As part of its continuous surveillance efforts, Fitch Ratings takes the following rating action on Fullerton Joint Union High School District's general obligation (GO) bonds and certificates of participation (COPs):
--$29.1 million GO bonds affirmed at 'AA+';
--$22.3 million COPs affirmed at 'AA'.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
--The Outlook revision to Negative from Stable reflects the district's exposure to volatile state funding, a structural budgetary imbalance than may reduce financial reserves to levels inconsistent with the 'AA+' rating category, and cessation of federal stimulus and other one time funds that have mitigated the impact of decreased state revenues.
--The 'AA+' rating reflects the district's currently strong financial position and history of strong financial management, solid unreserved general fund balances, and significant additional financial reserves maintained outside of the general fund.
--As with the majority of Californian school districts, the district is dependent on the state for funding, requiring it to manage through material revenue volatility and uncertainty.
--The district's debt ratios are low on a per capita and percentage of assessed value (AV) basis; however, outstanding principal amortizes at a very slow rate.
--The district's tax base is large, diverse, and relatively stable despite a modest 1.6% contraction in AV since fiscal 2009.
--The local economy is broad and diverse and features above average wealth levels; however, the unemployment rate in the area remains higher than the national average but below that of the state.
WHAT COULD TRIGGER A DOWNGRADE?
--Continued structural imbalance that result in reserve levels inconsistent with the 'AA+' rating.
SECURITY:
The GO bonds are secured by unlimited ad valorem taxes on all property within the district that is subject to taxation.
The COPs are secured by lease payments made by the district for use and occupancy of its Fullerton Union High School. The district has pledged to include all lease payments for the COPs in its annual budgets and to make lease payments from all sources of available funds. The district also pledges to maintain 24 months rental interruption insurance and maintains a cash funded debt service reserve.
CREDIT SUMMARY:
Fullerton Joint Union High School District is primarily located in Orange County with a relatively small portion in Los Angeles County. The district's boundaries cover an area of approximately 50 square miles and include Fullerton, La Habra, Buena Park, and six additional incorporated cities. The district operates six four-year comprehensive high schools and two continuation schools.
The district has a history of strong financial management with conservative financial practices, solid unreserved general fund balances, and additional financial reserves maintained outside of the general fund. However, like most California school districts, Fullerton Joint Union High School District is exposed to volatile state funding. Declining revenues and insufficient expenditure reductions resulted in a projected decline in the unreserved general fund balance to a still solid $20.4 million (15.1% of general fund spending) in fiscal 2011 (unaudited) from $23.5 million (16.9%) in fiscal 2010. The district benefits from a moderate degree of expenditure flexibility, including the ability to increase class sizes and eliminate programs; nonetheless, budgetary imbalance is projected to continue in fiscal 2012 and 2013. Reserves outside the general fund are projected at $16.9 million in fiscal 2011. Fitch views these additional reserves as providing additional financial flexibility beyond the general fund. However, without substantial expenditure reductions, the current strong level of reserves could be reduced to levels inconsistent with the 'AA+' rating.
The district's overall debt levels are low at $1,340 per capita and 1.3% of the district's assessed valuation; however, outstanding debt amortizes at a slow rate with less than 31% retired within 10 years. Capital needs are expected to be met through the district's deferred maintenance plan and no additional debt is anticipated at this time. The district has an unfunded other post-employment benefit (OPEB) liability of $17.8 million; however, management currently plans to address this liability through labor negotiations.
The district benefits from a fundamentally sound local economy that is linked to the diverse regional economies of Orange County and the greater Los Angeles area. The district's tax base is large, diverse, and relatively stable despite a modest 1.6% contraction in assessed valuation since fiscal 2009. The local real estate market has generally outperformed the state, reflecting both the area's higher average wealth and elevated unemployment rate that remains below the state average.
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 Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 08, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
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