SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds to be issued by the Peralta Community College District, California:
--Approximately $50 million 2016 GO bonds, 2006 election, series D;
--Approximately $80 million 2016 GO refunding bonds, series A.
The bonds are expected to price the week of June 6 via negotiated sale. Proceeds of the new-money GO bonds will be used to fund various capital projects. Proceeds of the refunding bonds will advance-refund outstanding GO debt for interest savings.
In addition, Fitch has assigned an 'AA' Issuer Default Rating (IDR) to the district.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.
KEY RATING DRIVERS
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. The 'AA' IDR reflects the district's solid economic basis, stable enrollment, moderate liabilities, and adequate gap closing ability.
Economic Resource Base
The district comprises several cities in the western portion of Alameda County, including the city of Oakland, and benefits from a robust local tax base. The regional economy continues to perform strongly and has experienced above-average employment growth over the past several years.
Revenue Framework: 'a' factor assessment
District revenues have grown steadily in recent years due to both state economic improvement and stable-to-modestly-growing enrollment; however, the district's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
The district has ample ability to adjust spending to match revenues due to its control over part-time staffing levels which can fluctuate with demand or state funding of enrollment. On average, growth in spending is likely to be in line with revenue growth over time.
Long-Term Liability Burden: 'aa' factor assessment
The district participates in two adequately funded state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies, resulting in a long-term liability total that is a moderate burden on resources. Fitch expects this burden to remain moderate given modest near-term capital needs and pension liabilities that are a relatively small portion of the burden.
Operating Performance: 'aa' factor assessment
The district's ample expenditure-cutting flexibility supplements its reserves, as community college districts have significantly more control over the level of services provided than K-12 school districts. The district budgets conservatively and maintains an adequate financial cushion.
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 'AA' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to offset historical volatility.
CREDIT PROFILE
The district serves six cities in western Alameda County, encompassing 78 square miles and a population of approximately 650,000. The local tax base is robust and has experienced average annual growth of close to 6% over the past 15 years, with only two years of small declines during the last recession. Job growth has been notably strong in recent years amidst a booming San Francisco Bay Area regional economy.
Revenue Framework
State aid and local property taxes provide the majority of district revenues which are ultimately determined by a formula based on enrollment and overall state revenues.
Historical revenue growth has exceeded inflation but was slightly below U.S. economic performance. Future revenue growth will be based on enrollment gains and state per pupil funding levels which may peak over the medium term.
State aid has expanded with the recent improvement in the state's economy. The district expects stable enrollment over the next several years.
The district has no independent ability to raise revenues. California's Proposition 13 requires a vote of the people to raise taxes. District voters approved an eight-year parcel tax by a substantial majority in 2012 that raises approximately $8 million per year to support core academic programs.
Expenditure Framework
Personnel costs for teachers and staff comprise the vast majority of district expenditures and spending growth is likely to be in line with to moderately above expected revenue growth based on the district's current spending profile.
The district enjoys solid spending flexibility to manage the level of services provided, made possible because it is able to adjust enrollment and its teaching staff. A majority of the district's teaching staff are adjunct professors, so staffing numbers can be adjusted rapidly.
Fixed costs for debt service and retiree benefits are somewhat elevated at 25% of spending. The teachers' pension contribution rates are scheduled to rise, but should remain manageable.
Long-Term Liability Burden
Debt and pension liabilities are a moderate burden on the resource base. Amortization of existing direct debt is slow, but this is offset somewhat by limited capital needs.
In addition to GO debt the district has approximately $175 million of outstanding OPEB bonds, the proceeds of which fund ongoing costs for these benefits. The proceeds are not deposited in an irrevocable trust but are pledged towards bond repayment and retiree benefits. The district also has several interest rate swaps on its OPEB bonds with a modest negative termination value relative to the district's total debt portfolio.
Operating Performance
Fitch expects the district to maintain relatively balanced operations over the long term and available fund balances above 10% of general fund spending. Recent budgets appear conservative. The district's current reserve levels are above the reserve safety margin for the rating level but may be reduced slightly by carryover spending planned for fiscal 2016. Notably, the district managed to maintain relatively stable fund balances through the recession due to the flexibility provided by its part-time teachers and ability to adjust services offered in terms of the number of classes.
The district has strengthened reserves during the recovery with no material deferral of required spending.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Master Criteria, this action was additionally informed by information from Lumesis.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003818
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003818
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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