Fitch Ratings has affirmed the following Natomas Unified School
District, California (the district) general obligation (GO) bonds
--$13.3 million GO refunding bonds, series 1999, and GO bonds (election
of 2002), series 2004B at 'BBB+'.
The Rating Outlook is Positive.
The bonds are secured by the district's full faith, credit, and
unlimited ad valorem property tax pledge.
KEY RATING DRIVERS
SOLID BUT LOWER GENERAL FUND BALANCES: Despite net operating deficits
after transfers in fiscal years 2013 and 2014 (projected), the district
has been outperforming its budgets, is benefiting from the state's new
local control funding formula (LCFF) for public education, and is
projecting stronger out-year results. Also, the district's
cashflow/liquidity position has improved greatly since severe liquidity
problems in the context of management challenges affected its credit
quality several years ago.
ELEVATED TOP MANAGEMENT TURNOVER: While the current superintendent who
assumed responsibility in June 2012 (the fifth in three years) remains
in position, there is still senior management team turnover. However,
management reports improved policy alignment, data-driven
decision-making, more productive labor relations, and positive feedback
from the community.
MIXED SOCIO-ECONOMIC AND TAX BASE CONTEXT: Although the district's
wealth characteristics are above average, regional unemployment remains
somewhat elevated, and the district's taxable assessed valuation (TAV)
has only begun to stabilize. Further development is currently hindered
by changes in flood plain designation requiring federally-funded levee
HIGH DEBT BURDEN; RISING CARRYING COSTS: The district's debt burden
remains very high with moderate amortization. Carrying costs for debt
service, pension, and other post-employment benefits (OPEB) are
affordable although Fitch expects pension costs to increase due to
poorly funded state pension systems.
An upgrade to the 'A' rating category will depend on the district's
ability to achieve general fund structural balance, maintain solid
general fund balances and reserves, and protect its improved general
fund cashflow and liquidity position.
Located in the northwestern portion of Sacramento County, approximately
four miles north of downtown Sacramento, the district is home to
approximately 72,000 residents.
SOLID GENERAL FUND RESULTS DESPITE STRUCTURAL IMBALANCEThe
district ended fiscal 2013 with a lower, but still solid, unrestricted
general fund balance of $15.7 million or 22.1% of spending, down from a
very strong $19.5 million or 29.7% of spending the year prior. The
district outperformed considerably its originally budgeted net operating
deficit after transfers of $10.7 million. The district's actual, much
smaller, net operating deficit after transfers of $3.2 million was
largely caused by a 7.4% increase in general fund expenditures while
general fund revenues decreased by 2.5%. A significant portion of the
expenditure increase was due to a 6.8% rise in personnel costs (82% of
the fiscal 2013 expenditures) as furloughs ceased.
Despite an 11.6% funding increase in fiscal 2014, largely due to the
state's implementation of LCFF, current projections indicate that there
will be a further $3.2 million general fund drawdown. This would lower
the unrestricted general fund balance to $13.8 million or 17.6% of
spending. Most of the expenditure increase is being generated by a
further 9.1% rise in personnel costs.
However, the district's latest out-year projections are considerably
improved since Fitch's previous review. Based on the governor's proposed
budget, the district is expecting positive operations in fiscal 2015
which wold strengthen the unrestricted general fund balance to 22.2% of
spending if current personnel expenditures remain level. At the time of
Fitch's previous review, the district had been conservatively estimating
an unrestricted general fund balance of only 4.4% of spending. The
district is also projecting positive operations in fiscal 2016,
resulting in an unrestricted general fund balance of at least 27.1%. The
district's multiyear projections assume general fund revenue growth
outstripping expenditure increases. While positive revenue projections
appear reasonable given improved state funding generated by LCFF and
stabilizing student average daily attendance figures, the outcome of the
district's upcoming labor negotiations are not reflected in the forecast
and could absorb a significant portion of any revenue gains.
The district ended fiscal 2013 with strong general fund cash and
investments and low liabilities, does not anticipate any cash flow
weakness in fiscal years 2014-2016, and maintains good access to
borrowable resources. Currently, borrowable resources total $23.2
million outside of the general fund. The district also remains committed
to its policy of maintaining a minimum 9% general fund reserve through
fiscal 2016, which is well in excess of the state's 3% minimum reserve
MIXED SOCIO-ECONOMIC AND TAX BASE CONTEXTThe regional economy was
hard hit by the economic downturn. As a result, the regional
unemployment rate remained somewhat high at 8.1% in October 2013,
although improved from a year earlier (9.8%). The region is likely to
benefit from the ongoing growth in the majority of employment sectors.
Post-2010 census data indicate that the district's wealth
characteristics are above-average.
After a period of rapid TAV growth resulting from large scale housing
development, TAV declined by a cumulative 23.9% in the last four years,
including a high 5.5% decline in fiscal 2013. Fiscal 2014 is seeing the
first signs of stabilization with a 4.3% TAV increase due to improving
residential property prices. Local property development is currently at
a standstill, in part due to the de facto moratorium on new construction
pending federal funding being secured for levee improvements around the
Natomas flood plain to meet certain flood requirements. Although
progress has been made on improved flood protection, final levee
improvement work cannot be completed until much delayed federal funding
is secured to complete the project. Legislative actions taken by the
Senate and House of Representative in 2013 indicate that progress is
being made to secure the necessary federal funding but the timing
remains uncertain. Once such funding is secured, the de facto
construction moratorium could be lifted before the levee improvements
are actually completed.
SIGNIFICANT DEBT BURDENOverlapping debt equals a high $7,941 per
capita and 8.1% of TAV. Debt amortization is moderate at 51.5% in 10
years, taking into account the district's limited exposure to capital
appreciation bonds. The district is considering future debt issuance
plans given its improved debt capacity (given its recent TAV increase)
and the anticipated lifting of the construction moratorium.
The district's fiscal 2013 debt repayments, pension costs, and OPEB
pay-as-you-go contributions cumulatively totaled an affordable 16.6% of
total governmental spending. However, pension costs are expected to rise
given the poorly funded state-sponsored pension systems. The district is
likely to face ongoing increases in contribution rates to address
current low funding levels. Funding for the state-run teachers'
retirement system (CalSTRS) is a particular concern, as statutory
contribution rates have been substantially below the level required to
amortize existing obligations.
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,
S&P/Case-Shiller Home Price Index, IHS Global Insight, and National
Association of Realtors.
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
Local Government Tax-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional DisclosureSolicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820931ALL
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