Fitch Ratings has assigned a rating to Mojave Unified School Facilities Improvement District #1, California's (SFID) general obligation bonds (GOs) as follows:
--$9,780,000 2011 Refunding GOs at 'AA-'.
The bonds are expected to sell via negotiated sale the week of Aug. 15.
In addition, Fitch affirms the following ratings:
--$26.3 million outstanding GOs at 'AA-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
--The 'AA-' rating reflects the SFID's currently strong financial position, reflective of a very high unreserved general fund balance, a moderate degree of remaining expenditure flexibility, a history of conservative budgeting, and impressive progress toward funding the district's OPEB obligation.
--These strengths are somewhat offset by a vulnerable state funding environment, expected deficits in fiscal years 2011 and 2012, and two years of enrollment losses.
--The small local economy is geographically isolated, economically concentrated among a handful of large employers, and the local housing market has faced acute stress.
--The SFID's tax base contains a significant degree of concentration among the top payers, and has contracted substantially over the past two fiscal years, though fiscal 2012 assessed value (AV) is stable.
--The SFID's debt profile is somewhat weak, with moderate debt levels, somewhat slower than average amortization, minimal capital needs, and certificate of participation (COP) debt service that will pressure the district's general fund operations unless refunded.
SECURITY:
The bonds are secured by an unlimited ad valorem tax pledge on all taxable properties within the SFID.
CREDIT PROFILE:
The SFID encompasses approximately half of Mojave Unified School District (the district) by AV, and is located in eastern Kern County, serving California City and unincorporated areas. Historically high attendance growth has turned to rapid decline over the past two years as the distressed local housing market and dislocated economy have resulted in outmigration. Unemployment and income levels are not available for the city, but county indicators are weak, reflective of its agricultural concentration. California City employment contains greater exposure to higher-paying jobs at Edwards Air Force Base, a prison, and various aircraft and car testing facilities. As such, income levels reportedly are higher than those of the county. Nonetheless, the tax base is concentrated, with the top 10 taxpayers making up 27% of AV.
Further, declining home prices caused a severe 23.8% cumulative AV decline from fiscal years 2009-2011, though AV growth stabilized in fiscal 2012, with slight growth of 0.3%. The top taxpayer, CCA Western Properties (13.4% of AV), operates a prison that lost its sole contract from the state in 2010. This resulted in the prison's temporary closure prior to reaching an agreement with the U.S. Marshals. The prison is now running at about two-thirds of its former levels, and the temporary closure contributed to a substantial 9.6% enrollment loss in fiscal 2011.
The district's financial operations currently are strong, but pressured by a challenged state funding environment and declining enrollment. Prior to fiscal 2011, the district implemented substantial expenditure reductions, resulting in surplus to nearly balanced operations. Fiscal 2010 general fund operations (the last year for which an audit was available) generated a small $136,000 deficit, resulting in still strong total and unreserved general fund balances of $11.9 million (55% of general fund expenditures and transfers out). Financial operations in fiscal 2011 deteriorated somewhat as revenues fell 2% while expenditures rose nearly 6%. As a result, management is anticipating a wider operational deficit of $1.2 million -$1.5 million, which is manageable given the high level of district reserves.
The fiscal 2012 budget calls for a $2 million deficit, but the district consistently has out-performed its budgeted operations due to conservative budgeting practices. Management does not currently have a timeframe or plan for returning the district's operations to balance. Although the general fund could withstand several years of drawdowns at current rates, Fitch likely would take a negative rating action over the next two to three years if the district failed to sufficiently narrow its operating deficit or produce a credible plan to do so.
Returning to balance may be complicated by the strained state funding environment, declining enrollment, and by $1 million of annual COP debt service that begins in fiscal 2013 if the district fails to refund its COPs, as originally anticipated. In spite of these challenges, the district has a moderate degree of remaining expenditure flexibility, the district's financial advisor believes sufficient SFID bonding capacity remains to refund the district's certificates, and management has a history of appropriately adjusting staffing levels to mitigate declining enrollment.
The SFID's debt profile is fairly weak. Direct debt and overlapping debt levels are moderate at 2.9% and 4% of AV, respectively, though capital needs are minimal. Principal amortization is slightly below average, with 16% and 45% of debt retired over five and 10 years, respectively. The district issued $7.5 million of COPs in fiscal 2008 that it intended to refund with SFID refunding GOs. However, based on recent tax rates, two years of substantial AV contraction would prevent the district from doing so in fiscal 2013 under the education code due to tax rate and maturity caps. The financial advisor believes that sufficient capacity remains to refund the COPs by issuing long-maturity capital appreciation GOs under the government code, which allows for maturities up to 40 years. Although doing so would prevent the district from using unreserved resources to make annual $1.1 million COP debt service payments, it would weaken the district's debt profile by significantly slowing debt amortization and restricting future financing flexibility.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug. 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct. 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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