Correction: Fitch Rates Simi Valley USD, CA's GO Bonds 'AAA' and IDR 'A'; Outlook Stable

SAN FRANCISCO--()--(This is a correction to a press release originally published on June 8, 2016. It includes the bonds being separated into two series.)

Fitch Ratings has assigned an 'AAA' rating to the following Simi Valley Unified School District, CA bonds:

-- $68 million 2017 general obligation (GO) refunding bonds (forward delivery);

--$4.5 million 2016 GO refunding bonds.

The bonds will sell via negotiation on or about the week of June 22 and be delivered in May 2017. Proceeds will advance refund outstanding debt for interest rate savings.

Fitch has also assigned an Issuer Default Rating (IDR) of 'A' to the district. The distinction between the 'AAA' bond rating and the 'A' issuer rating reflects Fitch's assessment that bondholders are legally insulated from the operating risk of the district.

SECURITY

The GO 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' unlimited tax general obligation 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 'A' IDR reflects the district's weak revenue framework, solid expenditure control and a limited gap closing ability, as well as a very low debt burden.

Economic Resource Base

The Simi Valley Unified School District serves 131,000 residents and 17,400 students in an established suburban bedroom community in Ventura County, California. The district includes the city of Simi Valley (home to the Ronald Reagan Presidential Library) and a small amount of unincorporated land and is located about 37 miles north of downtown Los Angeles.

Revenue Framework: 'bbb' factor assessment

The district is largely reliant on formulaic per pupil funding from the state of California and has no meaningful revenue raising flexibility. Revenue performance has been weak despite recent gains in per pupil funding due to the district's declining enrollment.

Expenditure Framework: 'aa' factor assessment

The expenditure framework is healthy with expenditures generally tracking revenues. Expenditure flexibility is solid with low fixed costs for debt and retiree benefits. Management retains the ability to control labor costs and staffing levels despite a structured bargaining framework.

Long-Term Liability Burden: 'aaa' factor assessment

Debt and pension liabilities are very low relative to the large economic base.

Operating Performance: 'a' factor assessment

Financial resilience through downturns is below average for the sector due to legal constraints on revenue raising and low reserves relative to historical revenue volatility. The district has rebuilt very little financial flexibility in the current economic expansion, positioning it poorly for the next downturn and suggesting significant service reductions will be necessary to maintain balance in the face of revenue declines.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE DRIVES IDR: The Issuer Default Rating could experience downward pressure if reserves fall materially from current levels. It could experience upward pressure if the district built and sustained a more robust reserve position.

TAX BASE DRIVES GO RATING: The general obligation bond rating could come under downward pressure if the district experienced a significant and long-lasting decline in economic activity and property values, which Fitch believes is unlikely.

CREDIT PROFILE

The $17.1 billion residential tax base provides strong fundamental support for the GO rating. Concentration is low with the top 10 taxpayers (primarily large apartment complexes) accounting for less than 4% of AV. The tax base suffered relatively moderate declines in the Great Recession with a cumulative decline of 6.5% and a worst year of 4.5%. The tax base is again growing at a healthy pace after recovering its former cyclical peak in 2015.

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 proposition 13), 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.

Revenue Framework

The weak revenue framework is the primary driver of the below-average IDR. The district is dependent on the State of California Local Control Funding Formula (LCFF) for about 80% of its revenues. State funding provides a broad and strong economic base for district revenues, constitutional priority for education funding and minimum funding levels, but it is also somewhat more volatile than typical municipal revenues. Demographic declines in local enrollment exacerbate the volatility of state funding. The district has not seen rapid funding gains under the state's new Local Control Funding Formula because it has a low unduplicated count of students who are second language learners, in foster care or in poverty.

Fitch expects revenues to remain stagnant until the district's enrollment stabilizes. Future revenue growth will be determined by overall state revenue performance, LCFF funding levels and attendance. Management believes declines are likely to abate over the next few years, given expectation for demographic stabilization and local housing development plans, but Fitch's assessment will change only after a sustained trend is demonstrated. The 10-year compound annual growth rate of general fund revenues was well below economic growth and the rate of inflation at 1.3% in 2014 and 1.1% in 2015. This pattern is not unusual for mature California suburbs past their rapid growth phase in communities with more older residents and fewer young families.

The district has no meaningful independent revenue raising ability due to strict property tax limitations of California's Proposition 13. The district may only raise taxes with a vote of the electorate, and it may not raise its operating property tax levy under any circumstances.

Expenditure Framework

Labor costs for teachers and staff comprise the vast majority of district expenditures, and spending control is the district's main method of financial management.

Spending growth is likely to keep pace with stagnant revenues because the district's declining enrollment allows gradual declines in staffing to match revenue weakness. Spending tends to outpace revenues during downturns but tracks revenues well on average across the business cycle.

Expenditure control is solid. The district's fixed costs for debt service and retiree benefits are low at just 13.9% of governmental funds expenditures. The district operates under the standard California school district labor relations framework, which requires management to meet and confer with organized labor but ultimately allows management to impose terms on workers in the rare instances where an agreement cannot be reached.

Long-Term Liability Burden

The district's direct debt portfolio is dominated by GO bonds with some historical use of capital appreciation bonds. The long-term liability burden (overall debt and Fitch-adjusted net pension liability) is very low at just 6.2% of personal income or 2.6% of AV. Direct debt amortization is typical with about half of debt paid off in the next decade. The district has no near-term new money bond issuance plans. The district participates in state-run pension systems that are adequately funded, and reforms adopted in 2012 should slow the growth in pension liabilities over time. Actuarial assumptions for the district's pensions are standard.

Operating Performance

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, but reserves are quite low relative to revenue volatility. Fitch's standard (1% decline in U.S. GDP) stress scenario suggests the district might have to manage a decline of 4.2% in general fund revenues in a moderate economic downturn. Reserves are currently about twice that level. Fitch expects the district to manage declines through a combination of reserve spending and headcount control, but the district's reserves are likely to approach the state minimum in fairly quickly.

Budget management in times of recovery is fairly typical with careful, conservative budget management and multiyear forecasting with oversight from the county office of education under AB 1200. However, the district's weak revenue performance has prevented it from rebuilding significant financial flexibility.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006269

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006269

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

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Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
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
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
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
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com