SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following general obligation (GO) bonds to be issued by the Montebello Unified School District, California:
--$100 million election of 2016 GO bonds, series A.
In addition, Fitch has assigned an Issuer Default Rating (IDR) of 'A-'.
The distinction between the 'AAA' rating on the 2016 GO bonds and the 'A-' IDR reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.
The Rating Outlook is Stable.
The bonds are expected to price the week of Dec. 5 via negotiated sale. Proceeds of the bonds will fund various capital improvements.
SECURITY
The 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' rating on the GO bonds 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.
Strong Tax Base; Low Debt: The economic resource base supporting the GOs is strong and diverse. The unlimited nature of the tax offsets any potential concern about tax base volatility. Overall debt is moderate relative to the tax base.
IDR Reflects Underlying Credit: The 'A-' IDR is based on analysis of the district's underlying credit, and incorporates manageable expenditure requirements and liabilities as well as strong state support, despite a relatively weak operating performance in recent years.
RATING SENSITIVITIES
MATERIAL CHANGES TO TAX BASE: Significant and long-lasting decline in the district's tax base and economy, while not anticipated, could result in downward ratings movement.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'A-' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to withstand historical revenue volatility, throughout the economic cycle. Continued revenue gains and increased financial resilience supported by reserves could result in upward rating pressure.
CREDIT PROFILE
The district encompasses a 22-square mile area in eastern Los Angeles County with ready access to multiple employment centers within a vast regional economy. District income levels are somewhat lower than regional and state averages.
DEBT SERVICE LEVY VIEWED AS SPECIAL REVENUE
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 for the bonds 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, specific to the bonds, 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 the proposed issuance 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 analyzes 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.
STRONG TAX BASE SUPPORTS BONDS
The district's diverse tax base and economy provide a strong basis for repayment of the ULTGO bonds that is unlikely to be reduced by normal or even severe cyclical fluctuations.
The tax base is growing at a healthy pace after experiencing moderate declines during the last recession. Assessed value (AV) has risen at a 4.2% CAGR since 1999 and prospects for further growth appear solid based on rising home values, while taxpayer concentration is minimal.
Tax rates are low and unlikely to rise to a level that pressures the rating even under relatively severe stress scenarios. The general tax rate of 1% of AV is established in the state constitution and may not be increased. Tax override levies for overlapping jurisdictions are similarly low at a combined 0.32% of AV for 2016.
IDR EXTENDS ANALYSIS TO OPERATING RISKS
The 'A-' IDR reflects the district's somewhat challenged recent operating performance, as well as rising state funding and manageable expenditure requirements and liabilities.
Economic Resource Base
Montebello Unified School District is located in eastern Los Angeles County and encompasses nearly all of the cities of Montebello, Commerce, and Bell Gardens, as well as portions of the cities of Monterey Park, Pico Rivera, Bell, Downey, Rosemead, and unincorporated portions of the county. The district operates 33 schools and serves a student population of approximately 28,000.
Revenue Framework: 'a' factor assessment
The district's revenues have lagged behind overall U.S. economic performance and inflation over the past 10 years, but it has begun to benefit from state funding increases targeted to schools with high proportions of disadvantaged students. The district's independent legal ability to raise revenues is limited by state constitutional provisions requiring voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
Based on the district's current spending profile and recent funding increases, Fitch expects district expenditures to be in line with revenues. Carrying costs for debt service and retiree benefits are affordable.
Long-Term Liability Burden: 'aa' factor assessment
Long-term liabilities for overall debt and the district's pensions are moderate relative to the district's resource base.
Operating Performance: 'a' factor assessment
The district retains adequate gap-closing ability despite reductions in reserves over the last several years, but operations could become stressed in a moderate recession. A recently adopted reserve policy should result in improved financial resilience and balanced operations going forward but has not yet been fully implemented.
Revenue Framework
State aid and local property taxes provide the vast majority of district revenues and are ultimately determined by a formula based on enrollment and overall state revenues.
Historical revenue growth has lagged behind overall U.S. economic performance and inflation due to enrollment declines, but Fitch expects stronger growth over the next few years as a result of state economic gains and the district's high share (89%) of disadvantaged students targeted under the Local Control Funding Formula. Management projects stabilizing enrollment over the next several years based on new investments intended to attract more students, but revenue gains could be diluted if enrollment continues to decline.
Like other California local governments, the district has no independent legal ability to raise revenues due to state constitutional provisions requiring voter approval for tax increases.
Expenditure Framework
Personnel costs for teachers and staff comprise the vast majority of district expenditures.
Based on the district's current spending profile, Fitch expects expenditure growth to be in line with to moderately above expected revenue growth.
The district's mandate to provide educational services limits its ability to make expenditure reductions in the event of a revenue shortfall. Management would likely utilize attrition and higher class sizes if needed to address unanticipated revenue declines. Carrying costs for debt service and retiree benefits are currently manageable at 13% of governmental expenditures but are likely to increase due to planned increases in pension contribution rates.
Long-Term Liability Burden
Long-term net pension liabilities and overall debt are moderate relative to the district's resource base. Amortization of direct debt is below average and is likely to weaken as a result of the current issuance and $200 million in additional GO debt expected to be issued over the next 6 to 8 years. Fitch expects long-term liabilities to remain within the moderate range following such issuance. The district participates in two state-sponsored pension plans with adequate funding levels and typical actuarial assumptions.
Operating Performance
Declines in reserves through fiscal 2015 have reduced the district's financial resilience and limit its gap-closing ability. Management reports a reversal of this trend in fiscal 2016 (unaudited) and projects additions to reserves in subsequent years per a new board-approved fund balance policy which would improve financial resilience if achieved.
The new fund balance policy calls for incrementally increasing general fund reserves to 15% of budgeted expenditures, in anticipation of potential future downturns. The district's budget management is also supported by California's robust Assembly Bill 1200 (AB 1200) school oversight framework, which requires conservative budgeting and multi-year forecasting with oversight from the county office of education.
The district's superintendent and chief financial officer were removed from office earlier this month by its governing board due to a reported difference of opinion on how to best run the district. An interim superintendent has been appointed but the timeframe for hiring of a permanent superintendent is not known at this time.
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 and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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