Fitch Affirms Anaheim City School District, CA's GOs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA-' rating on outstanding unlimited tax general obligations (ULTGO) bonds of the Anaheim City School District, CA (the district) as follows:

--$57.6 million outstanding series 2004 and 2007.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE: Planned general fund deficit spending due to the potential conversion of an elementary school to a charter school may decrease reserves to levels that Fitch still considers adequate.

CHARTER CONVERSION, REVENUE LOSS: The district stands to lose a significant amount of revenues if a lawsuit seeking the charter school conversion is successful. The district plans to mitigate the lost revenues, through both revenue and expenditure measures.

TOURISM-DEPENDENT ECONOMY: Tourism dominates the economy, with The Walt Disney World Company (Disney; Fitch Issuer Default Rating [IDR] 'A'; Outlook Stable) comprising a high 25% of taxable assessed value (TAV). The city of Anaheim experienced remarkably stable AV performance during the downturn and has seen a 16.6% rise over the past five years.

MANAGEABLE DEBT BURDEN: Fitch expects the district's overall debt burden to remain moderate. Pension costs will likely rise over the next several years in order to address substantial unfunded liabilities, subject to future state legislative action.

RATING SENSITIVITIES

POTENTIAL REVENUE LOSS MITIGATION: The district's financial performance would likely suffer, though remain adequate in the near term, if the conversion of a district elementary school to a charter school takes place. Thus, actions to mitigate the associated revenue losses are critical to maintaining the district's current credit rating.

CREDIT PROFILE

Anaheim City School District serves the city of Anaheim, located approximately 30 miles southeast of downtown Los Angeles in northern Orange County. As of 2016, the district serves a population of 201,750 and had average daily attendance of 18,110.

ADEQUATE FINANCIAL PERFORMANCE

The district is currently facing a lawsuit from a parent group seeking to convert a district elementary school into a charter school under the state Parent Empowerment Act. If the district receives an unfavorable ruling, it stands to lose a significant $6 million of ongoing funding. However, management presented a Budget Stabilization Plan to the board on March 9 that was unanimously approved. The plan provided solutions that exceeded budget revenue shortfall by more than 50%. It contains offsetting revenues, including additional Local Control Funding Formula (LCFF) monies contained in the Governor's budget (not yet adopted), reclassification of certain programmatic spending, and reduction in deferred maintenance contributions as allowed under state law.

Prudent budgeting practices and proactive spending reductions have helped the district weather general fund revenue declines in the post-recession years. Management implemented approximately $16.5 million in cuts from fiscal years 2009 to 2013, reducing general fund spending by nearly 10% over this time. Cuts included increased class sizes, reducing staff through layoffs and attrition, salary freezes, furlough days, and the elimination of several programs. Fitch believes the district retains a slim degree of additional expenditure flexibility.

The district's projected fiscal 2016 year-end unrestricted fund balance totals $26.5 million (equal to 13% of spending). Fiscal 2015 ended with an unrestricted general fund balance of $15 million, equal to 8% of spending. This is a slight increase from the 2014 balance of $13 million (7.7% of spending). In anticipation of additional LCFF gap funding in fiscal 2015, the district implemented the first wage increase raise in five fiscal years during fiscal 2014. A general fund balance draw in fiscal 2013 was related to a loss of federal stimulus money and the carry-over of expenditures for restricted programs from fiscal 2012.

DEPENDENT REVENUE STRUCTURE; IMPROVEMENT EVIDENT

State funding provides the majority of district revenues, and growth prospects have improved recently with the general recovery in state finances. The district benefits from the state's new funding formula as 89% of the student body is eligible for LCFF funding. Consequently, revenue growth appears likely to continue, even if the district loses the school conversion lawsuit. This trend is countered by the district's continued loss in average daily attendance (ADA), thus slowing revenue growth.

The district's maintenance of general fund balances above its low target of 6% appears likely through fiscal 2018 even given the loss of the charter school.

CONTINUED ADA DECLINE

The district's ADA in fiscal 2016 of 18,113 represented a decline of more than 15% since 2001, partly attributable to the district's minor population loss. ADA increased slightly in fiscals 2012 and 2013 before declining in fiscals 2015 and 2016, demonstrating volatility that the district did not anticipate when projecting flat enrollment. The district is now projecting further declines through fiscal 2018 and a recent report by its demographer shows declines for the next 10 years.

AVERAGE ECONOMY PERFORMING WELL

TAV declined only 1.2% during the downturn and has since increased nearly 17% though fiscal 2016. The district's economy is dependent upon tourism, largely driven by Disneyland, which accounts for 25% of fiscal 2015 AV. Disney completed over $1 billion in renovations to the California Adventure Park, including the opening of Cars Land in June 2012, and is expected to invest another $1 billion in its Star Wars land.

The unemployment rate of 5.2% as of December 2015 remains higher than the county average, but compares favorably with the state and is nearly even with the nation. Per capita money income is very low but median household income is much higher, reflective of both local service sector employment and larger households within the city.

MODERATE DEBT PROFILE

The overall debt burden for the district is moderate on a per capita basis and relative to TAV. Amortization is moderate with approximately 53% of principal repaid in 10 years, excluding $20.4 million in accreted interested attributable to the district's series 2011 capital appreciation bonds and $30 million in bond anticipation notes (BANs) that mature in fiscal 2017. The district is currently assessing capital needs. It expects to issue approximately $85 million within the next year to refund the $30 million BANs, refund approximately $25 million in GO bonds for economic savings, and provide $30 million for school modernization. Further, the district expects to issue $30 million for school projects in fiscal 2019.

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.

The district's other post-employment benefits (OPEB) had a very low unfunded OPEB liability of approximately $37 million (0.2% of fiscal 2014 TAV as of the most recent valuation on July 1, 2013. Carrying costs for debt service and retirement benefits are manageable (11% of governmental expenditures in fiscal 2015) but will rise over the next several years given increased pension contribution rates.

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 beginning of the second 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, Lumesis, IHS, 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=1000822

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000822

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

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Barbara Ruth Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Barbara Ruth Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com