AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by Fairfield-Suisun Unified School District, CA:
--Approximately $85 million general obligation (GO) bonds, series 2016.
The bonds will sell via competitive sale the week of Sept. 7. Proceeds will be used to modernize and improve district facilities.
Fitch has also assigned an Issuer Default Rating (IDR) of
'AA-' to the district. The distinction between the 'AAA' rating on the bonds and the 'AA-' issuer rating reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.
The Rating Outlook is Stable
The bonds are secured by an unlimited ad valorem property tax levied on all taxable property in the district.
KEY RATING DRIVERS
SPECIAL REVENUE ANALYSIS: The 'AAA' rating on the series 2016 unlimited tax GO bonds 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.
GROWING TAX BASE; AFFORDABLE DEBT: The economic resource base supporting the GOs is strong, diverse and growing. The unlimited nature of the tax offsets any concern about tax base volatility. Overall debt is affordable relative to the tax base.
SOLID TAX BASE AND ECONOMY DRIVES GO RATING: The 'AAA' series 2016 GO bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA-' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, continued sound budget management and maintenance of reserves to withstand a moderate economic recession.
The district's taxable assessed values have been somewhat volatile historically but have been solid overall, with a 5.5% average growth rate over the past 15 years and 7.3% over the past three years.
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 the lien on pledged revenues would survive and 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 and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily proposition 13), which limit and direct the use of pledged property tax revenues for bond repayment.
As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax pledge on the bonds eliminates the need for such calculations.
The $13.8 billion tax base provides strong fundamental support for the 'AAA' series 2016 GO rating. Concentration is low with the top 10 taxpayers (various commercial and industrial properties) accounting for roughly 6% of AV. The tax base suffered minor declines in the Great Recession, but the tax base is again growing at a healthy pace, gaining 8%, 7.8% and 6.2% in fiscal 2014, 2015, and 2016 respectively.
IDR Expands Analysis to Include Operating Performance and Framework
The 'AA-' IDR reflects the district's very strong gap closing capacity with sound reserves relative to historical revenue volatility. The rating also reflects the district's weak revenue framework with slow historical revenue growth and no independent legal ability to raise revenues without a vote of the people. These weaknesses are partially offset by the district's low long-term liability burden and solid expenditure flexibility.
Economic Resource Base
Fairfield-Suisun Unified School District serves approximately 21,400 students from the Cities of Fairfield, Suisun, and unincorporated Solano and Napa Counties. Located in the City of Fairfield the district operates 30 schools consisting of three high schools, four middle schools, 17 elementary schools in addition to several alternative and adult schools, making it the largest school district in Solano County.
Fairfield, with over 113,000 residents, has a diversified economy which includes companies such as Anheuser-Busch, Clorox, and the Jelly Belly Candy Company. Adjacent Suisun City has an estimated 30,000 population. The district's median household incomes are above state averages, but per capita incomes are lower. The 2016 unemployment rate for Fairfield was slightly lower (5.3%) than county (5.9%) and state (5.9%) averages. The tax base exhibits no taxpayer concentration and TAV has increased an average of 7.3% over the last three years. Enrollment has declined over the past 10 years but has fluctuated approximately 1% in the past five years and is expected to remain stable.
Revenue Framework: 'bbb' factor assessment
The district's discretion over its revenues is limited as it is dependent on the state's local control funding formula for a majority of its revenue. The district's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
The natural rate of spending is in line or slightly above revenues. The district's carrying costs (combined debt and retiree benefit payments) are relatively low, but are expected to climb through fiscal 2021 due to increased pension contribution rates.
Long-Term Liability Burden: 'aaa' factor assessment
The district's overall debt and pension liabilities are low relative to its resource base.
Operating Performance: 'aa' factor assessment
The district maintains sound available fund balances currently, which along with expenditure flexibility provide the district with a strong financial position relative to any revenue volatility.
Approximately 90% of district revenues come from the State of California, which are ultimately determined by a formula (LCFF-Local Control Funding Formula) based upon student average daily attendance (ADA) and overall state revenues
Historical revenue growth has trailed inflation and U.S. economic performance. Future revenue growth will be determined by overall state revenue performance as well as the funding formula established by the state, which is based upon each district's 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'). The district has benefited from the new funding formula and has seen an increase in revenue despite a very modest ADA decline in recent years (in part due to its unduplicated count of 60%).
The district has no independent ability to increase local property tax revenues as a result of California's proposition 13, which requires a vote of the people to increase taxes.
The district's mandate to provide educational services places some limitations on its ability to make expenditure reductions in the event of a revenue decline. Personnel costs for teachers and staff comprise the vast majority of district. expenditures. Labor costs, carrying costs and overall spending are likely to be in line with or moderately above expected revenue growth based upon both recent spending patterns and increasing contributions to CalSTRs through fiscal 2021. Spending pressures may be offset to some extent by possible increasing revenues under the LCFF funding formula through fiscal 2021.
In the event of a revenue shortfall, the district's main expenditure flexibility lies with its ability to cut headcount. Other possible cost reduction measures include salary cuts, class size increases, school closures and elimination of non-essential programing and personnel. The district demonstrated its ability to exercise such flexibility during the last recession, and would be expected to return to such strategies if needed to address new revenue declines.
Long-Term Liability Burden
The district's overall debt and pension liabilities are low relative to its resource base.
Gap-closing capacity is sound, although it is expected to be challenged by the district's planned drawdown of reserves in FY 2016 and 2017 for one-time expenditures. Available reserves, according to the district, are expected to decrease by more than half of its current levels to approximately 7% and 5.4% in FYE 2016 and 2017 respectively.
Based on its expenditure flexibility and past performance, Fitch believes that in a modest economic downturn scenario the district would maintain a satisfactory reserve safety margin and sound overall resiliency. Current management has stated its intention to rebuild reserves to its historical target of 16% (a level successfully maintained by the district since 2011) after the one-time expenditures planned in FY 2016 and FY 2017.
Historical financial performance has been solid, as the district posted surpluses the last four years and has maintained reserves at the district's target of 16% of expenditures. The district has been proactive in cost cutting when necessary and prudent financial management has led to continued structural balances.
The district's liquidity is adequate, eliminating the need for short term borrowing. Cash and investments stood at 135 days in fiscal 2015.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form