Fitch Affirms Bass Lake JUESD, CA's GO Bonds at 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Bass Lake Joint Union Elementary School District, California's ratings:

-- Approximately $13.2 million outstanding general obligation (GO) bonds, series 2006 and 2010 at 'A+'.

-- Issuer Default Rating (IDR) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax on all taxable property within the district.

KEY RATING DRIVERS

The 'A+' rating is based on stable revenue prospects pursuant to the state's guaranteed funding formula and stabilized enrollment, the district's solid expenditure flexibility enabled by good labor relations, management's willingness and ability to make spending cuts as necessary to maintain an unrestricted fund balance of roughly 27% over the past seven years, and the district's low long-term liability burden relative to its resource base.

Economic Resource Base

The district encompasses over 289 square miles located about 46 miles north of Fresno and is home to the southern entrance to Yosemite National Park. As such, much of the district's local economy is anchored in tourism and park-service related activity. The district operates four K-8 schools and has one sponsored charter school. Enrollment is expected to remain flat following a number of declines in recent years.

Revenue Framework: 'bbb' factor assessment

The district is dependent on the State's Local Control Funding Formula (LCFF) for nearly 70% of its revenues and has no independent legal ability to raise revenues. Historical revenues have been volatile and stagnant but are expected to continue to improve under LCFF combined with little to no changes in enrollment.

Expenditure Framework: 'aa' factor assessment

Spending demands may slightly outpace historically stagnant revenue growth. However, spending flexibility is solid, in part, due to its low carrying costs and a manageable workforce environment.

Long-Term Liability Burden: 'aaa' factor assessment

The district participates in two state-run pension plans and funds the bulk of its capital needs from voter approved property tax levies. The resulting long-term liability burden is expected to remain low relative to its resource base.

Operating Performance: 'a' factor assessment

The district has consistently maintained reserves above 20% of spending. Fitch expects the district to continue utilizing its expenditure flexibility, including its demonstrated ability to negotiate labor concessions, to support financial stability during periods of revenue uncertainty or decline. The district budgets conservatively, building in flat enrollment projections and potential increases in labor costs.

RATING SENSITIVITIES

Financial Cushion Adequacy: A prolonged weakening of the district's financial resilience to potential economic downturns and revenue declines could lead to the consideration of a rating downgrade.

CREDIT PROFILE

The district operates four K-8 schools and has one sponsored charter school. Enrollment is expected to remain flat following a number of declines in recent years driven by the economic downturn and tourism-dependent economy.

Revenue Framework

The district is dependent on the State of California Local Control Funding Formula (LCFF) for 70% of its revenues. The state constitution's priority for education funding and its minimum funding levels based on the state's own revenue performance provide a sound revenue framework, albeit a sometimes volatile one, despite the district having no independent ability to raise revenues. California's proposition 13 requires a vote of the people to raise all taxes.

The district shows a historical volatile revenue trajectory, including years where revenue contracted by double digits. Future revenue growth is determined by overall state revenue performance as well as the funding formula (LCFF) established by the state, which is based upon each district's average daily attendance (ADA) as well as the proportion of students that are English language learners, eligible for free or reduced priced lunch, or are foster students ('unduplicated count'). Though the ADA has declined in recent years, it increased in FY 2014 and is projected to increase slightly in FY2016 and remain flat thereafter. The district is expected to benefit from the funding formula as it has an unduplicated count of over 60%, above the 55% threshold to receive additional funding. In the past two years revenues have grown due to the state's economic improvement, gradual implementation of LCFF incorporating the district's unduplicated count, and enrollment stabilization.

Expenditure Framework

Labor costs drive the district's spending, which is likely to be moderately above expected revenue growth based upon increasing formulaic contributions to CalSTRs, offset to some extent by increasing revenues under the LCFF funding formula through fiscal 2021.

The district's main flexibility lies with its ability to manage headcount through layoffs or attrition. The district has historically made necessary staffing adjustments given revenue or enrollment declines. Labor relations are very strong, and the district counts on a strong ability to make expenditure cuts in personnel costs via labor concessions or changes to headcount. Class sizes are not part of the district's union contracts, and so it may utilize classroom size flexibility as a measure to adjust spending. Other spending flexibility exists in the district's ability to modify purchasing and outside contracts, implement furloughs, adjust instructional aides and athletics, and decrease bus routes and extracurricular activities. Carrying costs are moderate, though the teacher's pension (CalSTRS) contribution rates are scheduled to rise but remain manageable.

Long-Term Liability Burden

The district's combined debt and pension liabilities relative to personal income is relatively low at 7.9%. The district participates in both CalPERS and CalSTRs, and the combined Fitch-adjusted adjusted ratio of assets to liabilities for both pension plans is 73.8%. The district's liability related to other post-employment benefits (OPEBs) is $2.2 million, or 0.5% of personal income.

Operating Performance

The district has maintained relatively stable fund balances through the recession due to its ability and willingness to make expenditure reductions in line with declining revenues. It absorbed significant general fund revenue declines in the last recession by aggressively cutting expenditures and as a result, fund balances remained stable despite the drop in revenues. Fitch expects the district will take such responsive offsetting action in future downturns. Fitch also expects the district to maintain relatively stable, balanced operations over the long term and available fund balances near 20%, well above expenditures.

The district posted operating surpluses after transfers in each of the last three years. Fund balance reserves peaked in FY 2013 at 32.1% of spending, and 28.2% in 2014. As per the district's multi-year projections, reserves are expected to decline slightly but still remain at strong levels. Additionally, the district is prefunding OPEB costs.

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

In addition to the sources of information identified in Fitch's 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/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005452

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005452

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Nancy Rocha, +1-512-215-3741
Director
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Karen Ribble, +1-415-732-5611
Senior Director
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, Inc.
Primary Analyst
Nancy Rocha, +1-512-215-3741
Director
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Karen Ribble, +1-415-732-5611
Senior Director
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