Fitch Ratings has assigned an ‘AA’ rating to the following general obligation (GO) bonds to be issued by the Santa Clarita Community College District, California:
–$94 million 2016 GO refunding bonds.
The bonds are expected to price the week of May 30 via negotiated sale. Proceeds of the bonds will advance refund outstanding GO debt for interest savings.
In addition, Fitch has affirmed the following ratings:
–Issuer Default Rating (IDR) at ‘AA’;
–$214 million outstanding GO bonds at ‘AA’;
–$18 million outstanding certificates of participation (COPs) at ‘AA-‘.
The Rating Outlook is Stable.
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.
KEY RATING DRIVERS
The ratings reflect the district’s strong operating performance, moderate liabilities, considerable expenditure flexibility, and history of revenue growth. While the district has no ability to independently raise revenues, the district has ample ability to offset declines in state funding by reducing the number and hours of classes commensurately, which it can do by immediately reducing the number of adjunct professors. As a result, Fitch expects operating performance to remain sound, with largely balanced financial operations and stable reserves.
Economic Resource 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 gains over the past several years and wealth and income levels for the district remain above average.
Revenue Framework: ‘aa’ 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 ample 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.
The district participates in a two adequately funded 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 moderate burden on resources. A bond election scheduled for June would increase the district’s debt load materially if successful, but overall liabilities are anticipated to remain low.
Operating Performance: ‘aa’ factor assessment
The district’s solid expenditure cutting flexibility offsets its lack of independent revenue-raising ability and lower reserve levels relative to its historical revenue volatility. The district budgets conservatively and Fitch expects it to maintain an adequate financial cushion.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The ‘AA’ IDR could face downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to withstand historical volatility.
The district serves approximately 16,000 full-time equivalent students on two campuses in northern Los Angeles County.
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 to long-term enrollment growth. Future revenue growth will be based on continued enrollment gains and state per-pupil funding levels. The latter may peak over the medium term following recent growth due to improvement in the state’s economy.
The district has no independent ability to raise revenues. California’s proposition 13 requires a vote of the people to raise taxes.
The district is dependent on the State of California for the vast majority of its revenues. The state constitution’s priority for education funding and its minimum funding levels based on the state’s own revenue performance provide a sound revenue framework despite the district having no independent ability to raise revenues.
Personnel costs comprise the vast majority of district expenditures and are likely to be in line with-to-moderately above expected revenue growth based on the district’s current spending profile.
The district enjoys solid spending flexibility to manage the level of services provided because it is able to adjust enrollment and its teaching staff. A majority of the district’s teaching staff are adjunct professors, who while unionized do not share the tenure protections of regular faculty. Fixed costs for debt service and retiree benefits are moderate at 14% of fiscal 2015 primary government revenues. The teachers’ pension contribution rates are scheduled to rise but remain manageable.
Long-Term Liability Burden
Debt and pension liabilities are a moderate burden on the resource base at an estimated 9% of personal income. Amortization of existing direct debt is slow due to the district’s use of long-dated capital appreciation bonds, and appears likely to slow further if district voters approve a proposed new bond program that could double the district’s outstanding debt. Overall liabilities are expected to remain affordable even with the district’s potential new issuances over the next several years.
Fitch expects the district to maintain relatively balanced operations over the long term and available fund balances near 10% of general fund spending. Recent budgets appear conservative. The district’s current reserve levels are consistent with a reserve safety margin at the ‘a’ level; however, the district maintained relatively stable fund balances through the recession due to the flexibility provided by its part-time teachers and ability to adjust services offered in terms of the number of classes.
Budgets continue be balanced during the economic recovery and reserve levels have held stable.