SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Shasta Union High School District (the district), California general obligation (GO) bonds:
--$19.8 million series 2002 and series 2003 (election of 2001), and refunding series 2011.
The Rating Outlook is Stable.
The bonds are payable from unlimited ad valorem property taxes on property within the district.
KEY RATING DRIVERS
ROBUST GENERAL FUND BALANCE: The district has a strong record of maintaining strong general fund balances and solid reserves through the economic cycle.
SCHOOL ENROLLMENT DECLINE: The district has been experiencing enrollment decline over a number of years; future student population will likely stabilize at a level significantly lower than its historical enrollment which could create revenue pressure.
FUTURE STRUCTURAL BALANCE EXPECTED: Further student enrollment losses will likely require corresponding spending cuts in order to ensure structural balance within the general fund.
CONSTRAINED ECONOMY, TAX BASE: The district's economy is somewhat constrained by its elevated unemployment rate, below-average socioeconomic characteristics, and a focus on agriculture and natural resources. The tax base is recovering although it remains below its pre-recessionary valuation.
LOW DEBT BURDEN: The total debt level is low and annual debt, pension, and other post-employment benefit (OPEB) carrying costs are very manageable.
The district is 1,892 square miles, located 160 miles north of Sacramento. It includes a large portion of the city of Redding and adjacent unincorporated areas of Shasta County. It operates three comprehensive high schools, one continuation high school, one community day school, and an adult education program. The district sponsors two charter schools.
SOLID FINANCIAL RESULTS DESPITE CHALLENGES
The district's financial operations faced considerable headwinds during the recession from state funding cuts, falling student enrollment, and a weak economy. Between fiscal years 2008 and 2013, general fund revenues declined 24%. Management budgeted prudently and controlled costs effectively, maintaining the district's strong general fund balances and liquidity. With the passage of Proposition 30 temporary state tax increases, overall improvements in state education funding, and the state's implementation of its local control funding formula, general fund revenues have started to grow again.
Fiscal 2013 was the first year in the district's recent history to end with a net operating deficit after transfers that was not caused by general fund transfers out to the capital fund. The $1.8 million structural imbalance was caused by student enrollment decline and the loss of one-time federal revenues, coupled with the school board deciding to draw down a portion of its very high general fund balance in response to labor cost pressures. Nevertheless, the district still ended the year with an unrestricted general fund balance of $19.1 million or 43.7% of spending. Further, despite absorbing a 2% base salary increase, the district projects that it will breakeven in fiscal 2014 (based on unaudited figures).
STRUCTURAL BALANCE EXPECTED GOING FORWARD
The district's conservative projections for fiscal years 2015-2017 assume further net student enrollment declines without corresponding personnel cuts. Consequently, these projections indicate general fund draw downs and considerable use of reserve funds from outside the general fund. District officials advise, however, that they would adjust staffing and site expenditures as required, as they did during the recession. Fitch notes the district retains considerable flexibility to resolve future structural imbalances.
SOMEWHAT CONSTRAINED LOCAL ECONOMY
Redding is a regional commercial hub in northern California, and has significant exposure to the government sector, with the county and the city being its major employers. The local economy has expanded into service industries, but agriculture and natural resources still play an important role. As the local economy weakened, the lack of job opportunities negatively impacted the local unemployment rate which remains elevated at 8% in July 2014, although noticeably improved from its 9.6% rate a year prior.
TAX BASE RECOVERY UNDERWAY
The district's largely residential composition left it exposed to the effects of the housing market downturn. Between fiscal years 2009-2013, the district's tax base declined 13.8%. Positively, the trend has reversed with an 8% taxable assessed valuation (TAV) recovery during fiscal years 2014 and 2015. The impact of Proposition 8 revaluations is declining, and there are fewer foreclosed properties.
LOW DEBT LEVEL
The overall debt burden is low at $998 per capita, or 1.2% of TAV. Principal amortization is very swift at 86% in 10 years. This drops to a still rapid 76% in 10 years when capital appreciation bonds' accreted interest is included. Approximately 13% of the total debt principal bears unhedged variable interest rates.
The district participates in CalSTRS to provide retirement benefits for its certificated employees and CalPERS for its classified employees. The district's other post-employment benefit (OPEB) liabilities amount to a moderate $7.2 million, equivalent to approximately 0.1% of TAV. Fiscal 2013 debt repayment, actuarially required pension contribution, and OPEB pay-as-you-go carrying costs were very manageable at 10.9% of total general fund spending. However, Fitch expects carrying costs to increase, but remain affordable, as employer pension contributions are raised to improve the pension systems' funded ratios. CalSTRS, in particular, has already notified school districts of significant annual rate increases to rectify its very low funded ratio.
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' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria