SAN FRANCISCO--()--Fitch Ratings downgrades to 'AA' from 'AA+' the rating on the following Roseville Joint Union High School District (the district), California general obligation (GO) bonds:
--$107.9 million (election of 1992) series A, B, and 1998C, and (election of 2004) series A, B, and C.
The Rating Outlook is Stable.
The bonds are secured by unlimited ad valorem property taxes on property within the district.
KEY RATING DRIVERS
DOWNGRADE CONSIDERATIONS: The 'AA' reflects Fitch's belief that the district will continue to face operating pressures given its reliance on state revenues in light of longer-term state funding uncertainties (despite the recent passage of state Proposition 30). Fitch is concerned that resultant reserve levels would be insufficient to mitigate credit concerns related to the below-average economic profile.
STRONG FINANCIAL MANAGEMENT: The high rating importantly reflects the district's experienced management team which budgets prudently, commits to maintaining reserves in excess of minimum state requirements, cultivates good labor relations, and protects the district's strong academic reputation.
ECONOMIC VULNERABILITY: The district's slowly growing population, good mix of commercial and industrial businesses, and historically above-average wealth indicators partially offset concerns about continued economic weakness given the very high local unemployment rate and four years of taxable assessed valuation (TAV) declines in a weakened property market.
SOLID GENERAL FUND BALANCE: The passage of state Proposition 30 and avoidance of trigger cuts in fiscal 2013 positions the district well to maintain solid general fund balances going forward, albeit at a slightly lower level than in fiscal years 2011 and 2012. A good level of spending flexibility and liquidity remains.
MANAGEABLE LONG-TERM LIABILITIES: The district's debt burden is easily affordable and overall debt is moderate. Fitch expresses some concern over the district's likely increasing pension costs due to state pension system investment losses, but they too are currently manageable.
The district is located 16 miles northeast of Sacramento. The majority is in Placer County, with a small portion in Sacramento County.
STABLE FINANCIAL OPERATIONS
A key credit positive is the district's strong financial management reflected in various steps taken to preserve both high academic standards and financial flexibility. The district has not had to make drastic spending cuts, relying instead on budget balancing measures such as repurposing of state categorical funding and the receipt of non-recurring federal funding, multiple department and program savings, as well as the benefits from ongoing student enrollment increases.
The district ended fiscal 2011 with positive operations which contributed to a very strong unrestricted general fund balance of $20.1 million or 27.9% of spending. The district intentionally maintained high total general fund balances, well in excess of the 3% minimum state reserve requirement and the additional 2.42% school board requirement, as a rainy day reserve against ongoing state revenue pressure and to fund start-up costs associated with the district's upcoming sixth high school. Due to slower than projected population growth, this sixth school is now not expected to open until 2017. The district ended fiscal 2011 with good liquidity.
The district estimates that its fiscal 2012 unrestricted general fund balance will remain strong despite a $1.5 million draw down as a result of fiscal 2011 carryovers and state funding cuts. The district is projecting an unrestricted general fund balance of $18.6 million or 24.7% of spending.
Fiscal 2013 trigger cuts were avoided with the passage of state Proposition 30 and the district no longer expects a sharp drawdown of its general fund balances in fiscal years 2013-2015 in order to protect its academic programs. Instead, the district is budgeting a smaller $4.2 million draw down in fiscal 2013 which would decrease the total general fund balance to a still strong $14.9 million or 19.4% of spending. The district projects a steady state total general fund balance of around $12.2 million or 16% of spending in fiscal years 2014 and 2015. Fitch expects the district to meet or exceed its projections, consistent with its historical practice of outperforming conservative budgets and projections.
MIXED SOCIOECONOMIC CHARACTERISTICS
The district continues to benefit from a slowly growing population and consequent gradual student enrollment growth. While largely residential, there is a good mix of commercial and industrial businesses, assisted by proximity to Interstate-80. The district's historically above-average wealth indicators continue to withstand the high unemployment rate (10.6% for the metropolitan statistical area in August 2012), which has begun declining over the last two years.
TAV decreased 3.8% in fiscal 2010, 6.5% in 2011, and 4.2% in fiscal 2012 due predominantly to residential property value declines, after historically strong growth. A further minor TAV decline as anticipated by the district for fiscal 2013 could suggest local property market stabilization. Foreclosures and new residential construction are both trending positively. Sutter Health's establishment of an administrative service center in a leased facility in Roseville, from 2013 onwards, will reduce the city's office vacancy rate by 20%, according to city officials.
MANAGEABLE LONG-TERM OBLIGATIONS
Overall debt is moderate at $4,397 per capita or 3.4% of TAV. Debt amortization is average with approximately half repaid in 10 years. The district participates in CalSTRS for its certificated employees and CalPERS for its classified employees, and has very limited other post-employment benefit exposure. Increased employer pension contributions, due to pension system investment losses, have the potential to place some additional pressure on the district's general fund going forward given the district's stated intention to draw down its unrestricted general fund balance. However, Fitch expects carrying costs to remain affordable given their current low level; direct debt, pension, and other post-employment benefit (OPEB) obligations are low at 5.2% of fiscal 2011 general fund and debt service fund spending.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria