SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings for Gilroy Unified School District, CA's (the district) bonds at 'A+':
--$0.9 million unlimited tax general obligation (GO) bonds series 2005.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited ad valorem property tax levy upon all taxable property in the district.
KEY RATING DRIVERS
WEAK DEBT PROFILE: High debt levels and extremely slow amortization, along with limited additional bonding capacity, are key credit concerns. These concerns are heightened given significant capital needs and the need to refinance BANs by 2015.
STABILIZING FUNDING/PERFORMANCE: The district's financial performance has improved and appears stable going forward primarily due to expenditure reductions. In addition, the district stands to benefit from the state's new local control funding formula (LCFF) based on its high proportion of economically disadvantaged students; however, regulations may limit the flexibility of these funds.
MANAGEMENT CONCERNS SOMEWHAT ABATED: The County Office of Education (COE) appointed a fiscal advisor for the district in fiscal 2013 citing concerns related to cash flows and staffing. The district has addressed these issues.
LIMITED ECONOMY: Economic indicators, including employment and tax base growth, have recently improved. However, given the district's agricultural roots, it has maintained a historically above average unemployment rate.
RATING SENSITIVITIES
CONTINUED STABLIZATION OF MANAGEMENT: Management's continued ability to effectively manage and report its finances without requiring additional COE intervention is essential to maintaining the rating at this level.
CREDIT PROFILE
The district is located in southern Santa Clara County, 33 miles south of San Jose. The city of Gilroy, historically an agricultural and food processing center, experienced rapid growth during the housing boom due to an influx of Silicon Valley residents, followed by contraction due to the economic downturn.
STABILIZING FINANCIAL PROFILE
The district posted surpluses in each of the last three years, bringing the unrestricted fund balance to about 10% at unaudited fiscal year end 2013. The improved financial performance was due primarily to expenditure reductions. These included a reduction in school days through furlough days and elimination of teacher salary increases for five years. The district restored the furloughed days in fiscal 2013 and is currently in negotiations with teacher's union regarding compensation for fiscal 2014.
Going forward, the district's funding picture appears to improve due to the new state funding formula. The district will likely benefit under the formula as it provides additional funds to districts with a high proportion of students receiving free and reduced price lunch. Management indicated it is using county guidance to determine its allocation estimated at an additional $3.7 million in fiscal 2014 and $4.9 million in fiscals 2015 and 2016; however, it is budgeting just $2 million, or 40%, until there is more certainty at the state level. Given these assumptions the unrestricted fund balance remains at least 9% through fiscal 2016. District management believes the new funding will provide flexibility and is not concerned about limits to unrestricted spending.
While the additional revenue may provide a significant benefit to the district, forthcoming accountability rules (expected in early calendar year 2014) regarding how some of the funds may be used could potentially restrict the district's financial flexibility over the near term if the rules include significant restrictions. Conversely, fewer restrictions on the additional funds may position the district to outperform financially over the next few years as LCFF is further implemented.
MANAGEMENT CONCERNS SOMEWHAT ABATED
The district filed a positive certification for its first interim report for fiscal 2013; however, the Santa Clara COE instead issued a qualified certification. The COE's concerns were related to the district's cash flow and multi-year projections and its ability to meet the state-required 3% reserve for fiscal 2013. In addition, the COE indicated that it had concerns with the district's ability to effectively manage its finances and, as a result, appointed a fiscal advisor to assist the district. Specifically, the COE noted concerns with the district's business office including critical vacant positions, internal accounting discrepancies, and the lack of responsiveness to requests for information. The fiscal advisor is reportedly satisfied with district actions to date.
WEAK DEBT PROFILE
Overall debt levels are high at more than $6,000 per capita and 5.0% of AV. In addition, amortization is extremely slow with only 17% of principal repaid within ten years. The district is limited in its ability to issue additional GO debt as its tax rates are approaching the legal maximum for issuance due to tax base reductions during the downturn. The district issued bonds earlier this year which partially refunded several series of its GO bonds, including all but $1.4 million of its outstanding capital appreciation bonds, and all of its 2010 BANs. The district plans to refund its remaining BANs, which mature in April 2015, with long-term GO debt in 2015. In addition, the district's capital needs include a new elementary school in two to three years to meet growing enrollment. The cost is likely to be at least $20 million, and the district plans to apply for state grants to at least partially meet the funding needs, though it is unclear whether grants will be available. With only $37.7 million in remaining debt capacity, AV must continue on its current upward trajectory in order to reduce the tax rates and increase debt capacity.
The district participates in CalSTRS to provide defined-benefit pension benefits to teachers. As such, its annual contribution is established by statute and has not been upwardly adjusted for some time despite substantial investment losses over the past decade. As a result, annual contributions are well below the actuarially determined amount and the system's estimated fiscal 2013 funded ratio is a weak 66% based on a 7.5% discount rate. Using a more conservative 7% discount rate, the ratio is only 63.5%.
While it is unclear what course the legislature will take at this time, Fitch anticipates future contribution rate increases could be substantial. Total pension payments in fiscal 2012, including both CalSTRS and CalPERs contributions, equaled 7.3% of governmental fund spending. Total carrying costs, including pensions and debt service, equaled 21% of governmental spending. The district does not offer other post-employment benefits.
LIMITED ECONOMY IMPROVING
The district's assessed value increased 6.5% in fiscal 2014 after two flat years following a 13% decline during the downturn. Unemployment, historically on the high end due to the agricultural presence, fell to a still elevated 10.8% as of July 2013 from 13.4% year over year on strong employment growth. Median household incomes are significantly above state and national averages, though lower than the county and MSA likely due to elevated incomes in the nearby tech center of Silicon Valley.
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 and Zillow.
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=809538
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