SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Dixie Elementary School District, CA (the district) bonds:
--$5.3 million general obligation (GO) bonds, (election of 1999) series A and GO refunding bonds, series 2011 at 'AA+';
--$1.9 million lease revenue bonds (clean renewable energy bonds), series 2009 at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by an unlimited ad valorem tax on all taxable property within the district.
The lease revenue bonds are secured by lease rental payments from the district to the Dixie Education Foundation, a non-profit public benefit corporation, for use of the district's administrative offices, subject to abatement. The district covenants to budget and appropriate the lease rental payments annually.
KEY RATING DRIVERS
PROJECTED RETURN TO POSITIVE OPERATIONS: The district has drawn down its general fund reserves progressively over the last five fiscal years. With improved state education funding, the district expects to return to balanced-to-positive general fund operations in fiscal 2016.
FINANCIAL FLEXIBILITY STILL SOUND: Despite the reduction in reserves, the district's finances remain characterized by good liquidity, access to borrowable funds, manageable labor cost increases, conservative budgeting, and expenditure flexibility.
DIVERSE REVENUE SOURCES: The district benefits from diverse local revenue sources, including a parcel tax, lease revenue, and the support of an active foundation.
STRONG ECONOMY AND TAX BASE: The district is well located within the San Francisco Bay Area economy and its diverse tax base continues to benefit from solid AV gains.
MODERATE DEBT BURDEN: The district's moderate debt burden is characterized by average amortization and affordable carrying costs with rising pension contributions. The district's debt burden is projected to remain moderate despite additional new debt planned for issuance in 2016 or 2017.
RATING SENSITIVITIES
STRUCTURAL BALANCE: Fitch expects the district will rebuild its reserves from fiscal 2016 onwards given positive local economic indicators and increased state education funding. Failure to do so could result in downward pressure on the rating.
CREDIT PROFILE
The district is located in Marin County and covers approximately 50 square miles of which two thirds is the northern portion of the city of San Rafael and the balance is unincorporated county, including the communities of Marinwood and Lucas Valley. The district operates three elementary schools (grades K-5) and one middle school (grades 6-8) with enrollment of around 2,000 students.
PROJECTED RETURN TO POSITIVE OPERATIONS
The district has used general fund drawdowns in fiscal years 2011-2014 (of between 1.3% and 2.8% of total expenditures and transfers out each year) to avoid layoffs and protect its education programs. Consequently, the district's general fund ended fiscal 2014 with a total fund balance of $3.1 million (15.6% of spending), compared to $4.1 million (23.1% of spending) in fiscal 2011.
The district is projecting a further net operating deficit after transfers of approximately 2.4% of total expenditures and transfers out in fiscal 2015. This would draw the total general fund down to $2.6 million (12.4% of spending). Therefore, despite recent years' deficit spending, the total general fund balances have continued to exceed the district's 10% reserves policy. While this policy is well above the state's minimum reserves requirement of 3%, it is lower than the median reserves for the 'AA+' rating category.
Due to improved state education funding, the district is projecting a return to balanced-to-positive operations in fiscals 2016-2018. This would ensure that its general fund reserves remain above the 10% policy level.
FINANCIAL FLEXIBILITY STILL SOUND
General fund liquidity has remained strong throughout the recent recession and the district retains its access to Marin County's tax anticipation note (TAN) program in the unlikely event that should be needed. The district retains good expenditure flexibility, particularly with regard to its administrative and repair and maintenance budgets, and the ability to reduce positions in its fiscal 2016 budget.
The fiscal 2015 labor agreements increased employees' salary schedules by an affordable 2%, provided a 0.5% one-time salary payment, and increased employees' hard health benefits cap by 0.5%. Labor negotiations are currently underway for fiscal 2016. The district's labor contracts are typically somewhat flexible given that they permit layoffs and furloughs, do not require binding arbitration, and do not mandate consideration of regional compensation in salary/wage adjustments.
DIVERSE FUNDING SOURCES; STRONG COMMUNITY SUPPORT
In fiscal 2015, the district moved out of basic aid status and into the state's local control funding formula (LCFF). The district has benefitted from increased state education funding under LCFF. However, it is now relatively more exposed to state education funding volatility than it was previously. This exposure is somewhat mitigated by the district's receipt of more than 20% of its general fund revenues from three sources other than state education funding and local property taxes, higher than typical for California school districts.
These sources include a parcel tax which strong voter support in June 2011 both renewed through 2019 and increased to $352 per parcel, up from $245. This parcel tax generated almost $2 million in fiscal 2014 (10.7% of general fund revenues). The district also receives revenue from leasing out four surplus school sites to other education service providers ($1.4 million in fiscal 2014). Additional support is provided by significant charitable donations from the district's parent foundation ($0.9 million in fiscal 2014).
STRONG ECONOMY AND TAX BASE
The local economy benefits from its participation in the broad and diverse economy of the San Francisco Bay Area. Wealth levels in the district are well above average. Per capita income and median household income are 190% and 177%, respectively, of the national average. The April 2015 unemployment rates for the city of San Rafael and Marin County were very low at 3.4% and 3.2%, respectively, compared to the state average of 6.1% and the national average of 5.1%.
The district's tax base is nearly 82% residential and has remained relatively stable over the past several years. Since fiscal 2011, TAV has increased by a total of 16.1% as the district has benefitted from the strong local economy and, more recently, the county assessor has reversed TAV reductions approved during the recession. The tax base is diverse with no single taxpayer accounting for more than 3.3% of total TAV.
MODERATE DEBT BURDEN
The district's overall debt burden is moderate at an estimated $3,783 per capita and 2% of TAV. With the issuance of GO bonds in 2015 (not rated by Fitch), principal debt amortization has slowed to a still average 47% in 10 years. The district expects to issue a further $15 million in GO bonds in 2016 or 2017. That would use up the full $30 million authorization approved by 74.6% of voters in 2014 to fund school facility upgrades and repairs. Debt levels would remain moderate.
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. CalSTRS 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 unfunded OPEB liability is an affordable $1.04 million, and there is a designated OPEB special reserve of $208,000 maintained separately from the general fund.
The district's annual debt repayment, pension contributions, and OPEB pay-go carrying costs represented an affordable 9.6% of its fiscal 2014 total governmental expenditures. This fixed-cost burden will rise given the issuance of additional GO bonds and increased pension contributions. However, carrying costs are expected to remain manageable.
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=988279
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988279
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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