Fitch Ratings has affirmed Mojave Unified School District, California's (the district) certificates of participation (COPs) as follows:
--$7.5 million series 2008 at 'A+'.
Fitch additionally assigns the district an implied general obligation rating of 'AA-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
-- The 'A+' COPs rating reflects the certificates' sound lease structure and the district'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 towards funding the district's other post employment benefit (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 district's somewhat concentrated tax base contracted significantly in fiscal 2011 but rebounded to record levels in fiscal 2012, resulting from rapid growth in renewable energy facilities.
-- The district's debt profile is sound overall, with low debt levels, rapid amortization, progress towards funding the district's OPEB obligation, and minimal capital needs.
-- However, COP debt service will pressure general fund operations beginning in September of 2012 if they are not refunded with general obligation (GO) bonds, as originally intended.
SECURITY:
Payment of principal and interest is secured solely from lease payments by the district to the Public Property Financing Corporation of California, for use of California City Middle School.
CREDIT PROFILE:
Mojave Unified School District 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. A large local employer, CCA Western Properties, 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 of the prison contributed to a substantial 9.6% enrollment loss in fiscal 2011. California City employment contains greater exposure to higher-paying jobs at Edwards Air Force Base, the prison, and various aircraft and car testing facilities. As such, income levels reportedly are higher than those of the county. The tax base is somewhat concentrated, and declining home prices caused a substantial 16% assessed value (AV) decline in fiscal 2011. However, fiscal 2012 AV jumped by a very high 27% to $2 billion, resulting from construction of renewable energy facilities.
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 certificates of participation, 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 district's debt profile is sound overall. Direct debt and overlapping debt levels are low at 0.38% and 2.5% of AV, respectively. Principal amortization is rapid, with 32% and 74% of debt retired over five and 10 years, respectively. The district's COPs were issued in fiscal 2008 with the intent to refund them with school facilities improvement district (SFID) GOs. However, based on recent tax rates, two years of substantial AV contraction in the SFID would prevent the district from doing so under the education code in fiscal 2013 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 restricting future financing flexibility, as the district historically has used SFIDs to finance its capital needs.
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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