SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA+' rating to the following Campbell Union High School District, California general obligation (GO) bonds (GOs):
--$18.5 million 2013 GO refunding bonds.
The bonds will sell via negotiated sale on or about May 7.
In addition, Fitch affirms the following rating:
--$140 million outstanding district GOs at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax on all taxable property within the district.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The 'AA+' rating reflects the district's strong financial position, with solid general fund balances, prudent management practices, and several years of mostly surplus operations. However, management anticipates a degree of fund balance spend-down in future years.
RELATIVELY DIVERSE REVENUE BASE: The district benefits from property tax revenues in excess of the state-guaranteed minimum, parcel tax revenues, and lease revenues, all of which have remained stable throughout the economic downturn.
STRONG LOCAL ECONOMY: The local economy benefits from solid long-term fundamentals, such as high income and educational attainment levels, its central position within the large and diverse San Francisco Bay Area employment market, and a diverse and mature tax base that was resilient through most of the recession.
ADEQUATE DEBT PROFILE: The district's debt profile is weighed by slow principal amortization and participation in the poorly funded CalSTRS pension system, as is typical for all school districts in the state. These weaknesses are mitigated by a moderate debt burden, currently low carrying costs, and minimal capital needs with no planned debt issuances.
GOOD MANAGEMENT PRACTICES: Labor contracts include automatic wage reduction triggers, management has successfully obtained surplus revenue streams from site leasing and parcel tax extensions, and the district is subject to strong financial reporting and distress procedures, per AB 1200.
Operational usage of non-recurring sources to more than a modest extent and for a number of years would likely lead to negative rating action.
The district serves a population of 223,000 in western Santa Clara County, including the cities of Campbell, Santa Clara, Saratoga, Monte Sereno, Los Gatos, and San Jose. Campbell is a somewhat affluent bedroom community to San Jose and the San Francisco Peninsula, and San Jose represents a large employment and residential market with outsized concentration in the economically cyclical high-tech industry.
The district's local economy was moderately affected by the housing-led recession, but has remained fairly resilient overall. AV fell in just one year, by a modest 1.8% in fiscal 2011, and reached a new peak of $32.4 billion in fiscal 2013, a 2.3% gain from fiscal 2012. Preliminary estimates for fiscal 2014 point to a solid 4.2% increase resulting from significant house price gains through January 2013.
Income and educational attainment levels are high, and employment levels have grown in each of the past three years, reaching record levels in 2013. However, San Jose's January unemployment of 8.8% remained slightly higher than the national rate but lower than the state rate of 10.4%.
The district area is largely built out, so population growth has remained stable for some time. Student attendance has fallen modestly through the years, however, due to adverse demographic trends. More recent data shows slight gains. The negative trend does not impact most of the district's revenues which, atypically for a California district, are based primarily on AV levels and not student enrollment. As a result, declining enrollment can improve the district's financial position through lower expenditure requirements.
STRONG FINANCIAL POSITION
The district has had limited expenditure growth over the past several years, resulting in operating surpluses in three of the past four audited years, and projections of surplus operations in fiscal 2013.
Audited fiscal 2012 operations produced a manageable $2.1 million deficit, lowering the total and unrestricted general fund balances to still sound levels of $18.4 million (27.3% of general fund expenditures and transfers out) and $15.1 million (22.4%), respectively. Actual operations out-performed budgeted operations significantly, as is typical given management's tendency to budget conservatively.
The district projects a $2.1 million operating surplus in fiscal 2013 followed by balanced to modestly deficit operations beginning in fiscal 2014. However, the projections do not include salary increases or programmatic enhancements following years of pent-up wage pressures and service reductions.
The district's financial cushion is supplemented by $10.9 million of economic uncertainty and capital reserves that are located outside of the general fund. The capital reserve is board-designated to be allocated to the re-opening of an un-used district high school.
Some use of reserves for operations has been signaled by management for some time, as the district's unreserved fund balance grew from 6.2% of spending in fiscal 2008 to 25% in fiscal 2010. The district's 'AA+' rating reflects Fitch's expectation that future fund balance drawdowns will be measured and time-limited, and that operations will resume structural balance in the next few fiscal years, with financial cushion remaining satisfactory for the rating level. However, if operations rely on non-recurring sources to more than a modest extent, or for a number of years, Fitch will likely take negative rating action likely would be taken.
DIVERSE REVENUE BASE
The district benefits from three revenue streams not available to most California school districts. First, the district's wealthy and diverse tax base generates more local property taxes for the district than what the state would guarantee. These surplus revenues are retained by the district and this surplus status is referred to as 'basic aid'. Basic aid revenues add $10 million, though the district has tended to fall in and out of basic aid status over the years due to fluctuating state funding, enrollment, and AV.
In recent years the state has reduced categorical revenues to basic aid districts, although the state does not provide any meaningful revenue limit funding to such districts, which resulted in a $5.2 million reduction in fiscal 2013. Any potential reduction in fiscal 2014 will depend on the state's adopted budget.
The district's second largest supplemental revenue source is its voter-approved parcel tax. The district has benefitted from a parcel tax since at least 2004, with a typical five-year lifespan. The district's current parcel tax was extended in 2008, expires in fiscal 2015, and generates $5 million annually. Management plans to seek voter approval for an extension of the parcel tax in coming years, and the current rate of $85 may rise if the state continues to reduce the district's categorical revenues by a meaningful degree. Management has tended to seek voter approval well before expiration of the tax, and the 2008 approval margin was an impressively high 79.4%.
The district's smallest supplemental revenue source consists of lease revenues for an unused high school site. This source generates roughly $2 million annually and must be used for capital purposes.
ADEQUATE DEBT PROFILE
The debt burden is moderate, with net debt equal to $4,772 per capita, or 3.3% of AV. However, principal amortization is slow, with just 17% and 38% of debt retired over five and 10 years, respectively. Capital needs are minimal and the district has no planned debt issuances. Carrying costs (debt, OPEB, and pension costs as a percentage of non-capital total governmental spending) are low at 11.3%, but likely will rise due to anticipated pension contribution rate hikes in future years.
The district participates in the poorly funded CalSTRS pension system, as is common for all districts in the state. Contribution rates are set by statute, and have not been increased for some time to reflect recent years' investment losses. Fitch expects the district's contribution rate will rise over the coming years, perhaps significantly, after the legislature begins to address the system's growing unfunded liabilities.
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, S&P/Case-Shiller Home Price Index.
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
U.S. Local Government Tax-Supported Rating Criteria
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