SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Natomas Unified School District's (the district) general obligation (GO) bonds as follows:
--$60.7 million GO bonds at 'BBB'.
The Rating Outlook is Negative.
--While the district's general fund balances are currently strong, they are vulnerable to significant reduction in the next two fiscal years.
--The district continues to experience significant cash flow pressure which could result in needing a state emergency appropriation loan in fiscal 2013.
--This financial pressure results from significant declines in student enrolment due largely to strong charter school competition, limited spending flexibility, and a difficult state funding environment.
--Labor concessions in fiscal years 2011 and 2012 provide important budgetary relief, but more are needed, in addition to improvement in the state education funding situation, to alleviate the immediate need for a state loan.
--Turnover in top management has been high, and the district is facing yet another change as the superintendent is leaving after one year in the position due to concern about a state takeover; the majority of the assistant superintendent positions will have new occupants in fiscal 2012.
--The district's socio-economic characteristics are below-average, the district has experienced significant taxable assessed valuation (TAV) declines, and further development is currently hindered by a flood plain moratorium that is expected to be lifted at the end of 2012.
WHAT COULD TRIGGER A DOWNGRADE?:
--The need for a state emergency appropriation loan which would evidence severe financial stress, add to the district's existing debt burden, and require repayments from the general fund that could crowd out other spending.
The bonds are secured by the district's full faith, credit, and unlimited ad valorem tax pledge.
Financial operations are strained, and Fitch expects the pressure will continue. While the district currently has a strong unreserved general fund balance, it is projecting significant general fund balance drawdowns and cash flow shortfalls over the next few years attributable to a difficult state funding environment and significant ongoing declines in student enrollment. The ongoing loss of students to local charter schools has a particularly severe financial impact since the resulting loss of attendance-related revenues is felt immediately. The district must rely on further labor concessions from bargaining units to achieve structural balance. While a state takeover of the district, triggered by the receipt of an emergency appropriation loan, might be avoided by improved state education funding and further labor concessions, draft legislation is ready for introduction if necessary.
The district, with significant support from the Sacramento County Office of Education (SCOE) fiscal advisor, has worked over the past 18 months to solve the district's budget deficit. As a result, the district was able to increase its fiscal 2010 unreserved general fund balance to $11.4 million or 15.8% of spending, up from $9.1 million or 11.2% of spending in fiscal 2009. Projected fiscal 2011 unreserved general fund results of $12.5 million or 18.6% of funding indicate continued improvement, as well as the use of one-time federal monies and increased state funding flexibility. However, the district's three-year projections indicate considerable pressure in fiscal 2013, assuming management is unable to make $11 million of very difficult budget cuts, the state does not waive its payment deferrals, and state aid funding declines in line with the Governor's original fiscal 2012 budget proposal. Under these assumptions, which Fitch views as conservative but realistic, the unreserved general fund balance could drop as low as $1.4 million or 2% of spending, below the state's 3% minimum general fund reserve requirement.
For fiscal 2011, the district continued its hiring freeze, received a waiver to increase class sizes above the state cap, implemented significant layoffs, employed more realistic student enrollment projections, and reduced departmental budgets in an effort to narrow the budget imbalance. While necessary, these expenditure reductions have compromised the district's financial flexibility leaving the district's personnel budget as the most likely source for cuts in fiscal years 2012 and 2013. The current prolonged labor negotiations for fiscal 2012 suggest that obtaining further personnel concessions will be difficult and may well need to be imposed unilaterally.
Located in the northwestern portion of Sacramento County, the district is home to approximately 28,000 residents. After a period of rapid growth, the district's total assessed value growth slowed over the past two years, before declining 7.6% in fiscal 2010 and 7.8% in fiscal 2011. The area economy is under stress as evidenced by high unemployment, below-average wealth levels, and a weakened property market with no development currently underway.
Net direct debt equals a high $6,828 per capita or a more moderate 2.4% of TAV. Overlapping debt is higher at $8,484 per capita but still moderate at 2.9% of TAV. Debt amortization is very slow with only 31% of debt repaid in 10 years. At this time, the district does not plan to issue additional debt, although a state emergency appropriation loan would add an estimated $20-$30 million to the district's existing debt burden, further reducing its financial flexibility going forward.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria