SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns its 'AA' rating to the following Long Beach Unified School District, CA (the district) general obligation (GO) bonds:
--$3 million election of 2008 series B (tax-exempt);
--$72.4 million election of 2008 series B-1 (Federally Taxable - Qualified School Construction Bonds - Direct Payment to Issuer);
--$25 million GO refunding bonds series 2011.
The district plans to sell the bonds via negotiation on or about the week of April 11.
In addition, Fitch affirms its 'AA' rating on $542 million of outstanding district GO bonds.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district has maintained sound general fund reserves amid declines in state education funding through disciplined spending reductions.
--The district's dependence on the state of California for funding requires careful management of significant revenue volatility and uncertainty, which is exacerbated by declining enrollment trends, but the district has prudently planned for a variety of funding scenarios, including significant cuts, over the next two years.
--The local economy is large and diverse, and despite a cyclical downturn, it has strong fundamental underpinnings.
--The expansive and well-established local tax base has declined in value over the past two years, but the losses have been quite manageable thus far.
--The district's debt profile is mixed, characterized by a moderate overall debt burden and strong community support for its bond program, balanced against its large deferred capital needs and slow principal amortization.
KEY RATING DRIVERS:
--Policymakers' continued willingness to make difficult decisions to align expenditures with declining state revenues
--Maintenance of healthy reserves to offset some of the uncertainty about state funding
SECURITY:
The bonds are secured by an unlimited ad valorem property tax on all taxable property within the district.
CREDIT SUMMARY:
Long Beach USD is California's third-largest school district, serving about 79,500 students and 525,000 residents. It includes 129 square miles of southeastern Los Angeles County, including the cities of Long Beach, Signal Hill, Santa Catalina Island, much of the city of Lakewood and a portion of unincorporated Los Angeles County. The district operates 51 primary, 23 middle and K-8, eight high schools, four charter schools, and an adult continuation school.
The district has managed well through a period of financial and economic stress that continues to force significant expenditure reductions. The district is largely dependent on the state of California for funding, which has declined 16.5% over the past three fiscal years. State funding declines stem from both state spending reductions and declines in district enrollment, which has been dropping for most of the past decade. Given very limited local revenue raising flexibility, the district has reacted to revenue declines with expenditure reductions. While the district has used non-general fund reserves to ease the spending decline, it made significant spending cuts that totaled about 10% over the past two fiscal years. Management made further cuts in the current budget year, including layoffs and unpaid furloughs, and it expects to post a small net surplus in the current year.
Fund balances are sound. The unreserved general fund balance rose to $64.4 million, or 8.8% of expenditures at the end of fiscal 2010, up from $41.2 million, or 5.4% in fiscal 2009. The state revenue outlook is uncertain due to ongoing state budget negotiations. The district may face significant reductions in revenues, and it has made prudent plans to reduce spending in the event of further state funding cuts. The district has sent layoff notices to almost a quarter of its teaching staff for the upcoming year. While management anticipates that actual layoffs are likely to be less dramatic, the district's proactive planning and careful budgeting is a credit positive. Fitch anticipates that the district will draw down fund balances over the next two years if it faces further state funding reductions, but the district is likely to maintain its traditionally healthy fund balances, despite some drawdown in fund balance.
Long Beach continues to suffer the effects of the recent economic downturn, but its large and diverse economy provides strong fundamental support for repayment of the GO bonds. The district's assessed value (AV) is quite large at about $49 billion. The housing market decline of recent years was somewhat muted in Long Beach because it is a built-out, established coastal community. AV declined a manageable 2.9% in 2009 and 2.4% in 2010. The district's tax base is a diverse mix of residential, commercial and industrial properties, and concentration is low with the top 10 taxpayers accounting for 3.2% of AV.
While the district benefits from its position at the heart of the massive Los Angeles metropolitan area economy, the district's local economy remains stressed. The Long Beach economy is heavily influenced by the cyclical trade, manufacturing and tourism industries, with some stability provided by large healthcare, education and government employers. The Boeing Co. (Issuer Default Rating 'A'/Stable Outlook) is the largest private sector employer, and the Port of Long Beach (rated 'AA'/Stable Outlook) is the nation's second-largest container port. Port traffic rose 24% in 2010, but remains below its 2007 peak. The city's unemployment rate remained elevated at 14.4% in January 2011, above both state and national averages and year ago figures. The urban, blue collar community's socioeconomic indicators are mixed. Median household income is near the national median at about $50,500, but just 83% of the state median income. The poverty rate is above average at 19.1%.
The district's debt profile is mixed but adequate. Direct debt is low at 1.7% of AV, and overall debt is moderate at 3.6% of AV. The district relies on fixed-rate GO bonds to meet almost all of its capital needs. Amortization is somewhat below average with 40% of bonds repaid in 10 years. The district has considerable capital needs because much of its physical plant was built before 1960 and will need to be updated, but the district faces no growth pressures and enjoys considerable flexibility in the timing of projects and bond issuance. The district plans to use that authorization to update its physical plant gradually over the coming years, and its debt burden should remain quite manageable. It plans to return to market with another $175 million of GO bonds in late 2012. District voters have strongly supported the capital plan, approving a $1.2 billion bond authorization with 72.1% of the vote in 2008. Bondholders are protected from a sudden issuance of the entire amount by state debt limits and the statutory limit on the levy at the time the bonds are issued. There is no levy limit after issuance, providing strong bondholder protection.
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, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, Underwriter, Bond Counsel, Underwriter Counsel and California Municipal Statistics Inc.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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