Fitch Ratings has assigned an 'A+' rating to the following West Contra
Costa Unified School District (the district), CA general obligation (GO)
--$77.7 million GO refunding bonds, 2014 series A.
In addition, Fitch affirms its 'A+' rating on the following district
--$901.7 million GO bonds.
The Rating Outlook is Stable.
Purpose: Bond proceeds will be used to refund various outstanding GO
obligations of the district and pay the costs of issuance. The bonds
will be sold via negotiation during the week of July 21.
The bonds are secured by an unlimited ad valorem tax on all taxable
property within the district.
KEY RATING DRIVERS
HIGH DEBT BURDEN: The district's overall debt burden is projected to
remain high given future debt issuance plans and the slow amortization
rate of outstanding debt.
SOUND FINANCIAL PROFILE: The district's financial profile is expected to
remain sound following modest operating deficits in fiscal 2013 and 2014
(estimated) with satisfactory reserves and solid liquidity.
MODEST DEFICITS PROJECTED: Modest operating deficits are projected over
the next couple of years as the district continues to increase spending
to implement Local Control Funding Formula (LCFF) requirements before
receiving full funding for the changes. Reserve levels are projected to
remain satisfactory for the rating despite the projected draw down.
RISING PENSION CONTRIBUTIONS: Rising pension contributions, particularly
from CalSTRS, along with already elevated costs for other
post-employment benefits (OPEB) are likely to reduce the district's
financial flexibility to some degree over the medium term.
MIXED ECONOMY: The local economy benefits from its proximity and access
to the diversified Bay Area economy, but performance is mixed with some
cities within the district recovering at a quicker pace while others
continue to experience relatively high unemployment rates.
CONCENTRATED, RECOVERING TAX BASE: The district's tax base is
concentrated in its largest taxpayer, Chevron. A recent rebuilding of a
fire-destroyed portion of the Chevron refinery and a generally
recovering housing market should result in increased assessed values
(AV) for fiscal 2015.
SIGNIFICANT REDUCTION IN RESERVES: A larger than anticipated reduction
in the district's unrestricted reserves would likely exert negative
pressure on the rating.
The district is located approximately 15 miles northeast of San
Francisco. It covers a large area in western Contra Costa County,
including the cities of Richmond, El Cerrito, Hercules, Pinole, and San
Pablo, along with several unincorporated areas. The district currently
operates 37 elementary schools, two K-8 schools, six junior high
schools, six high schools, along with several continuation programs,
adult education sites, and state-funded preschools.
The district's average daily attendance (ADA) was 28,148 in fiscal 2014,
approximately 2% higher than 2011 levels. Management projects additional
modest increases over the next few years.
SOUND FINANCIAL PROFILE
The district recorded its first operating deficit in the past three
audited fiscal years in fiscal 2013 and projects an additional deficit
in fiscal 2014. The negative financial margins -- $5.9 million in fiscal
2013 (2.2% of spending) and projected at a similar size for fiscal 2014
-- were partly driven by policy decisions to fully implement LCFF
requirements ahead of state mandates and funding. Most notably, this has
included the district's efforts to fully comply with LCFF class size
reduction requirements, which is expected to be fully realized in fiscal
Operating deficits are expected to continue in fiscal 2015 before
narrowing significantly to nearly break-even performance in fiscal 2016.
These deficits reflect the district's continued implementation of the
class size reduction targets as well as additional self-imposed goals
and spending requirements as directed throgh the district-adopted Local
Control Accountability Plan (LCAP).
The district's reserves are projected to remain at satisfactory levels
following the expected operating deficits in fiscals 2014 and 2015. At
the end of fiscal 2013, the district's unrestricted reserve was $34.7
million or 13% of spending. Liquidity levels remain sound and the
district has not needed to issue cash-flow notes over the past several
Fitch views the district's projected financial position as satisfactory
and in-line with the rating. However, the district's financial
commitments from its somewhat aggressive implementation of LCFF/LCAP
requirements and increasing pension contributions will reduce financial
flexibility over the near term and expose the district to potential
future volatility in state funding. The expenditure plan will maintain
pressure on the district to keep labor costs constrained, which may
present a challenge after several years of limited wage increases and
the promise of additional funding for the district.
HIGH DEBT BURDEN
Overall debt ratios are well above average at $7,458 per capita and 8.1%
of AV. The district has successfully applied for and received waivers
from the state's Board of Education to exceed bonding capacity limits,
allowing the district to issue general obligation debt up to 5% of AV.
While direct general obligation indebtedness is 4.4% currently, the
district expects to use some of its significant remaining general
obligation authorization (approximately $592.6 million) to address
capital needs over the next several years.
PENSION CONTRIBUTION INCREASES
Future budgetary pressure is expected to come from increasing pension
contribution amounts that will be phased in over the next several years.
The district participates in CalSTRS and CalPERS to provide defined
pension benefits for teachers and classified employees, respectively.
The district is expected to pay increasing contribution amounts to both
systems, but particularly CalSTRS where contribution amounts are
projected to increase from $9.8 in fiscal 2015 to $22.6 million in
fiscal 2021. While increased costs are expected to be offset by
projected increases in LCFF funding over the same timeframe, the rise in
fixed costs will limit the district's discretion in utilizing the
SIGNIFICANT OPEB LIABILITY
The district successfully renegotiated its OPEB in fiscal 2010. Under
the agreement, the district offers health insurance benefits that are
capped according to several criteria, including employment start date
and years of service.
The revised agreement reduced the district's unfunded actuarial accrued
liability to approximately $364.5 million as of fiscal year end 2013,
down from $523 million at the end of fiscal 2007. Despite the reduction,
the district's unfunded OPEB liability remains significant at 1.6% of
fiscal 2014 AV and annual pay-go contributions (a sizable 6.4% of
general fund spending in fiscal 2013) will continue to pressure the
district's financial position.
ECONOMY AND TAX BASE
The local economy is mixed with some areas outperforming others. While
western Contra Costa County is well-positioned to participate in the Bay
Area's broad and diverse labor market, the unemployment rates vary
significantly with the district's two largest cities, Richmond and San
Pablo, recording relatively high unemployment rates in April 2014 of
10.1% and 12.6%, respectively. Some of the less populated areas, like
Pinole and Hercules, have unemployment rates below the national average
CONCENTRATED TAX BASE
The district's tax base is concentrated in the largest taxpayer,
Chevron, which owns a refinery in the city of Richmond. The damage from
a fire at the refinery and a reported error on the assessor's roll lead
to a 6% reduction in the district's fiscal 2014 AV despite an improving
real estate market in most areas.
Fiscal 2015 AV figures are not yet available but Fitch expects a
moderate increase. This expectation is based on the refinery's reported
return to operations, a recovering housing market across most western
areas of the county, and significant AV increases reported for cities
within the district.
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, National
Association of Realtors, Zillow.com.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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