SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds to be issued by Yuba Community College District, California:
--$73.5 million GO refunding bonds (dedicated unlimited ad valorem property tax bonds), series 2016A (tax-exempt);
--$3.8 million GO refunding bonds (dedicated unlimited ad valorem property tax bonds), series 2016B (taxable).
In addition, Fitch assigns an 'AA-' Issuer Default Rating (IDR) to the district.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.
KEY RATING DRIVERS
SPECIAL REVENUE ANALYSIS: 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.
ECONOMIC RESOURCE BASE
The district's economy and tax base is limited but stable to modestly growing, the long-term liability burden is affordable relative to its resource base and the unlimited nature of the ad valorem tax pledge offsets any concern about potential assessed valuation volatility.
ISSUER DEFAULT RATING
The 'AA-' IDR is based on the district's limited but stable economy providing stable to growing enrolment and related revenues. It further includes the district's moderate long-term liability burden relative to its resource base and strong ability to offset declines in funding by reducing the number and hours of classes commensurately.
Revenue Framework: 'a' factor assessment
District revenues have grown steadily in recent years due to both state economic improvement and stable-to-modestly-growing full-time equivalent students (FTES) and Fitch expects continued solid growth; 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 FTES. On average, growth in spending is likely to be in line with revenue growth over time.
Long-Term Liability Burden: 'aaa' 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 low burden on resources. Fitch expects this burden to remain low given the district is at the tail end of its capital program and pension liabilities are a relatively small portion of the burden.
Operating Performance: 'a' factor assessment
The district's ample expenditure cutting flexibility offsets its lower reserve levels relative to its historical revenue volatility as community college districts (CCD) have significantly more control over the level of services provided than K-12 school districts. The district budgets conservatively and is working to further bolster its financial cushion by adding to fund balance.
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 IDR is sensitive to the district's ability to maintain structural balance and maintain satisfactory reserves through spending cuts if revenues do not rise sufficiently.
CREDIT PROFILE
The district spans over 4,000 square miles of mostly rural and agricultural communities in northern-central California. It includes three entire counties (Yuba, Sutter and Colusa) and parts of an additional five counties. As a rural area remote from large population centers, the district is somewhat more exposed to assessed valuation (AV) volatility than areas closer to the urban center.
The Yuba City MSA includes both Sutter and Yuba counties and is centered around Yuba City (pop. 66,363), by far the largest city in the district. Located about 50 miles north of Sacramento, Yuba City and the surroundings are largely agriculturally centered as reflected in top taxpayers that include several food production operations (e.g. fruit and tomato processors) as well as power plants (geothermal and natural gas-fired). The unemployment rates in the more agricultural areas trend significantly higher than state and national rates. The tax base had four consecutive years of modest declines which has been followed by three years of solid growth bringing total AV to a new peak in fiscal 2016. There was a large fire in the western region of the district which may affect fiscal 2017 AV as it was not incorporated into fiscal 2016 AV. It is expected that structures will be rebuilt so the related AV decline would be temporary.
TAX REVENUE TO REPAY BONDS VIEWED AS 'SPECIAL REVENUES'
Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code and therefore the lien on pledged revenues would survive and 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. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district's bonds eliminates the need for such calculations.
ISSUER RATING ANALYSIS
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 FTES 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, as well as rising enrollment for the district. The district expects FTES to continue to rise based on the high school enrollment within the district.
The district has minimal independent ability to raise revenues. California's proposition 13 requires a vote of the people to raise taxes.
Expenditure Framework
Personnel costs for teachers and staff comprise the vast majority of district expenditures and are likely to be in line with to moderately above expected revenue growth based on the current spending profile. The district operates two colleges, Yuba College and Woodland Community College. In addition, the district offers classes at the Lake County Campus, the Colusa County Campus, Sutter County Center, and Beale Air Force Base.
Fitch expects expenditures to grow at about the same pace as revenues. The district enjoys ample spending flexibility to manage the level of services provided which is made possible because it is able to adjust enrolment and its teaching staff.
Over half of the district's employees are adjunct professors, so staffing numbers can be adjusted rapidly. Fixed costs for debt service and retiree benefits are moderate and only a modest burden on discretionary revenues as all outstanding bonds are unlimited ad valorem GO bonds payable from property taxes. The teachers' pension contribution rates are scheduled to rise but remain manageable.
The adjunct, classified and police contracts expired at FYE 2014 so the district is operating under the previous contract. The district is currently in negotiations with all unions and expects to finalize them in time for fiscal 2017. The district is expecting concessions in benefits as were achieved during the recession. The district believes salaries are very competitive so does not expect much pressure for salary increases.
Long-Term Liability Burden
Debt and pension liabilities are a moderate burden on the resource base. The other post-employment benefits (OPEB) liability is manageable. The district has about $33 million in remaining bonding authorization; however, debt service is currently at the promised tax rate cap. The district is considering returning to voters to re-authorize the $33 million. Amortization of existing direct debt is very slow, but this is offset somewhat by the limited capital needs.
Operating Performance
Fitch expects the district to maintain relatively balanced operations throughout the economic cycle and available fund balances near its policy level of 15% of expenditures. Recent budgets appear conservative.
The district has continued prefunding OPEB during the recovery and continues to build reserves in the current fiscal year.
The district expects surplus operations in fiscal 2016, bringing its available fund balance (general fund, retiree benefits fund and capital projects fund) to about 21% of spending, well above policy levels.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was 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=1003869
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003869
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.