Fitch Rates Ravenswood City School District, CA's $16MM ULTGO Bonds 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned a 'AAA' rating to the following general obligation (GO) bonds to be issued by the Ravenswood City School District, California:

--$16 million election of 2016, series 2016, GO bonds.

In addition, Fitch has downgraded the following ratings to 'A' from 'A+':

--Issuer Default Rating (IDR)

--$6.6 million 2016 GO refunding bonds.

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 downgrade of the district's IDR reflects application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. In particular, the revised criteria place increased focus on financial resilience, which has been challenged by a trend of declining reserve levels.

The Rating Outlook is Stable.

The bonds are expected to price the week of November 28 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; Moderate 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 recent draws on reserves.

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 is located approximately 30 miles south of San Francisco and serves a population of about 37,000 in the cities of East Palo Alto and a portion of Menlo Park. Industry-leading technology businesses dominate the regional economy and have contributed to sustained job growth and rapid appreciation of both commercial and residential real estate values in recent years.

The district serves approximately 3,400 students in kindergarten through eighth grade and operates eight schools and one child development center. Although historically a low income community, the demographic profile of the district has begun to change in recent years with an influx of wealthier residents attracted by relatively affordable home values.

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 substantial 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 a cumulative 17.5% decline during the last recession. Assessed value (AV) has increased at a 6.8% CAGR since 1996 and by more than 40% in just the past two years. Prospects for further growth appear solid based on the strong regional economy.

Taxpayer concentration is high with the top ten taxpayers accounting for approximately one-third of AV. Most of the district's major taxpayers, however, are commercial and industrial properties with multiple tenants, mitigating the risk of business relocations or closures that could result in steep AV declines. The technology sector is dominant in the local economy but no single taxpayer accounts for more than 9% of AV.

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 0.11% of AV for 2017.

IDR EXTENDS ANALYSIS TO OPERATING RISKS

The 'A' IDR reflects the district's adequate gap closing ability, which benefits from manageable expenditure requirements and moderate liabilities.

Revenue Framework: 'a' factor assessment

The district's revenues have lagged behind overall U.S. economic performance over the past 10 years -- but ahead of inflation -- and have 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 the natural pace of expenditure growth 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: 'bbb' factor assessment

The district retains limited gap-closing ability following recent reductions in reserves and operations could become stressed in a moderate recession. Budget practices are sound and supported by a state budgeting and reporting framework.

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. Additional sources of funding include contributions from a local education foundation that accounted for 18.6% of fiscal 2016 revenues according to management and a voter-approved parcel tax that provided about 2.5% of district support.

Historical revenue growth has lagged behind overall U.S. economic performance in part due to enrollment declines during the past decade. Recent revenue growth has been strong due to state economic improvement and the district's high share (90%) of disadvantaged students targeted under the Local Control Funding Formula. Management projects stabilizing enrollment over the next several years but revenue gains could be diluted if enrollment declines are renewed.

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 the natural pace of expenditure growth to be in line with to moderately above expected revenue growth.

The district's mandate to provide educational services somewhat limits its ability to make expenditure reductions in the event of a revenue shortfall. During the last recession management utilized furloughs, attrition and higher class sizes to offset revenue declines and would likely return to such strategies if required.

Long-Term Liability Burden

Long-term net pension liabilities and overall debt are moderate relative to the district's resource base at 14% of personal income. District borrowing represents a small portion of overall debt and a booming regional economy appears likely to reduce this ratio over the next several years through growth in personal income levels. The district participates in two state-sponsored pension plans with adequate funding levels and typical actuarial assumptions.

Local voters approved $26 million in new GO bonding capacity in June of this year and this transaction will be the first issuance under the new authorization. The district plans to issue the remaining bonds within the next two years but Fitch does not expect such issuance to materially impact the district's long-term liability burden.

Operating Performance

District reserves provide a limited cushion against revenue declines expected in a moderate recession. Unaudited results for fiscal 2016 indicate additional reductions in reserves to approximately 9% of general fund spending, which could drop further based on plans for deficit spending in the district's 2017 budget. Fitch expects the district to maintain unrestricted reserves on an ongoing basis above the 3% minimum required by the state.

Budget management in times of recovery is solid with conservative budgeting, no unusual deferrals of required spending and long-term budget, capital and enrollment forecasting. 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.

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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Fitch Ratings, Inc.
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Director
+1-415-732-7573
Fitch Ratings, Inc.
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San Francisco, CA 94108
or
Secondary Analyst
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Analyst
+1-415-732-7578
or
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+1-212-908-0568
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Graham Schnaars
Analyst
+1-415-732-7578
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com