Note: This pertains to the Measure M bonds that were approved by voters 10 years ago. The remainder of the authorization is scheduled for sale in November. In 2016, voters approved a successor bond, known as Measure E.
Fitch Ratings has assigned an ‘AAA’ rating to the following general obligation bonds to be issued by the Santa Clarita Community College District, California:
–$20 million 2016 GO bonds, election of 2006, series 2016.
In addition, Fitch has affirmed the following ratings:
–Issuer Default Rating (IDR) at ‘AA’;
–$192.8 million outstanding GO bonds at ‘AA’;
–$15.5 million outstanding certificates of participation (COPs) at ‘AA-‘.
The distinction between the ‘AAA’ rating on the series 2016 bonds and the ‘AA’ IDR reflects Fitch’s assessment that bondholders are legally insulated from any operating risk of the district.
The Rating Outlook is Stable.
The bonds are expected to price the week of Nov. 7 via negotiated sale. Proceeds of the bonds will fund various capital improvements and pre-pay outstanding debt.
The GO bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district. The district’s COPs are supported by a covenant to budget and appropriate lease rental payments for the use of certain essential assets and rated one notch below the IDR.
KEY RATING DRIVERS
SPECIAL REVENUE ANALYSIS: The ‘AAA’ series 2016 unlimited tax general obligation (ULTGO) bond rating is based on a dedicated tax analysis without regard to the district’s financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues’ in the event of a district bankruptcy.
STRONG TAX BASE; LOW DEBT: The economic resource base supporting the GOs is diverse, growing at a healthy pace and reasonably stable in downturns. The unlimited nature of the tax offsets any concern about tax base volatility. Overall debt is low relative to the economic resource base.
MATERIAL CHANGES TO TAX BASE: Significant and long-lasting decline in the district’s tax base and economy, while not anticipated, could result in downward ratings movement.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The ‘AA’ IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to withstand historical revenue volatility, throughout the economic cycle.
The district is located in northern Los Angeles County (IDR ‘AA’/Stable Outlook) along Interstate 5, approximately 35 miles from downtown Los Angeles, and includes the city of Santa Clarita and adjacent unincorporated areas. The district operates two campuses with full-time equivalent enrollment of approximately 16,000. The local tax base is largely residential and has benefited from ongoing housing development, above-average population growth, and access to the broad and diverse Los Angeles regional economy.
SERIES 2016 DEBT SERVICE LEVY VIEWED AS SPECIAL REVENUE
Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code and therefore the lien on pledged revenues for the 2016 bonds would survive and would not be subject to the automatic stay (i.e., payment interruption) in the event the district were to file for bankruptcy.
Fitch has reviewed and analyzed legal opinions provided by district counsel, specific to the series 2016 bonds, and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily Proposition 13), which limit and direct the use of pledged property tax revenues for bond repayment. No such opinion has been provided for the district’s outstanding GO bonds.
As a result, Fitch analyzes the series 2016 bonds as dedicated tax bonds. This analysis focuses on the district’s economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. Fitch typically analyzes the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district’s bonds eliminates the need for such calculations.
STRONG TAX BASE SUPPORTS BONDS
The district’s large and diverse tax base and economy provide a strong basis for repayment of the ULTGO bonds that is unlikely to be reduced by normal or even severe cyclical fluctuations.
The tax base is growing at a healthy pace after experiencing moderate declines during the last recession. Assessed value (AV) has risen at a 6.1% compound annual growth rate (CAGR) over the past two decades and prospects for further growth in the district appear solid. The district includes substantial developable land and a variety of major residential and commercial development projects are underway. Taxpayer concentration is minimal.
Tax rates are low and unlikely to rise to a level that pressures the rating even under relatively severe stress scenarios. The general tax rate of 1% of AV is established in the state constitution and may not be increased. Tax override levies for overlapping jurisdictions are similarly low at a combined 0.19% of AV for 2016.
IDR EXTENDS ANALYSIS TO OPERATING RISKS
The ‘AA’ IDR reflects the district’s strong operating performance, low liabilities, considerable expenditure flexibility, and history of strong revenue growth. While the district has no legal ability to independently raise revenues, it has benefited from strong enrollment growth and retains ample ability to offset declines in state funding by reducing expenditures through service level and staffing reductions. As a result, Fitch expects operating performance to remain sound, with largely balanced financial operations and stable reserves.
Revenue Framework: ‘a’ factor assessment
District revenues have grown strongly over the past 15 years due to rising enrollment, and have also been bolstered more recently by state economic improvement; however, the district’s legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: ‘aa’ factor assessment
The district has solid ability to adjust spending to match revenues due to its control over part-time staffing levels, which can fluctuate with demand or state funding of enrollment. On average, growth in spending is likely to be in line with revenue growth over time.
Long-Term Liability Burden: ‘aaa’ factor assessment
The district participates in two state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies, resulting in a long-term liability total that is a low burden on resources. Voters’ approval in June of $230 million in additional GO bonding authority will increase the district’s debt load materially over time, but overall liabilities are anticipated to remain low.
Operating Performance: ‘aaa’ factor assessment
Expenditure cutting flexibility and solid financial reserves leave the district very well positioned to address cyclical downturns. Budgets are conservative and the district maintained solid financial flexibility through the last recession and in subsequent years.
State aid and local property taxes provide the majority of district revenues, which are ultimately determined by a formula based on enrollment and overall state revenues.
Historical revenue growth has exceeded inflation and U.S. economic performance due primarily to long-term enrollment growth. Fitch expects future revenue growth to remain robust based on continued population and enrollment gains in combination with rising state per-pupil funding levels resulting from growth in the state’s economy.
Like other California local governments, the district has no independent legal ability to raise revenues due to state constitutional provisions requiring voter approval for tax increases. The district also has no discretion to raise tuition revenues, as rates are established on a statewide basis.
Personnel costs for teachers and staff comprise the vast majority of district expenditures.
Such expenditures are planned on the basis of revenue levels established in the state’s annual budgets, and are expected to increase at roughly the same rate. Unanticipated mid-year revenue reductions can upset this balance but have been rare historically.
The district has considerable spending flexibility and can manage service levels through adjustments to enrollment and teaching staff. Roughly half of the district’s employees are adjunct professors and the district has substantial discretion to adjust their hours of employment. Fixed costs for debt service and retiree benefits are moderate and only a modest burden on discretionary revenues. Pension contribution rates for teachers are scheduled to rise over the next several years but should remain affordable.
Long-Term Liability Burden
Overall debt and pension liabilities are low relative to the district’s resource base at less than 8% of personal income. Amortization of existing direct debt is slow due to the district’s past issuance of long-dated capital appreciation bonds, and appears likely to slow further with planned issuance from a recently approved $230 million GO bond authorization. Overall liabilities are expected to remain low based on continued population and personal income growth.
Fitch expects the district to achieve balanced operations over the long term, with aggregate available fund balances, including those outside the general fund, totaling well above 10% of general fund spending. The district maintained relatively stable fund balances through the recession and would likely make use of its notable expenditure flexibility to address any future revenue shortfall. The district’s financial flexibility is enhanced by the substantial reserves for capital and employee benefits that could be returned to the general fund at its board’s discretion.
The district maintained adequate reserves during the last recession with no material deferral of required spending. Budgets continue be balanced during the recovery and reserve levels have held stable.
Since the initial review of the district’s IDR under Fitch’s revised criteria for U.S. state and local governments in May, the revenue framework assessment has been revised to ‘a’ from ‘aa’ to highlight the district’s revenue-raising constraints and for consistency with Fitch’s approach to similarly-situated credits, and the operating performance assessment has been revised to ‘aaa’ from ‘aa’ based on additional consideration of the financial flexibility afforded by the district’s substantial reserves outside the general fund.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form