[Fitch] – Fitch Ratings affirms the following ratings for the Santa Clarita Community College District (the district):
* $189.6 million general obligation (GO) bonds at ‘AA’;
* $19.8 million certificates of participation (COPs) at ‘AA-‘.
The Rating Outlook is revised to Stable from Negative.
The GO bonds are general obligations of the district, payable solely from the proceeds of ad valorem taxes, without limitation as to rate or amount.
The COPS are limited obligations secured by lease rental payments for the use of certain district properties, subject to abatement. They are additionally supported by the district’s covenant to budget and appropriate lease payments.
KEY RATING DRIVERS
IMPROVED REVENUE PROSPECTS: The revised Rating Outlook reflects recent revenue improvements for the district resulting from a recovering economy and improved state finances. Fitch expects that increased state revenue collections and resulting increases in the Proposition 98 funding guarantee will ease budgetary pressures for the district over the next several years. In addition, the state’s commitment to curtail revenue deferrals should improve liquidity.
OPERATING BALANCE RESTORED: The district finished the 2013 fiscal year with a small surplus and management expects positive results for the current fiscal year. Fund balances are adequate and remain well above state-mandated levels.
STRONG ECONOMIC BASE: The district benefits from its access to and participation in the broad Los Angeles economy and is well positioned to capture ongoing regional growth. Local employment and housing markets have seen steady improvements over the past several years and wealth and income levels for the district remain above average.
AFFORDABLE DEBT; SLOW AMORTIZATION: Overlapping debt levels are moderate, but amortization is slow due to the district’s extensive use of long-dated capital appreciation bonds (CABs).
MAINTENANCE OF OPERATING BALANCE: Management’s inability to maintain operating balance would create downward pressure on the rating. Upwards rating movement is somewhat limited by the district’s reliance on state funding and would likely require sustained improvements in reserve levels to offset historical revenue volatility.
The district is located in northern Los Angeles County along Interstate 5, approximately 35 miles from downtown Los Angeles, and includes the city of Santa Clarita and adjacent unincorporated areas.
IMPROVED REVENUE PROSPECTS
The district relies heavily on state funding for operations and has benefited from recent improvements in the state’s economy and revenue collections. Unrestricted general fund revenues for the district rose by 4.3% in fiscal 2013 following a 10.8% decline in 2012, and further increases appear likely. The governor’s proposed budget for fiscal 2015 projects an 11.4% increase in the Proposition 98 funding guarantee for K-14 schools as well as the repayment of prior year revenue deferrals. District funding has also been aided by the November 2012 approval of Proposition 30 by state voters, which increased statewide sales and income taxes on a temporary basis to fund education.
OPERATING BALANCE RESTORED
Increased revenues have helped the district to restore operating balance following several years of funding reductions. The district finished fiscal 2013 with a small general fund surplus following a deficit in 2012 and appears likely to add to fund balance in fiscal 2014 based on year-to-date results. Fitch expects that proposed increases in state revenues will help extend this positive trend for fiscal 2015.
Cash balances have also increased with the general improvement in the district’s financial position. The district issued $8 million in cash flow notes in 2013 in response to state revenue deferrals but has no plans for further short-term borrowing. Fund balance rose to 11.8% of general fund spending in fiscal 2013, well above the 5% state-mandated minimum.
STRONG ECONOMIC BASE
The tax base of the district is largely residential and has withstood the recent housing crisis better than many outlying communities in southern California. Taxable assessed valuation (TAV) for the district fell by 8% between 2009 and 2013 but returned to growth in 2014 with a 2.2% increase. Year-over-year home value increases of 23% through December 2013, as reported by Zillow, point to further gains as the residential real estate market continues to improve. Several large-scale residential developments underway or in the planning stages are also expected to boost the district’s population and TAV over the next several years.
Wealth and income indicators for Santa Clarita are well above county, state, and national averages, while poverty levels are much lower. Unemployment rates have historically compared favorably to state and national averages and peaked at a relatively low 7.8% in 2010. As of November 2013 the unemployment rate for the city of Santa Clarita was 5.7%, as compared to 8.3% and 6.6%, respectively, for the state and nation. Recent employment growth has also been robust with a 2.4% increase over the last 12 months, although employment levels remain below pre-recession peaks.
MANAGEABLE DEBT LEVELS; SLOW AMORTIZATION
Overlapping debt levels for the district are moderate at 3.2% of TAV, but amortization is very slow due to the district’s extensive use of long-dated capital appreciation bonds. Approximately 21% of outstanding principal and principal accreted through maturity is scheduled for repayment within the next 10 years. The district retains $45 million in GO authorization and is considering plans for issuance in late 2014.
The district is a participant in two state-sponsored defined benefit pension plans and faces ongoing increases in contribution rates to address current low funding levels. Funding for CalSTRS is a particular concern, as current contribution rates are substantially below the level required to amortize existing obligations. OPEB costs are funded on a pay-as-you-go-basis, resulting in a growing liability for these commitments, but the district’s unfunded liability was relatively low at $7.6 million as of 2013. Carrying costs for long-term obligations, including debt service and contributions towards retirement benefits, were affordable at approximately 15% of 2013 operating expenditures.