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Fitch Rates Livermore Valley JUSD, CA's GOs 'AAA'; Outlook StableFitch Ratings has assigned a 'AAA' rating to the following Livermore Valley Joint Unified School District (JUSD; the district) general obligation (GO) bonds: --$82 million GO bonds (election of 2016), series 2016. In addition, Fitch has assigned an 'A+' Issuer Default Rating (IDR) to the district. The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited ad valorem tax levied on all taxable property in the district. KEY RATING DRIVERS SPECIAL REVENUE ANALYSIS: The 'AAA' rating on the series 2016 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 moderate relative to the tax base. RATING SENSITIVITIES TAX BASE DRIVES GO RATING: The 'AAA' 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 'A+' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility and sufficient levels of reserves to withstand a moderate economic recession. CREDIT PROFILE As with most California school districts, the bulk of Livermore Valley JUSD's operational revenues are derived from a state-determined per pupil funding formula, although capital funding is largely locally funded. The district's tax base growth has been steady. The recent unemployment rate is low at 3.3% in the City of Livermore. Income metrics are above the state and county averages. The district's taxable assessed values (AVs) have been somewhat volatile historically but have been strong overall, with a 3.8% average growth rate over a 10-year period (2004-2014) and 5.6% 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 rate pledge on the district's bonds eliminates the need for such calculations. The $18 billion tax base provides strong fundamental support for the 'AAA' series 2016 GO rating. Taxpayer concentration is low, with the top 10 taxpayers (various commercial and industrial properties) accounting for less than 4% of AV. The tax base suffered declines in the Great Recession with the largest drop of 5.4% during that period. The tax base is again growing at a healthy pace, gaining 7.2% and 6.7% in fiscal 2015 and 2016, respectively. IDR Expands Analysis to Include Operating Performance and Framework The 'A+' IDR reflects the district's limited gap-closing capacity with low 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 increase revenues without voter approval. These weaknesses are partially offset by the district's moderate long-term liability burden, solid expenditure flexibility, and expected increase in enrollment. Economic Resource Base Livermore Valley Joint Unified School District operates 13 schools and is located in Alameda and Contra Costa Counties, serving approximately 90,000 residents primarily in the city of Livermore and some unincorporated areas. The city of Livermore is 18 miles from Oakland and 33 miles from San Francisco. The district experienced declining enrollment in recent years due to the presence of charter schools in the area. However, the district saw a revesal of that trend in fiscal 2017 with the increase of approximately 300 students; the current total enrollment is 12,817 students, compared to the fiscal 2016 figure of 12,519. The district expects to see more students return to the district in the coming year. A large housing development in the area may contribute to additional enrollment growth in the longer term. Revenue Framework: 'bbb' factor assessment District's revenue history is directly tied to student enrollment, which has experienced modest declines over a sustained period of time. However, general fund revenues are expected to increase given improvements in the state's economy, the continued implementation of the Local Control Funding Formula and a reversal of the enrollment trend. The district's independent legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases. Expenditure Framework: 'aa' factor assessment The natural pace of spending growth is expected to remain in line with or modestly above that of revenues. The district has a moderate fixed cost burden including rapid amortization of debt, which contributes to solid spending flexibility. Long-Term Liability Burden: 'aa' factor assessment The combined long-term debt and pension liability burden is currently moderate at 10.2% of personal income and is not expected to change materially over the near to medium term. Operating Performance: 'a' factor assessment The district's has limited gap-closing capacity due to low reserves and limited revenue flexibility. Multiyear operational deficits have weakened the district's financial cushion. Revenue Framework State aid and local property taxes provide the majority of district operating revenues and are supplemented by local parcel taxes. State aid has been expanding due to improvements in the state's economy, recent enrollment gains and a new funding formula (the LCFF) which provides additional funding for targeted students. The district benefits from a voter-approved parcel tax measure (in place for 10 years and approved for renewal in 2014 for another seven years), which generates about $3.8 million annually. The parcel tax has experienced strong support from district residents, with a 72.4% approval rate at the last renewal election. Historical revenue growth has fallen below U.S. economic performance and inflation. Future revenue growth will be determined by enrollment, overall state revenue performance, and the funding formula established by the state. The formula is based upon each district's ADA as well as the proportion of students who 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 enrollment declines. Additionally, a recent reversal in the enrollment trend is expected to add 300 students to the district this year. Turmoil in a competing charter school has prompted an outflow of students, who have begun to return to the district. Fiscal year 2017 should show an enrollment spike, and taper off thereafter. California's proposition 13 requires voter approval to increase taxes, which leaves the district with no independent ability to raise revenues. Expenditure Framework Personnel costs for teachers and staff comprise the vast majority of district expenditures. Fitch expects expenditure growth to be in line with to moderately above expected revenue growth, based on the current spending profile and on the district's current labor contracts expiring in fiscal 2017. 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. Nonetheless, the district's moderate carrying costs and ability to increase class sizes, implement salary freezes, reduce non-essential services and personnel, and utilize furloughs if needed provide solid expenditure flexibility. Long-Term Liability Burden The district's combined debt and pension liabilities as a percentage of personal income is moderate at 10.2%. The district participates in both CalPERS and CalSTRS. The Fitch adjusted ratio of assets to liabilities for the combined pension plans is adequate at 73.8%. The district's liability related to other post-employment benefits (OPEB) is $6.6 million, or 0.1% of personal income. Operating Performance Financial resilience is limited due to low reserve levels relative to historical revenue volatility. The district's available fund balance (including a 3% reserve for economic uncertainties mandated by the state) totaled 4.3% of spending, just above the board's 4% target. Fitch assesses the district's gap-closing capacity as limited relative to the expected revenue loss during a 1% GDP decline scenario. District reserves have decreased due to management's decision to spend funds on one-time expenditures. Management has run operational deficits for the past four years and is expected to post another deficit next fiscal year. The board's informal reserve target is 4%, which Fitch believes is a minimal cushion with which to withstand an unexpected revenue shortfall. The district is currently in the process of selling a property and the proceeds of this sale will be set aside for OPEB costs and additional reserves. 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/site/re/879478 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011408 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011408 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160908006689/en/ |
