 through fiscal 2018, of which approximately half will be students who reside outside the district's boundaries.
MODERATE DEBT PROFILE
The district's estimated overall debt levels are high as a dollar amount at $5,709 per capita, reflecting the district's low population density, but low as a percentage of AV (1.9%) reflecting the district's strong tax base. The district's outstanding debt is composed entirely of GO bonds with a moderate principal amortization rate of 60% in 10 years. The district has no future debt issuance plans.
The district's obligations to retirees are manageable but likely to pose an increasing burden due to participation in the inadequately funded California State Teachers' Retirement System (CalSTRS). The district also participates in the better funded California Public Employees' Retirement System (CalPERS). Whereas contribution rates for CalPERS are actuarially based, those for CalSTRS are set by statute and were below the level required to amortize the system's unfunded liability for some time. The system reported a funded ratio of 76.5% for fiscal 2014. Fitch estimates that funded ratio to be 72.5% based on a more conservative 7% rate of return assumption. School districts' CalSTRS contribution rates will rise significantly over the coming years in order to address the system's growing unfunded liabilities.
The district's OPEB liability is limited to employees hired before 1999 and according to the most recent audit is immaterial to the district's financial position. The district's debt service, pension and OPEB carrying costs were an affordable 14% of fiscal 2014 total governmental spending.
STRONG LOCAL ECONOMY
Wealth levels in the district are well above average with per capita income and median household income at 201% and 234% of the national averages, respectively. The local unemployment rate was only 4.2% in April 2015, compared to 5.1% nationally. Although approximately 41% of the district's students are English language learners, in foster care, or economically disadvantaged, this is likely due to the high percentage of the district's students who reside outside the district.
The district's tax base is performing well. After a modest 1.4% AV decline in fiscal 2011, there was strong 26.5% growth through fiscal 2015. However, increased taxpayer concentration might cause higher AV volatility in the future. In 2013, Vintage Petroleum LLC acquired the Santa Clara oilfield. That company now represents 14% of the district's tax base, compared to only 1.5% at the time of Fitch's previous review. Lower oil prices mean that oil underground is currently less valuable. After taking into accounting increased local property values, the county is estimating a fiscal 2016 AV decline of 5.3%.
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, and 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=988152
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988152
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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