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Fitch Downgrades Cerritos Community College Dist (CA) GO Bonds to 'AA'; Outlook StableSAN FRANCISCO --(Business Wire)-- Fitch Ratings has downgraded Cerritos Community College District, CA (News - Alert) (the district) general obligation (GO) bonds as follows: --$2.7 million GO bonds series 2004A to 'AA' from 'AA+'; --$24.2 million GO bonds series 2005A to 'AA' from 'AA+'; --$30.6 million GO bonds series 2006B to 'AA' from 'AA+'. The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited property tax pledge of the district. KEY RATING DRIVERS WEAKENED DEBT PROFILE: The downgrade to 'AA' from 'AA+' reflects the district's weakened debt profile following a 2012 GO issuance that extended amortization and deferred repayment of most principal and accreted interest for more than 20 years. In addition, the recent authorization of additional GO borrowing by district voters would more than double outstanding debt levels. STRONG OPERATING PERFORMANCE: The district maintained balanced operations throughout the recent downturn, reducing spending to match substantial revenue declines. Reserve levels are healthy and remain well in excess of state minimum requirements. EXPOSURE TO STATE FINANCES: The district is heavily dependent on state revenues, which fell sharply during the recent downturn. Funding prospects have improved following voters' approval of Proposition 30 and California's overall improved finances, but the district remains vulnerable to state revenue volatility. MIXED ECONOMIC CHARACTERISTICS: The district's service area profile is generally below average and consistent with the broader Los Angeles County economy. RATING SENSITIVITIES FINANCIAL FLEXIBILITY: A material reduction in reserve levels or persistent operating deficits would raise downwards rating pressure. The Stable Outlook suggests this is unlikely during the next two years. CREDIT PROFILE Cerritos Community College is located in southeastern Los Angeles County, encompassing 52 square miles including the cities of Artesia, Bellflower, Cerritos, Downey, Hawaiian Gardens, La Mirada, Norwalk and portions of Bell Gardens, Lakewood, Long Beach, Santa Fe Springs and South Gate. The district provides collegiate-level instruction to approximately 23,000 students annually. WEAKENED DEBT PROFILE The downgrade to 'AA' from 'AA+' reflects the district's weakened debt profile following a 2012 GO issuance. The 2012 GO issue represents approximately 40% of the par value of the district's outstanding principal, or more than 56% of outstanding principal plus accreted interest. Amortization is very slow due to the use of capital appreciation bonds and long-dated current-interest bonds, with 14% of outstanding principal and accreted interest repaid within 10 years. Overall debt levels remain low at 1.7% of taxable assessed value (TAV), but are likely to rise with anticipated new issuances. District voters approved $350 million in new GO authorization at the end of 2012, which would raise the par value of overall debt levels to a still moderate 2.7% of TAV if issued immediately. New issuances are expected over a 10-year period and will support an expansive capital program to rehabilitate or replace multiple campus facilities. The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. Funding for CalSTRS is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. In addition, the district offers other post-employment benefits (OPEBs) and had a relatively small unfunded OPEB liability of $14.3 million at the end of 2012, partially offset by a non-trust reserve of $4.2 million. STRONG OPERATING PERFORMANCE Financial operations remain sound due to prudent expense management in response to prolonged disruptions in state funding. The district projects ending fiscal 2014 with a budget surplus and unreserved general fund balance equal to a strong 13.7% of spending; well above the 3% state minimum. Management has consistently achieved operating surpluses and the district's only recent deficit, in 2011, resulted from prudent transfers to support an early retirement incentive and additions to an OPEB reserve. Management projections for 2015 and 2016 anticipate continued positive operating performance, which Fitch considers likely based on the district's strong track record. The district has a history of conservative budgeting and has regularly outperformed budget estimates. EXPOSURE TO STATE FINANCES The district is heavily dependent on state funding for operations and remains vulnerable to state revenue volatility. State funds account for approximately 80% of total general fund revenues, and are subject to cuts during downturns in the state's financial condition. The district has ably managed this volatility in recent years, maintaining operating balance despite a 13% reduction in state apportionment revenues between 2009 and 2012. Nonetheless, a reversal of the state's recent fiscal progress could result in renewed pressure on the district's finances. Funding prospects for the district have improved recently with the 2012 approval by state voters of temporary taxes under Proposition 30. In addition, the state's improved revenue collections are expected to increase general support for K-14 schools through growth in the Proposition 98 funding guarantee. MIXED ECONOMIC CHARACTERISTICS The district encompasses multiple jurisdictions within southeastern Los Angeles County with mixed economic characteristics. TAVs have remained relatively stable, declining a cumulative 4.3% in 2010 and 2011 before returning to growth in 2012, and TAV levels now exceed pre-recession peaks. Median household incomes for Los Angeles County are below the state average, but higher than the national average. The county's unemployment rate remains elevated at 10.2% as of June 2013, as compared to a national rate of 7.8%, but employment levels have risen steadily for 36 consecutive months. Year-over-year employment growth accelerated in 2013, with June 2013 employment levels 3.6% higher than the previous year. 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. Applicable Criteria and Related Research: --'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012. Applicable Criteria and Related Research: 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=803821 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
