Fitch Affirms Arvin Union School District, CA's GOs at 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A' rating on the following general obligation (GO) bonds of the Arvin Union School District, CA:

--$129 thousand series 2004A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: The district's consistently sound general fund balance levels, ranging from 7.2% to a projected 8.36% of total expenditures, are supported by conservative budgeting practices.

IMPROVED REVENUE PROSPECTS: The state provides most of the district's revenues, and growth prospects have improved recently with the general improvement in state finances and economy. The district benefits from the state's adoption of the Local Control Funding Formula (LCFF) in 2013 and voters' 2012 approval of temporary tax increases under Proposition 30.

WEAK AND NARROW ECONOMY: The local economy and tax base are highly dependent on agriculture and a power plant. The Pastoria Energy Facility (power plant) represents about 29% of the district's tax base. Unemployment rate is improving but still remains high at 11.9% in December 2015, which is a clear sign of a limited economy.

MODERATE LONG-TERM OBLIGATIONS: Overall debt levels and retiree costs are moderate. The district's relatively sizeable capital needs are likely to increase pressure to the debt profile, but Fitch expects it to remain manageable.

RATING SENSITIVITIES

RESERVES OFFSET RISKS: Management's maintenance of a solid general fund balance mitigates the risks posed by the district's limited economy, concentrated tax base, and reliance on state funding.

CREDIT PROFILE

Arvin Union School District is located about 18 miles southeast of Bakersfield. As of 2015, the district serves a population of 20,585 and has enrollment of 2,978.

STRONG FINANCIAL POSITION

The district retains a moderate degree of spending flexibility with options to reduce or cut spending on student and community involvement programs. However, due to a stabilizing revenue environment and the implementation of the local control funding formula (LCFF), Fitch does not anticipate that the district will need to utilize this additional flexibility.

Following a $1.9 million decrease in general fund balance over the past two years, the district projects that fiscal 2015-2016 will add $3.2 million to reserves, which will bring unrestricted general fund balance levels to $10.9 million or a strong 33.2% of spending. The additional reserves provide the district with sufficient liquidity to absorb slight revenue declines or unexpected state funding deferrals if needed.

IMPROVED REVENUE PROSPECTS

State funding provides the majority of district revenues, and growth prospects have improved recently with the general improvement in state finances. Because over 95% of the district's student body has been targeted by LCFF funding, the district benefits substantially in fiscal year 2014-2015 by receiving approximately $21 million in LCFF target base grants as well as an additional $9 million in supplemental funding.

WEAK AND NARROW ECONOMY

The district's regional economy is largely rooted in agricultural and industrial entities, as reflected in the district's very concentrated tax base. The top taxpayer represents 29% of taxable assessed value (TAV) and the top 10 taxpayers comprised 53% of TAV. The district's TAV stabilized in fiscal 2014 and saw a small 1.8% increase in 2015 after several years of declines. 2015 TAV is now at about 10% below peak levels. Due to a lack of development in the city, Fitch expects minimal tax base growth over the medium term.

STABILIZED ENROLLMENT TREND

School funding is based on a per-pupil funding formula determined by the state and governed by voter-approved initiatives. The district believes that previously declining enrollment has stabilized, and projections for fiscal years 2016 are based on the assumption of no ADA growth. The district may experience an increase in ADA the next couple of years due to reconfiguration of district boundaries. Additionally, the local charter school has reached full enrollment (reducing competition for the district) and that several younger grade levels, particularly kindergarten, have started to experience higher enrollment.

MODERATE OVERALL LIABILITIES

The remaining maturities of the series 2004A bonds that Fitch rates are comprised of capital appreciation bonds with a combined initial purchase price of $129.3 thousand, an accreted value to date of $506 thousand and a $1.9 million maturity value. The district advance refunded the balance of the 2004A bonds with its series 2015A bond issuance (not rated by Fitch).

The overall debt burden for the district is moderate at $1,664 per capita and 2.9% of TAV; amortization of direct debt is slow with 34.3% of principal repaid in 10 years. The district's capital needs over the coming years are fairly extensive, as the district wishes to modernize outdated facilities and reduce the utilization of portable classrooms. Voters authorized the issuance of $15 million of GO's for capital improvements in November 2014, the first piece of which was issued in June 2015. Fitch expects that the district's capital improvement plan will be supplemented by the sizable increases in LCFF revenue and that future issuance will have a minimal impact on the district's debt profile.

The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. Funding for the California State Teachers Retirement System (CalSTRS) is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. Carrying costs for debt service and retirement benefits are currently low at 9.8% of governmental expenditures in 2015 but are likely to rise over the next several years.

The district also offers other post-employment benefits (OPEB) to employees, and its unfunded OPEB liability ($23.6 million as of the most recent valuation on July 1, 2014, 2% of fiscal 2015 TAV) is considered moderate. In most recent labor negotiations, the district maintained no change in benefits. In addition, the district intends to prefund the OPEB liability and maintains a $3.8 million OPEB fund designated for payment of future benefits, which Fitch views positively.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 in 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 Lumesis, CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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=1000420

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000420

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Nancy Rocha
Director
Fitch Ratings, Inc.
+1-512-215-3741
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Stephen Walsh
Senior Director
+1-415-732-7573
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nancy Rocha
Director
Fitch Ratings, Inc.
+1-512-215-3741
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Stephen Walsh
Senior Director
+1-415-732-7573
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com