Rating Action: Moody's assigns A1 to San Bernardino City USD, CA's 2020 GO Bonds; outlook stable
Global Credit Research - 21 Aug 2020
New York, August 21, 2020 -- Moody's Investors Service has assigned A1 ratings to San Bernardino City Unified School District, CA's $35 million Election of 2012 General Obligation Bonds, Series F (Federally Tax-Exempt); $18 million Election of 2012 General Obligation Bonds, Series G (Federally Taxable); $14 million 2020 General Obligation Refunding Bonds, Series A (Federally Tax-Exempt); and $70 million 2020 General Obligation Refunding Bonds, Series B (Federally Taxable). Concurrently, we have affirmed the A1 ratings on the district's outstanding general obligation (GO) bonds and A3 ratings on the outstanding certificates of participation (COP), affecting about $220 million and $96 million, respectively. The outlook is stable.
The A1 GO rating reflects continued growth in the district's large tax base, weak resident income measures, and a satisfactory financial position with considerable liquidity outside of the general fund which the district could borrow for operations. The district's general fund reserves are below average and a large projected deficit in fiscal 2020 stands to narrow reserves to thin levels. However, affirmation of the A1 GO rating reflects that this projection is primarily a spend down of carried over one-time state revenues and redevelopment agency pass-through revenues for one-time expenditures, including a large textbook adoption. Given management's track record of conservative budgeting and fiscal prudence, we expect stability in reserves at thin levels going forward, which will be a key point of future reviews. The rating also reflects the district's above average debt and pension burden and a relatively low unfunded other-post employment benefits (OPEB) liability. The rating further incorporates the above average legal strength of California (Aa2 Stable) school districts' GO bonds.
The A3 COP rating is two notches lower than the A1 rating on the district's GO bonds. For a California school district, Moody's typically applies a two-notch distinction between a GO bond rating and the rating on lease-backed debt secured by "more essential" assets. This two-notch distinction reflects both the absence of California GO bond security features, which provide uplift to the GO rating, and the weaker legal structure of a standard abatement lease, despite the more essential nature of pledged assets.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We do not see any material immediate credit risks for San Bernardino City USD. However, the situation surrounding coronavirus is evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the district's credit quality changes, we will update the respective rating and/or outlook at that time. The district closed school facilities in March because of the coronavirus crisis. California's Senate Bill 117 guaranteed all districts funding based upon average daily attendance (ADA) through February 29, 2020 and waived instructional time penalties, effectively holding districts harmless for state funding in fiscal 2020. In addition, the state has committed to funding districts in fiscal 2021 based on last year's ADA level, as long as districts fulfill certain instruction requirements.
The stable outlook reflects our expectation that the district's large tax base will continue to expand and remain a strength for the rating level, despite near term weakness because of the coronavirus pandemic. Following a significant spend down of carried over one-time state revenues in fiscal 2020, we expect stability in the district's reserves at thin levels, supported by management's conservative budgeting practices.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Sustained growth in assessed value and local economy
- Material improvement in socio-economic profile
- Substantial strengthening in the district's financial position
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Significant, sustained contraction in tax base
- Weakening of reserves and liquidity below projected levels for fiscal 2020
- Inability to manage pension and OPEB cost increases
The district's outstanding GO bonds are secured by the levy of ad valorem taxes, unlimited as to rate or amount, upon all taxable property within the district. The portion of the levy restricted for debt service is collected, held, and transferred directly to the paying agent by San Bernardino County (Aa1 stable) on behalf of the district.
The COPs are standard California abatement lease obligations secured by lease payments for the use and occupancy of district school sites. Lease rental payments are payable from any source of legally available funds of the district. The 2019 COPs are secured by the district's Norton Elementary School as well as a K-8 school, Paakuma School. The outstanding 2011 Series A COPs are secured by three elementary schools - Juanita Blakely Jones Elementary, Bing Wong Elementary, and Rodriguez Preparatory School. Moody's considers these leased assets more essential. The COPs additionally each benefit from a debt service reserve fund funded at the three-pronged test.
USE OF PROCEEDS
Proceeds of 2020 GO refunding bonds, series A and B will be used to refund portions of the district's outstanding GO bonds, series 2004C, 2012A and 2012B for savings.
Proceeds of the Election of 2012 GO bonds, series F will be used to finance the acquisition and construction of school facilities. Proceeds of the Election of 2012 GO bonds, series G will be used to fund lease principal payments on the district's 2011 COPs beginning February 1, 2022 through February 1, 2024.
San Bernardino City Unified School District is located in San Bernardino County, about 60 miles east of the City of Los Angeles (Aa2 stable). The district serves the majority of the City of San Bernardino, a portion of the cities of Highland, Redlands, Colton, Rialto, and unincorporated areas of the county. The district is the tenth largest school district in California with an enrollment of 53,037 students for fiscal 2020 and operates 72 schools, including 50 elementary schools, 11 middle schools, 10 high schools, and one adult education school.
The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Kirstyn Lee Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Helen Cregger Additional Contact Regional PFG West JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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