Fitch Ratings assigns an 'AA+' rating to the following Clovis Unified School District (the district), California bonds:
--Approximately $18 million series 2012 general obligation (GO) refunding bonds.
The bonds will refund a portion of the district's outstanding series 2004B GO bonds. The bonds are scheduled to sell via negotiation on or about May 31.
In addition, Fitch has affirmed the following ratings:
--$195.8 million GOs at 'AA+';
--$27.8 million certificates of participation (COPS) at 'AA'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem property tax. The COPs are secured by lease rental payments for essential assets, including several elementary schools and one of the district's five high schools.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: The district has performed well financially during a period of declining state support for education, as evidenced by the build-up of strong reserves. The district benefits from rising enrollment, a history of prudent management practices including significant expense reductions, and continued expenditure flexibility. It remains exposed to volatility in state funding, which accounts for the vast majority of its budget.
HEALTHY ECONOMY: The district is located in the Fresno metropolitan area, which was very hard hit by the recession and housing downturn, but the district's economy is stronger than the region as a whole with higher income levels and lower unemployment rates than the region.
DIVERSE TAX BASE: The tax base is well diversified and assessed valuation (AV) levels have shown a surprising degree of stability despite a weak regional housing market. New retail and residential construction continues at a subdued pace, partially offsetting declines in the value of existing properties and boosting enrollment.
MODERATE DEBT BURDEN: The district's debt burden is moderate at 3.6% of AV, and debt levels are likely to remain moderate despite proposed additional debt issuance due to rapid amortization of outstanding bonds. In addition to bond debt, the district's unfunded retiree health benefits represent a significant liability equal to about 0.7% of AV.
LEASE DEBT NOTCHED: The one-notch rating distinction between the GOs and the COPs reflects a weaker legal pledge for the certificates, which are subject to abatement and annual appropriation risks. The rating also incorporates the essentiality of the leased asset, and solid legal provisions such as a covenant to budget and appropriate lease payments.
The suburban residential district serves 190,000 residents and 37,600 students within a nearly 200 square mile territory in California's San Joaquin Valley. It encompasses a majority of the city of Clovis, a portion of the city of Fresno, and unincorporated areas of Fresno County.
Clovis' unemployment rate has trended below state and national averages over the past decade, reflecting the city's ongoing transition from an agriculturally based economy to increased service and retail oriented activity. The jobless rate averaged an elevated 9% in 2011, close to the nation's 8.8% rate but substantially below California's 11.8% and Fresno County's 16.2% rate.
Median household income is solid at 121% of the national, 103% of the state and 135% of the county medians, particularly in light of the region's relatively low cost of living. The tax base deteriorated during the recent economic downturn, but held up better than many other inland California communities. AV more than doubled between 2000 and 2009 and has dropped 5.5% since its peak. AV declined a modest 0.6% in fiscal 2012.
STRONG FLEXIBILITY; RELIANCE ON STATE
Financial operations remain strong and have outperformed previous expectations due to disciplined expenditure control and growing enrollment. The district is dependent on the state of California for almost 90% of funding, exposing it to significant revenue uncertainty in recent years. Rising enrollment has helped offset cuts to the state's per pupil funding, while federal stimulus spending and expenditure cuts allowed the district to build reserves throughout the period.
The unrestricted general fund balance remains well above the state's 2% minimum requirement and the district's 6% internal target over the past three years, rising to 15% at the end of fiscal 2011. The district controlled expenditures by allowing class sizes to rise with increases in enrollment, reduced staffing via attrition, and imposed a 2% across the board pay cut in 2012, among other measures. Expenditures dropped 5.2% from 2009 to 2011, outstripping a 1.5% drop in revenues over the same period.
The district faces the possibility of significant cuts in fiscal 2013 if state tax increases are not approved, but it retains a degree of expenditure flexibility that is unusual for a California school district. Clovis has not scaled back its school year and has increased class sizes only incrementally, leaving room to absorb further funding cuts, and its workforce is non-unionized, allowing greater flexibility in setting pay rates.
MODERATE DEBT; SIZEABLE OPEB LIABILITY
The district's debt burden is moderate, with overall net debt at about $3,300 per capita. Capital needs are significant, given ongoing enrollment growth and the need to renew aging infrastructure. The district is seeking a $298 million bond authorization from voters at the June 5, 2012 election. Nonetheless, the debt burden would remain moderate at less than 4% of AV if the bonds are approved and fully issued over the next five years because the district's outstanding bonds amortize rapidly with just over 65% repaid in 10 years.
The district's unfunded other post-employment benefit (OPEB) liability is significant at about $130 million. While management has taken steps to slow accruals, it has not addressed the accrued liability. Pensions are less of a concern. The district participates in two statewide cost-sharing multi-employer defined benefit pension plans that are adequately funded, and the district pays 100% of its annual required contributions.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, the S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, the National Association of Realtors, the financial advisor, bond counsel and the underwriter.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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