Fitch Affirms San Rafael City High School District, CA's GOs at 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following rating for San Rafael City High School District, CA (the district):

--$18 million general obligation (GO) bonds, (election of 2002) series B at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax levy.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Prudent financial management drives solid financial performance, characterized by sound reserve levels, ample expenditure flexibility, and a parcel tax.

BASIC AID STATUS: Since the district derives the majority of its revenues from local property tax revenues, it has little exposure to state funding volatility.

STRONG LOCAL ECONOMY: The district benefits from its close proximity to the San Francisco Bay Area employment market. Socioeconomic characteristics are above average, and the housing market has been resilient.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are moderately low and carrying costs are affordable but expected to rise given below average state pension funding levels. Amortization is moderate.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district serves approximately 2,300 students in three schools in San Rafael (implied GO rated 'AA' by Fitch), which is the seat of Marin County (implied GO rated 'AAA' by Fitch), and surrounding communities. The district is located about 20 miles north of San Francisco.

SOUND FINANCIAL PROFILE DRIVEN BY BASIC AID STATUS

Over the last several years the district has consistently operated at a surplus despite the recently recessionary environment. The district ended fiscal 2014 with a $464,000 operating surplus after transfers (1.7% of total general fund spending). The district's unrestricted general fund balance remained very sound at $10.2 million, or 37.6% of total spending.

The district's fiscal 2015 second interim report projects a $3 million operating deficit after transfers (9.5% of total spending). The district expects to significantly outperform this conservative estimate. Nevertheless, the district does expect to end the year with a much smaller but currently unspecified general fund balance draw down due to the one-time state-mandated implementation of Smarter Balance Assessment technology, which is requiring a significant non-capital equipment outlay. Fiscal 2015 is the first year in which the new assessment methodology is being applied to all students. Further technology upgrade expenditures will be required in fiscal 2016, so the district is conservatively projecting deficit spending in fiscal years 2016 and 2017. Taking into account the district's historically conservative projections and currently solid general fund balance, Fitch anticipates that the district will maintain unrestricted general fund balances appropriate for the 'AA+' rating level despite these state-mandated expenditures.

The district's basic aid status is a credit strength as its revenues are derived primarily from local property taxes which generally exceed the revenue limit and allow the district to avoid state funding volatility. However, basic aid status also exposes the district to declines in property tax revenues and the costs associated with significant student enrollment increases. Property tax revenue growth is heavily constrained by Proposition 13 so significant expenditure increases cannot easily be matched by revenue increases.

An important counterbalance to those concerns is the district's voter-approved parcel tax which generates $2.7 million in additional annual general fund revenue (approximately 9.5% of projected fiscal 2015 total general fund revenues) and benefits from an automatic 5% cost of living adjustment. The parcel tax has been consistently renewed by voters since its initial implementation in 1989. Most recently, in May 2013, 79% of voters supported renewal of the parcel tax through fiscal 2022.

STRONG LOCAL ECONOMY

The district benefits from its proximity to the diverse San Francisco Bay Area employment market. The city of San Rafael serves as a local commercial, retail, and employment hub within Marin County. The district's income levels are above average, with median household income in 2012 equal to 131% and 151% of state and national averages, respectively. The city's unemployment rate was only 3.8% in February 2015, well below both the state and national levels.

The district has a broader tax base and lower student enrollment than its two feeder districts which drives its basic aid status. The district has benefited from strong AV growth over decades and lack of property taxpayer concentration. There were only small AV dips in fiscal years 2011 and 2013 as a consequence of the recent recession. Subsequently, these declines have been more than offset by strong AV growth in fiscal years 2014 (3.8%) and 2015 (5.2%), driving AV to a peak of $13.9 billion. Strong AV grow is projected going forward, particularly given rising housing prices.

LONG-TERM LIABILITIES WILL REMAIN MANAGEABLE

Overall debt levels are moderately low at $2,599 per capita and 1.5% of AV. Amortization is moderate at 60% in 10 years (taking into account the accreted interest on one series of capital appreciation bonds). The district has nearly completed a master facilities planning process to review needs arising from some aging facilities plus student enrollment growth. The district might consider placing a bond measure on the November 2015 ballot to help with funding identified capital needs. The par amount of such a bond measure would be determined once the master facilities planning process is complete.

Carrying costs for debt service repayment, annually required pension contributions, and other post-employment benefit (OPEB) pay-as-you-go costs are currently affordable at 16.7% of total governmental spending. Carrying costs are expected to rise, particularly given the poorly funded status of the California State Teachers' Retirement System (CalSTRS), which the state is seeking to rectify through increased contributions from plan participants. The above carrying costs incorporate the initial phasing in of the state's move towards actuarially required, rather than statutorily determined, CalSTRS annual contributions.

The district is seeking to address its $5.4 million unfunded actuarially accrued OEPB liability by funding a special OPEB reserve fund which currently has $2 million set aside. The district plans to resume contributions to that reserve after a break in fiscal 2015 when resources were redirected towards common core curriculum implementation.

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, 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984070

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Contacts

Fitch Ratings
Primary Analyst
Alan Gibson, +1-415-732-7577
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
George Stimola, +1-212-908-0770
Analyst
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Gibson, +1-415-732-7577
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
George Stimola, +1-212-908-0770
Analyst
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com