SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following Santa Ana Unified School District, California (the district) general obligation bonds (GOs) at 'A+':
--$ 45.6 million (election of 1999) series 2002B.
The Rating Outlook is revised to Stable from Negative.
The bonds are payable from an unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
STABILIZED OPERATIONS: The Outlook revision to Stable reflects significant gains in state funding and enrollment stabilization giving rise to recent positive operating results and improved financial prospects.
GROWING EXPENDITURES: The district has expanded available programs, increased instruction time, and continues to face employee cost pressures. Should state funding fall short again, structural balance will depend on successful expenditure management.
MIXED ECONOMIC PROFILE: Santa Ana's economy is mature and diverse, benefiting from its good transportation links to many large regional employment centers. However, the city's income, poverty and unemployment levels are weak.
ADEQUATE DEBT PROFILE: Slow debt amortization and the district's participation in the poorly funded CalSTRS pension system weaken the debt profile. However, the debt ratios are moderate, carrying costs are low, and capital needs are limited.
STRUCTURAL BALANCE: Continued break-even operating results and a sound financial cushion are required for the current rating level.
The district, the largest school district in the county and one of the largest in California, serves over 51,000 students from most of the city of Santa Ana (30 miles south west of Los Angeles) and portions of Irvine, Newport Beach, Costa Mesa, Orange, and Tustin. The district operates 37 elementary schools, nine intermediate schools, and 10 high schools.
SIGNIFICANT FUNDING IMPROVEMENTS
The Outlook revision largely reflects elevated state funding levels. Since the implementation of the Local Control Funding Formula (LCFF) in fiscal 2014, the district has seen drastic increases in state funding receipts, its main source of revenues accounting for 75% of the total. State aid was $276.3 million in fiscal 2013, which rose to $353.4 million (28% increase) and $415.9 million (18% increase) in 2014 and 2015, respectively. The first interim currently estimates $488.6 million, or yet another 17% increase for fiscal 2016.
General economic improvements in the state, the passage of proposition 30, and most notably, favorable demographics of the district to benefit from the new funding formula have led to the cumulative three-year 77% increase in state funding. The district serves a disproportionate share of disadvantaged students (English learners, low income, and/or foster youth) with an unduplicated count of 94%, enabling it to receive additional supplemental and concentration grants under LCFF.
At the same time, enrollment, which is also a factor determining funding, has started to stabilize after several years of modest declines due to dampened economic activities. The district now sees an increased kindergarten enrollment, and expects that the restored programs will help attract and retain students.
Two new county-sponsored charter schools were approved recently, providing more school choices for students within the district. However, district management expects minimal impact on district enrollment. Meanwhile, the district opened another charter school of its own, resulting in average daily attendance (ADA) addition of over 100, increasing to over 300 next year.
BETTER THAN EXPECTED RESULTS
Fiscal 2014 ended with a $7 million deficit, compared with an $18 million deficit previously expected, mostly due to higher than anticipated revenues. Fiscal 2015 also beat Fitch's prior expectation producing an $11 million surplus, boosting ending unrestricted general fund balance to $42 million (7.8% of spending) from a low $24 million (4.8%) in 2014.
The first interim projects a $17 million surplus by the end of fiscal 2016, further enhancing general fund reserves to 9.1%. Out year projections are also showing small surpluses, pointing to a reserve level at around 10%.
Elevated revenues allowed the district to increase spending. Over the past three years, total revenues grew by 40% from 2013 to 2016 while expenditure went up by 23%. Expenditure reduction measures were no longer needed, and cost savings were achieved through natural attrition and early retirement incentives, which will continue to play out in the intermediate term. The district has restored programs, increased instruction time, reduced class sizes, funded maintenance, set aside funds for OPEB, and given salary increases. Total paid teacher days will be 187 days (including 182 instruction days) in fiscal 2017, up from 185.5 days in 2016. Structural balance does not currently present a challenge for the district. However, if revenue growth slows or underperforms expectation, management will need to refocus on expenditure control to maintain a healthy financial profile. The increased days and programs could serve as a financial cushion should expenditure reduction becomes necessary.
Revenue growth has outpaced expenditure increases, resulting in enhanced reserve levels of 7.8% at the end of fiscal 2015. Together with tightened financial management, this lessens Fitch's previous concern that the district would prioritize the need to maintain services and spend reserves down to the state mandated 2% minimum level. However, the district does not formally have a higher reserve target. The mandated state minimum for districts of this size is 2%, and the district maintains a stabilization reserve of $7.5 million (or 1.2% of spending). If the district were to draw down to this low 3.2% reserve level, Fitch would view the action as a credit negative.
BELOW AVERAGE LOCAL ECONOMIC CHARACTERISTICS
Santa Ana's economy is well-diversified and enjoys good transportation options to the employment centers in the counties of Orange, Los Angeles and San Diego. Top employers include large theme parks, universities, hospitals, Boeing, Bank of America, and restaurant chains.
Many local economic indicators are below average. Per capita income and educational attainment levels are substantially below national averages, while poverty rates are elevated. However, the city's unemployment rate at 4.7% was on par with the national rate of 5% due to recent employment gains.
Assessed values (AV) fell by a cumulative 12% during the recession but started to recover in fiscal 2013. Zillow indicates an 8.4% year-over-year growth in house prices, suggesting further strengthening in AV can be expected.
MODERATE DEBT; CONCERN OVER CALSTRS
The district's overall debt is moderate at $2,480 per capita, or 2.4% of AV. Direct debt amortization is slow due to the significant use of capital appreciation bonds. After heavy bond issuances between 2008 and 2010, the district reports limited unmet capital needs. The district has no remaining bond authorization, and does not plan on additional issuances in the near term.
The district participates in CalPERS for classified staff and the poorly funded CalSTRS pension system for teachers, as do all school districts in the state. The combined funded ratio for the district is estimated by Fitch to be 74% based on a 7% investment return assumption.
The district's other post-employment benefit (OPEB) liability is $120.5 million, or 0.4% of district AV. Fiscal 2015 total debt service, pension and OPEB carrying costs are equivalent to an affordable 10.1% of total governmental spending. The state-sponsored teachers retiree system (CalSTRS) has particularly weak funding levels due to years of statutory contribution rates below actuarially required levels. Under AB 1469 approved in 2014, school district contributions to CalSTRS are set to increase by 11%, phased in over seven years. Fitch expects carrying costs to remain affordable despite the potential increase in pension costs.
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 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 Fitch's applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form