Fitch Ratings has affirmed the ‘AA-‘ rating on the following general obligation (GO) bonds of William S. Hart Union High School District, California (UHSD, or the district):

–$87.1 million (2001 election) GO bonds, series B;

–$90.7 million (2008 election) GO bonds, series A;

–$168.9 million GO bonds (2008 election), series C.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited property tax levied on all taxable properties within the district.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION; VULNERABILITIES REMAIN: The ‘AA-‘ rating reflects years of operating surpluses, a strong financial cushion, good remaining expenditure flexibility, and prudent management practices. However, the district is exposed to various vulnerabilities that could pressure reserves over the coming years. These include five years of modest enrollment losses, a material degree of charter school competition, and participation in the state-run CalSTRS pension plan, which has a low funded ratio.

WEAK DEBT PROFILE; LIMITED CAPITAL NEEDS: The district’s debt profile is weak. Amortization is very slow and actual assessed value (AV) growth has not kept pace with aggressive assumptions, resulting in a tax rate higher than promised to the voters. Concern about opposition to potential future GO authorizations is mitigated because near-term capital needs are fully funded. Current debt ratios are moderate.

SOLID LOCAL ECONOMY: Santa Clarita benefits from its location within the large and diverse Los Angeles employment market. Further, the local economy enjoys materially stronger income and unemployment levels than the state and the nation, and population growth historically has been rapid.

DIVERSIFIED, RECOVERING TAX BASE: The district’s tax base is well diversified, but its AV contracted an aggregate 8% before making a solid recovery in fiscal 2015 bringing AV back to its fiscal 2009 level.

CREDIT PROFILE

Located in the northwestern portion of Los Angeles County (the county), the district includes the city of Santa Clarita (the city) and nearby unincorporated parts of the county. Historical population growth had been very high until recent years, as real estate and economic weakness has weighed on new development. Recent data shows new construction activity is rebounding significantly from trough levels, suggesting population growth may also recover somewhat.

STRONG LOCAL ECONOMY

The district’s economic profile is good overall and the recessionary impact was relatively mild. Poverty rates are very low, and median household income levels are well above average at 146% and 169% of state and national levels, respectively. September unemployment measured a low 4.7%, attributable to a strong 3% employment gain.

The local tax base is well-diversified and AV growth had been strong until fiscal 2010 when the hard-hit local housing market experienced two consecutive years of moderate AV decline. AV rose 2.2% in fiscal 2014 and a strong 7.7% in fiscal 2015 bringing total AV back to the fiscal 2010 level. Year-over-year home value increases of 10% in 2014 points to further gains for fiscal 2016 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 AV over the next several years.

SOLID FINANCIAL CUSHION EXPECTED DESPITE BUDGET CHALLENGES

The district’s financial operations have performed well over the past several years, but are moderately vulnerable to various pressures moving forward. Management prudently enacted significant expenditure reductions early in the downturn, thus allowing the district to grow its general fund balance in each year from fiscal 2008 to 2013. Fiscal 2014 ended with breakeven operations bringing the district’s total and unrestricted fund balances to high levels of $44.8 million (23.4% of expenditures and transfers out) and $36.3 million (18.9%), respectively.

The district budgets conservatively, regularly outperforming its budget significantly. The original fiscal 2014 budget called for a $4.8 million operating deficit (after transfers) compared to the actual breakeven operations. Likewise, the fiscal 2015 budget calls for a $13.5 million drawdown, mostly of unrestricted funds. Fitch expects the district to finish the year with a more moderate drawdown and to maintain a sound fund balance over the near term.

However, there could be downward rating pressure if, in future years, funding levels stagnate and the district does not initiate sufficient expenditure reductions to regain structural balance. Fitch does not anticipate that this scenario will occur, based on the district’s historically strong financial management and maintenance of high fund balances. The district expects modest enrollment declines to continue for the next two to three years, given enrollment trends at lower grade levels. However, persistent or accelerating enrollment declines could pressure future financial operations.

The $13.5 million projected fund balance deficit in fiscal 2015 largely stems from the one-time spending noted above as well as 4% salary increases and adding back some positions which had been eliminated. Multi-year projections indicate smaller operational deficits in fiscals 2016 and 2017, though prior year projections have been similarly negative while actual financial performance has been positive.

These operational pressures are mitigated by strong management practices. The district has a considerable amount of legal expenditure flexibility in addition to the district’s history of conservative budgeting and positive operating results.

MODERATE DEBT LEVELS OFFSET BY ELEVATED TAX RATES

Net debt levels are moderate at about $4,000 per capita (3.3% of AV). Principal amortization of direct debt is very slow with only 28% paid off in 10 years in large part due to the significant use of back-loaded current interest bonds. The district’s near-term capital needs have been satisfied through two recent bond authorizations. Future capital needs include school renovations and technology upgrades, though the district is unlikely to move forward with such improvements for several years, and a related capital improvement plan (CIP) has not yet been formulated. No debt issuances are planned for the foreseeable future.

Recent debt issuances raised the district’s total GO tax rate (a combination of the Measure SA and V tax rates) to a high of $55.88 in fiscal 2014. The tax rate declined to $53 in fiscal 2015 due to the AV gain; however, this is well in excess of the district’s politically promised tax rate ceiling of $35 per $100,000 AV despite the slow payout of bonds. Fitch has concerns that both the increased debt service in future years and exceeding the promised tax rate may suppress voters’ appetite for future bond authorizations, though this concern is somewhat mitigated by district’s currently limited capital needs.

DISTRICT LIKELY TO FACE RISING OPEB, PENSION COSTS

The district’s other post-employment benefit (OPEB) costs are currently manageable, but are likely to rise, as the district only funds OPEB on a pay-as-you-go basis. The unfunded liability currently is small at about $60 million, or just 0.2% of AV.

Carrying costs (debt, OPEB, and pension costs as a percentage of non-capital total governmental spending) are moderate at 15%, but may rise significantly due to CalSTRS pension contribution rate hikes in future years. The district participates in the poorly funded CalSTRS pension system, as do all districts in the state. As part of its fiscal 2015 budget, the state initiated a seven-year program of pension contribution rate hikes that is structured to fully fund the system’s unfunded liability over a 32-year period.

The rate hike, if enacted as currently scheduled, would substantially increase the district’s contribution rates to 19.1% of wages from 8.25%. The district’s audited CalSTRS expenditures in fiscal 2014 equaled 3.8% of general fund expenditures and transfers out. If the district had hypothetically paid at the full phase-in contribution rate of 19.1%, the cost would have increased to 8.8%.

Additional information is available at ‘www.fitchratings.com‘.

In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=966695