SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Natomas Unified School District, California (the district) general obligation (GO) bond ratings:
--$6.96 million GO refunding bonds, series 1999, and GO bonds (election of 2002), series 2004B to 'A-' from 'BBB+'.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by the district's full faith, credit, and unlimited ad valorem property tax pledge.
KEY RATING DRIVERS
PROJECTED RETURN TO STRUCTURAL BALANCE: The district is projecting a return to positive-to-breakeven general fund operations from fiscal 2016 onwards, despite ongoing labor cost pressures.
LOWER BUT SOLID GENERAL FUND BALANCES: Because of net operating deficits after transfers in fiscal years 2013-2015, the district has lower but still solid general fund balances. One-time state funds for mandated cost settlements are expected to protect the general fund balance in fiscal 2016.
MIXED SOCIO-ECONOMIC CONTEXT: Although the district's wealth characteristics are above average and the regional unemployment rate is much improved, there are indications of socioeconomic constraints for many of the district's families.
REBOUNDING TAX BASE: The district's assessed valuation (AV) continues its strong recovery from the housing-led recession. Residential housing construction has resumed since the de facto construction moratorium was lifted in June 2015 and is expected to boost student enrollment.
HIGH DEBT BURDEN; RISING CARRYING COSTS: The district's debt burden remains very high with moderate amortization. Carrying costs for debt service, pension, and other post-employment benefits (OPEB) are affordable, although pension costs will increase due to scheduled increases in pension contribution rates for two state-sponsored pension systems.
RATING SENSITIVITIES
The rating upgrade assumes the district's ongoing financial and administrative stability, particularly in relation to general fund structural balance, strong reserves, and good liquidity.
CREDIT PROFILE
Located in the northwestern portion of Sacramento County, approximately four miles north of downtown Sacramento, the district is home to approximately 73,000 residents. It is responsible for 13 schools plus four fiscally dependent charter schools. Approximately one-quarter of its student body attends charter schools.
LOWER BUT SOLID GENERAL FUND BALANCES
As previously anticipated by Fitch, the district ended fiscal 2015 with a lower, but still good, unrestricted general fund balance of $9.3 million or 10.4% of spending, down from a peak $19.5 million or 29.7% of spending in fiscal 2012. The general fund's net operating deficit of $4.7 million in fiscal 2015 occurred despite a 13.7% increase in general fund revenues. Concurrently, the district's general fund expenditures increased by a high 17.5%, largely caused by remuneration cost increases agreed in anticipation of ongoing funding improvements under the state's local control funding formula (LCFF).
The district's current labor contracts for both certificated and classified employees include a high 6% base salary increase, 1.5% off-schedule salary increases in each of fiscals 2015 and 2016, and other remuneration enhancements. In line with previous projections, the district expects to resume balanced general fund operations in fiscal 2016 due to LCFF funding increases and rising student enrollment (up 3.5%), bolstered by approximately $5 million in one-time state funds for mandated cost settlements.
The district expects to negotiate further base salary increases in fiscal 2017. A 2% increase would cost an estimated $1.3 million, effectively voiding most of the $1.8 million net operating surplus after transfers currently projected for that year. Rolling forward, such a salary increase will have the same impact on fiscal 2018, effectively meaning two years of near breakeven general fund operations. Nevertheless, general fund balances are projected to remain solidly above the district's 9% minimum unrestricted general fund balance policy.
After some significant cash flow weakness in the past, the district ended fiscal 2015 with improved and solid general fund cash and investments and does not anticipate any cash flow weakness in fiscals 2016-2018. The district maintains good access to borrowable resources with $62.2 million available outside the general fund (equivalent to approximately 70% of fiscal 2015 general fund spending).
The district remains committed to its policy of maintaining a minimum 9% general fund reserve, which is well in excess of the state's 3% minimum reserve requirement. The board has also committed additional funds for known one-time expenditures such as textbook purchases and technology upgrades.
IMPROVING ECONOMY AND TAX BASE
Census data indicate that the district's wealth characteristics are above average. However, the district's 63% unduplicated count of English learners, economically disadvantaged students, and foster care youths also suggests socioeconomic constraints for many of the district's families. The county unemployment rate is much improved at 5.6% in November 2015, compared to 6.8% a year prior. Employment growth has consistently outstripped labor force growth since 2012.
REBOUNDING TAX BASE
During fiscals 2010-2013, the district's AV declined by a cumulative 23.9%. This was due to both the housing-led recession and a de facto moratorium on new construction pending levee improvements around the Natomas flood plain to meet certain flood requirements. Subsequently, despite the continued construction moratorium, there was a partial AV rebound propelled by improving residential property prices, with AV growing by 16.8% in fiscals 2014-2016.
Further tax base growth is expected, since the de facto construction moratorium was lifted in June 2015. Per city of Sacramento ordinance, residential development will be limited each calendar year to 1,000 single-family houses and 500 multiple-family units (given that the levee improvements have yet to be completed). In addition to fueling AV growth, such levels of residential construction should also increase student enrollment and related per-pupil revenues under LCFF. Competition for students from charter schools appears to be stabilizing.
The city has yet to see concrete interest in commercial development beyond some retail construction.
HIGH DEBT BURDEN; RISING CARRYING COSTS
Overall debt equals a high $8,725 per capita and 7.7% of AV. Debt amortization is moderate at 42% in 10 years, taking into account the district's limited exposure to capital appreciation bonds. AV growth and any future GO bond refundings will determine the timing and amounts of future new money bond issuances under two outstanding voter authorizations. Fitch expects that new debt issuances to fund the district's capital master plan will keep overall debt levels high for the foreseeable future.
The district's fiscal 2015 carrying costs (debt repayment, annually required pension contribution, and OPEB pay-as-you-go contributions) cumulatively totaled an affordable 15.4% of total governmental spending. However, such carrying costs are likely to rise. In addition to repayment of additional bonded indebtedness, pension costs are expected to rise over the next several years due to scheduled increases in pension contribution rates for two state-sponsored pension systems.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
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=998262
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998262
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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