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Saugus Union School District, CA -- Moody's assigns Aa2 to SFID No. 2014-1 of the Saugus USD, CA's GO Bonds, Series C

Rating Action: Moody's assigns Aa2 to SFID No. 2014-1 of the Saugus USD, CA's GO Bonds, Series C

Global Credit Research - 28 Aug 2020

New York, August 28, 2020 -- Moody's Investors Service has assigned a Aa2 rating to the School Facilities Improvement District (SFID) No. 2014-1 of the Saugus Union School District, CA's $102.4 million General Obligation (GO) Bonds, 2014 Election, Series C. Moody's maintains a Aa2 rating on the district's $30.1 million in outstanding SFID GO bonds, a Aa2 rating on the district's close to $8.4 million in outstanding districtwide GO bonds, and a Aa3 on the district's $10.3 million in outstanding lease revenue bonds (LRBs) which are scheduled to be defeased on 9/1/20.

RATINGS RATIONALE

The Aa2 GO rating for the SFID bonds reflects a tax base that is nearly contiguous with that of the entire district and one that benefits from a growing regional economy and high resident income levels. Both tax bases will continue to grow, although near-term increases will be slowed by impacts from the coronavirus pandemic, with the district's tourism and retail related businesses especially impacted. The Aa2 SFID GO rating and Aa2 districtwide GO rating reflect the district's solid financial position characterized by moderate but stable reserves and strong liquidity. Both the school district and SFID have low net direct debt. In common with most California school districts, pension liabilities are somewhat elevated but remain manageable. The ratings also incorporate the strength of management and its conservative budgeting approach. The GO ratings account for the strength of the unlimited tax pledge, secured by ad valorem property taxes for debt service that are levied, collected, and disbursed by Los Angeles County, outside of the district's operations.

The Aa3 LRB rating is one notch lower than the Aa2 rating on the district's GO bonds. For a California school district, Moody's typically applies a two-notch distinction between a GO rating and the rating on lease-backed debt secured by a "more essential" asset. The 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 an abatement lease, despite the more essential nature of the asset. In this case, the rating distinction is one notch, recognizing that the credit quality of the LRBs is materially improved by the availability of revenue streams outside the district's general fund that are used to pay debt service.

RATING OUTLOOK

Outlooks are usually not assigned to local government credits with this amount of debt outstanding.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Significant, sustained improvement in financial position

- Meaningful reduction in unfunded pension liabilities

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Material decline in fund balances or cash reserves

- Continued enrollment losses that would pressure financial performance

LEGAL SECURITY

The current GO bond issuance will be secured by the SFID's voter-approved unlimited property tax pledge. Los Angeles County rather than the school district or SFID will levy, collect, and disburse the property taxes restricted to pay debt service on the bonds. Los Angeles County does not participate in a Teeter Plan, however tax delinquencies within both the SFID and district overall have historically been low at less than 1%. Actual delinquencies have also fallen below the tax delinquency rate assumed by the county in setting property tax rates for general obligation bonds, supporting over collection. While we expect that tax delinquencies will increase, over collection and LA County's six-month advance collection of property taxes serve to insulate property tax collections for GO debt service payments.

The LRBs are secured by debt service payments made by the Saugus/Hart Financing Authority, which are derived from rental payments made by the school district to the authority for the use and occupancy of Tesoro del Valle Elementary School, pursuant to a standard abatement lease, and includes a debt service reserve.

USE OF PROCEEDS

The Series C bonds represent the third and final issuance of a $148 million GO authorization approved by voters within the SFID in 2014. Bond proceeds will be used to fund a variety of construction and improvement projects within the SFID.

PROFILE

Saugus Union School District serves the City of Santa Clarita, and communities of Canyon Country, Saugus, Valencia, and Newhall, as well as other unincorporated areas in northern Los Angeles County. The district encompasses about 99 square miles, with an estimated population of 107,585. It operates 15 elementary schools serving an estimated 9,621 students in grades K-6, in fiscal 2021.

The SFID was formed in 2014, encompassing 99% of the parcels in the school district. Properties included in the SFID are primarily developed and served by existing schools in the district that will be renovated using the proceeds of the SFID Election of 2014 bond authorization. The properties excluded from the SFID are subject to a mitigation agreement with an owner-developer that has agreed to construct new schools as necessary to serve the development planned on the excluded properties.

METHODOLOGY

The principal methodology used in this rating was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Cregger 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 Alexandra Cimmiyotti 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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