Fitch Rates Sweetwater Union High School District (CA) ULTGO Bonds 'AAA'; Outlook Stable

PARIS & FRANKFURT--()--Fitch Ratings has assigned an 'AAA' rating to the following bonds to be issued by the Sweetwater Union High School District (CA):

--$163 million 2016 general obligation (GO) refunding bonds;

--$97 million 2016 GO bonds, election of 2006, series 2016B.

The bonds will be sold via negotiation during the week of March 7. Proceeds will refund outstanding debt for interest savings and provide financing for school improvements.

Fitch also has assigned an Issuer Default Rating (IDR) of 'A+' to the district. The distinction between the 'AAA' rating on the bonds and the 'A+' issuer rating reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.

KEY RATING DRIVERS

PLEDGED SPECIAL REVENUE: The 'AAA' bond rating 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.

DIVERSE AND GROWING ECONOMY: The district participates in the broad and diverse San Diego regional economy, which has experienced sustained growth in recent years. Population and assessed values have risen steadily and prospects for further growth appear strong.

MODERATE LIABILITIES: Overall debt levels are moderate although amortization is slow. Carrying costs for debt service and retiree benefits will likely rise due to pending pension contribution rate increases but are expected to remain moderate.

IDR REFLECTS FINANCES: The 'A+' IDR reflects the district's limited financial flexibility and recent history of declining reserves, offset by expectations of rising revenues under the state's Local Control Funding Formula (LCFF).

RATING SENSITIVITIES

SOLID TAX BASE AND ECONOMY: The ratings are sensitive to material negative changes in the district's tax base and economy, which Fitch believes are unlikely.

IDR SENSITIVE TO FINANCIAL PERFORMANCE: The IDR is sensitive to the district's ability to maintain operating balance and satisfactory reserves.

CREDIT PROFILE

Sweetwater Union High School District serves an area of 153 square miles in southern San Diego County (implied ULTGO bonds rated 'AAA'). The total population of the district is approximately 455,000, including the communities of Bonita, Chula Vista, Eastlake, Imperial Beach, National City, Otay Mesa, South San Diego and San Ysidro. The district provides education for grades 7 through 12 and is the largest secondary district in the state, with enrollment of 40,000 students. District facilities include 12 comprehensive high schools, a continuation high school, 10 middle schools, a junior high school, five adult education programs and four alternative education schools.

TAX REVENUE TO REPAY BONDS VIEWED AS 'PLEDGED SPECIAL REVENUES'

Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code and therefore 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 that provide a reasonable basis to conclude that due to certain provisions of the state constitution (primarily proposition 39 and Article XIIIA), which limit and direct the use of pledged property tax revenues for bond repayment, these revenues would be treated as pledged special revenues.

As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy and tax base and its debt burden, without regard for the district IDR, because Fitch believes that bondholders are insulated from any operating risk of the district.

DIVERSE AND GROWING ECONOMY

The district's economy and tax base are large and diverse and have experienced steady growth in recent years. District assessed value (AV) rose 5.4% in fiscal 2016 to $39.7 billion following a 5.6% increase in fiscal 2015 and 2.9% in fiscal 2014. The tax base experienced several years of moderate AV declines during the last recession but has performed strongly over the last 20 years with a compound annual growth rate of 6.1% since 1996.

Prospects for further growth in the district appear strong. The district includes substantial tracts of developable land and population growth is above average.

Taxpayer concentration is minimal with the top 10 taxpayers accounting for just 3.6% of total AV. Major taxpayers include apartments, shopping centers, and industry.

Employment data for the district are limited but the city of Chula Vista (representing 61% of the district) had an unemployment rate of 6.0% in December 2015, above the county unemployment rate of 4.7% and close to the state rate of 5.8%. Median household incomes for the district are similarly below the regional average at 83% of county levels, but 8% above the national average.

MODERATE LIABILITIES

Overall debt levels are moderate at 4.4% of AV and $3,407 per capita. The district will retain approximately $120 million in GO authority following this transaction and plans to issue new debt as AV rises, limiting further increases in debt-to-AV ratios. Amortization is slow with approximately 30% of outstanding principal due for repayment within 10 years.

Carrying costs for debt service and retiree benefits are moderate at about 16% of governmental expenditures. Pending increases in pension contribution rates are likely to increase carrying costs, but Fitch expects them to remain affordable. The district participates in two state-sponsored multi-employer pension plans and Fitch estimates that the district's fiduciary net position was equivalent to 74% of its total pension liability at the end of fiscal 2015, assuming 7% investment returns.

IDR REFLECTS ADEQUATE FINANCIAL POSITION

In addition to the tax base and debt levels of the district, the 'A+' IDR incorporates the district's somewhat challenged financial operations.

The district recorded net deficits in its general fund for each of the past six years, lowering unrestricted fund balance to $20.1 million (5.4% of general fund spending) by the end of fiscal 2015. Management reports that deficits in fiscals 2014 and 2015 resulted from deferred spending of prior-year revenues, and projects surplus results in fiscals 2016 through 2018.

The district's board was replaced in 2014 following the indictment and subsequent conviction of several of its former members in a 'pay to play' scandal over school construction financing. The new board invited a review of its finances by the state's Fiscal Crisis and Management Assistance Team, completed in April 2015, which has contributed to renewed efforts by the district to maintain operating balance. The district also hired a new superintendent in June 2015.

Fitch expects the district's finances to benefit over the next several years from revenue gains under LCFF as well as increased management stability. Financial flexibility will remain limited, however, due to the district's somewhat low reserves and lack of revenue-raising ability.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999686

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999686

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com