SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following bonds to be issued by the Grossmont Union High School District, California:
--Approximately $47.5 million 2016 general obligation (GO) refunding bonds.
The bonds will be sold via negotiation during the week of March 7. Proceeds will refund outstanding debt for interest savings.
Fitch also has assigned an Issuer Default Rating (IDR) of 'A' to the district. The distinction between the 'AAA' rating on the bonds and the 'A' issuer rating reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.
KEY RATING DRIVERS
PLEDGED SPECIAL REVENUE: The 'AAA' bond rating is based on a dedicated tax analysis without regard to the district's financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered 'pledged special revenues' in the event of a district bankruptcy.
DIVERSE AND GROWING ECONOMY: The district participates in the broad and diverse San Diego regional economy, which has experienced sustained growth in recent years. Population and assessed values have risen steadily and prospects for further growth appear strong.
MODERATE LIABILITIES: Overall debt levels are moderate although amortization is slow. Carrying costs for debt service and retiree benefits will likely rise due to pending pension contribution rate increases but are expected to remain moderate.
IDR REFLECTS FINANCES: The 'A' IDR reflects a strong financial oversight framework, adequate expenditure control and moderate debt burden. The rating is below average for the sector due to the district's limited financial flexibility, persistent operating deficits, and declining enrollment.
RATING SENSITIVITIES
SOLID TAX BASE AND ECONOMY: The 'AAA' general obligation bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'A' IDR could come under downward pressure if the district fails to restore structural budget balance and maintain reserves above the minimum levels required by the state of California.
CREDIT PROFILE
Grossmont Union High School District serves a 456 square mile area in San Diego County (implied GO bonds rated 'AAA' by Fitch). The district is home to 477,712 residents and has an enrollment of 17,243. Its boundaries include the entire cities of El Cajon, Santee and Lemon Grove, most of La Mesa, a small portion of the city of San Diego and a number of unincorporated areas within the county. It operates nine comprehensive high schools, two charter schools and a continuation high school, as well as adult education, career technical, alternative and special education programs.
TAX REVENUE TO REPAY BONDS VIEWED AS PLEDGED SPECIAL REVENUES
Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code and therefore would not be subject to the automatic stay (i.e. payment interruption) in the event the district were to file for bankruptcy.
Fitch has reviewed and analyzed legal opinions provided by district counsel and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily propositions 13 and 39), which limit and direct the use of pledged property tax revenues for bond repayment.
As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district.
DIVERSE AND GROWING ECONOMY
The district's large and diverse tax base and economy provide a strong basis for repayment of the ULTGO bonds that is unlikely to be reduced by normal or even moderately severe cyclical fluctuations.
The tax base is growing at a healthy pace after experiencing moderate declines (6.6% over two years) during the Great Recession. Assessed value (AV) has risen an average of 4.9% annually over the past two decades and rose 5.4% to $42 billion in 2016. Prospects for further growth in the district appear solid. The district includes substantial developable land and is within commuting distance of major San Diego employment centers. Growth has traditionally been driven by middle class workers seeking affordable homeownership away from the very expensive housing markets of the region's coastal cities.
Taxpayer concentration is minimal with the top 10 taxpayers accounting for just 2.7% of secured AV and no single payer accounting for more than 1%. The overall tax base is largely residential (86% of AV).
Tax rates are low and unlikely to rise to a level that pressured the rating even under relatively severe stress scenarios. The general tax rate of 1% of AV is set by Proposition 13 and may not be increased. The debt service tax levy (which varies automatically with debt service and AV changes) is low at just 0.21% of AV for 2016 for all taxing jurisdictions and 0.06% for the district's debt. The rates would rise to .25% and .08% respectively in a stress scenario that was twice as severe as the AV losses seen in the national housing downturn. Fitch believes the tax base is very unlikely to suffer losses that would meaningfully erode repayment capacity.
While precise data on the district's job market is unavailable, district residents have solid access to the broader San Diego County employment market. The county's job market generally tracks the national economy well and is experiencing a strong cyclical upturn. The county's non-seasonally adjusted unemployment rate was low at 4.7% in December 2015, in line with the national average and a percentage point below the state average.
Socioeconomic indicators are healthy despite considerable variation in incomes across the district. Overall district median household income is solid at 115% of the national median and 102% of the state median, but just 93% of the of the county level. The individual poverty rate is below the national average 13.2%.
MODERATE LIABILITIES
Overall debt levels are moderate at 4.1% of AV and $3,569 per capita. The district has $128 million of approved but unissued GO bond authorization available and plans to issue new debt gradually as AV rises to keep tax rates at levels presented to voters when the bonds were approved. The district is considering asking voters for the authority to accelerate issuance, but the debt burden would remain moderate even if the full authorization were issued immediately. Amortization is slow with just 31% of outstanding principal repaid within 10 years.
Carrying costs of debt service and retiree liabilities are moderate at 17% of governmental expenditures. Pending increases in pension contribution rates are likely to increase carrying costs, but Fitch expects them to remain affordable. The district participates in two state-sponsored multi-employer pension plans and Fitch estimates that the district's fiduciary net position was equivalent to 74.5% of its total pension liability at the end of fiscal 2015, assuming 7% investment returns.
IDR REFLECTS ADEQUATE BUT BELOW AVERAGE FINANCIAL PERFORMANCE
In addition to the tax base and debt levels of the district, the 'A' IDR incorporates the district's challenged financial operations and a strong financial oversight framework.
The district, like many California school districts, tends to run low reserves relative to historical revenue volatility and other school districts across the nation. Strong financial oversight and budget planning under California Assembly Bill 1200 and adequate expenditure control have allowed the district to consistently maintain reserves in excess of the 3% state minimum fund balance policy and the district's internal 4.5% fund balance policy.
However, Fitch judges financial flexibility to be limited. The district's operating budget is dependent on volatile state per-pupil funding, and persistent declines in enrollment (due to charter school competition and demographic changes) have yielded weak revenue growth for a decade. Like other California school districts, the district lacks meaningful revenue raising flexibility due to property tax limitations imposed by Prop. 13.
The district recorded net deficits in its general fund for each of the past four fiscal years, lowering unrestricted fund balance to $10.5 million, or a modest 7.2% of general fund spending at the end of fiscal 2015. The district's multi-year projections show a return to positive operating results in fiscal 2017, but rely on continued gains in state per pupil funding, which has been quite strong in recent years but are not guaranteed to continue. The district has returned to financial balance less quickly than other California school districts. A surge in per pupil funding has been muted by enrollment declines that have reduced the number of high school students by 11.8% since 2011.
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 Orrick, Herrington & Sutcliffe LLP as bond and disclosure counsel, KNN Public Finance as financial advisor to the district, and Lumesis.
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=1000432
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000432
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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