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Fitch Rates West Contra Costa Unified School District, CA's GO Refunding Bonds 'A+'; Outlook StableSAN FRANCISCO --(Business Wire)-- Fitch Ratings has assigned an 'A+' rating to the following West Contra Costa Unified School District (the district), CA (News - Alert) general obligation (GO) bonds: --$77.7 million GO refunding bonds, 2014 series A. In addition, Fitch affirms its 'A+' rating on the following district bonds: --$901.7 million GO bonds. The Rating Outlook is Stable. Purpose: Bond proceeds will be used to refund various outstanding GO obligations of the district and pay the costs of issuance. The bonds will be sold via negotiation during the week of July 21. SECURITY The bonds are secured by an unlimited ad valorem tax on all taxable property within the district. KEY RATING DRIVERS HIGH DEBT BURDEN: The district's overall debt burden is projected to remain high given future debt issuance plans and the slow amortization rate of outstanding debt. SOUND FINANCIAL PROFILE: The district's financial profile is expected to remain sound following modest operating deficits in fiscal 2013 and 2014 (estimated) with satisfactory reserves and solid liquidity. MODEST DEFICITS PROJECTED: Modest operating deficits are projected over the next couple of years as the district continues to increase spending to implement Local Control Funding Formula (LCFF) requirements before receiving full funding for the changes. Reserve levels are projected to remain satisfactory for the rating despite the projected draw down. RISING PENSION CONTRIBUTIONS: Rising pension contributions, particularly from CalSTRS, along with already elevated costs for other post-employment benefits (OPEB) are likely to reduce the district's financial flexibility to some degree over the medium term. MIXED ECONOMY: The local economy benefits from its proximity and access to the diversified Bay Area economy, but performance is mixed with some cities within the district recovering at a quicker pace while others continue to experience relatively high unemployment rates. CONCENTRATED, RECOVERING TAX BASE: The district's tax base is concentrated in its largest taxpayer, Chevron (News - Alert). A recent rebuilding of a fire-destroyed portion of the Chevron refinery and a generally recovering housing market should result in increased assessed values (AV) for fiscal 2015. RATING SENSITIVITIES SIGNIFICANT REDUCTION IN RESERVES: A larger than anticipated reduction in the district's unrestricted reserves would likely exert negative pressure on the rating. CREDIT PROFILE The district is located approximately 15 miles northeast of San Francisco. It covers a large area in western Contra Costa County, including the cities of Richmond, El Cerrito, Hercules, Pinole, and San Pablo, along with several unincorporated areas. The district currently operates 37 elementary schools, two K-8 schools, six junior high schools, six high schools, along with several continuation programs, adult education sites, and state-funded preschools. The district's average daily attendance (ADA) was 28,148 in fiscal 2014, approximately 2% higher than 2011 levels. Management projects additional modest increases over the next few years. SOUND FINANCIAL PROFILE The district recorded its first operating deficit in the past three audited fiscal years in fiscal 2013 and projects an additional deficit in fiscal 2014. The negative financial margins -- $5.9 million in fiscal 2013 (2.2% of spending) and projected at a similar size for fiscal 2014 -- were partly driven by policy decisions to fully implement LCFF requirements ahead of state mandates and funding. Most notably, this has included the district's efforts to fully comply with LCFF class size reduction requirements, which is expected to be fully realized in fiscal 2015. Operating deficits are expected to continue in fiscal 2015 before narrowing significantly to nearly break-even performance in fiscal 2016. These deficits reflect the district's continued implementation of the class size reduction targets as well as additional self-imposed goals and spending requirements as directed throgh the district-adopted Local Control Accountability Plan (LCAP). The district's reserves are projected to remain at satisfactory levels following the expected operating deficits in fiscals 2014 and 2015. At the end of fiscal 2013, the district's unrestricted reserve was $34.7 million or 13% of spending. Liquidity levels remain sound and the district has not needed to issue cash-flow notes over the past several years. Fitch views the district's projected financial position as satisfactory and in-line with the rating. However, the district's financial commitments from its somewhat aggressive implementation of LCFF/LCAP requirements and increasing pension contributions will reduce financial flexibility over the near term and expose the district to potential future volatility in state funding. The expenditure plan will maintain pressure on the district to keep labor costs constrained, which may present a challenge after several years of limited wage increases and the promise of additional funding for the district. HIGH DEBT BURDEN Overall debt ratios are well above average at $7,458 per capita and 8.1% of AV. The district has successfully applied for and received waivers from the state's Board of Education to exceed bonding capacity limits, allowing the district to issue general obligation debt up to 5% of AV. While direct general obligation indebtedness is 4.4% currently, the district expects to use some of its significant remaining general obligation authorization (approximately $592.6 million) to address capital needs over the next several years. PENSION CONTRIBUTION INCREASES Future budgetary pressure is expected to come from increasing pension contribution amounts that will be phased in over the next several years. The district participates in CalSTRS and CalPERS to provide defined pension benefits for teachers and classified employees, respectively. The district is expected to pay increasing contribution amounts to both systems, but particularly CalSTRS where contribution amounts are projected to increase from $9.8 in fiscal 2015 to $22.6 million in fiscal 2021. While increased costs are expected to be offset by projected increases in LCFF funding over the same timeframe, the rise in fixed costs will limit the district's discretion in utilizing the additional revenue. SIGNIFICANT OPEB LIABILITY The district successfully renegotiated its OPEB in fiscal 2010. Under the agreement, the district offers health insurance benefits that are capped according to several criteria, including employment start date and years of service. The revised agreement reduced the district's unfunded actuarial accrued liability to approximately $364.5 million as of fiscal year end 2013, down from $523 million at the end of fiscal 2007. Despite the reduction, the district's unfunded OPEB liability remains significant at 1.6% of fiscal 2014 AV and annual pay-go contributions (a sizable 6.4% of general fund spending in fiscal 2013) will continue to pressure the district's financial position. ECONOMY AND TAX BASE The local economy is mixed with some areas outperforming others. While western Contra Costa County is well-positioned to participate in the Bay Area's broad and diverse labor market, the unemployment rates vary significantly with the district's two largest cities, Richmond and San Pablo, recording relatively high unemployment rates in April 2014 of 10.1% and 12.6%, respectively. Some of the less populated areas, like Pinole and Hercules, have unemployment rates below the national average of 6.3%. CONCENTRATED TAX BASE The district's tax base is concentrated in the largest taxpayer, Chevron, which owns a refinery in the city of Richmond. The damage from a fire at the refinery and a reported error on the assessor's roll lead to a 6% reduction in the district's fiscal 2014 AV despite an improving real estate market in most areas. Fiscal 2015 AV figures are not yet available but Fitch expects a moderate increase. This expectation is based on the refinery's reported return to operations, a recovering housing market across most western areas of the county, and significant AV increases reported for cities within the district. 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 (News - Alert) Global Insight, National Association of Realtors, Zillow.com. 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=838604 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. |
