Fitch Ratings has affirmed the 'A+' rating on the following
Kernville Union School District's general obligation (GO)
bonds:
--$2.7 million, series 2004A.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an unlimited ad valorem tax pledge on
all property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: The district's financial position is
sound, characterized by solid fund balances and historically
surplus operations. However, the district expects to use
accumulated reserves for capital over the near term.
LIMITED ECONOMY: The limited local economy is reliant on tourism
and agriculture, and as a result, wealth levels are well below
average. However, top taxpayers are diversified and the tax base
performed adequately.
STATE DEPENDENCE: The district's dependence on the state of
California for funding requires careful management of significant
revenue volatility and payment deferrals. Recent state funding
trends are positive for the district.
INCREASING CARRYING COSTS: The district's overall debt burden is
moderate; however, direct debt amortization is very slow due to the
extensive use of capital appreciation bonds (CABs) with escalating
debt service. Retiree costs are currently manageable, though
pension costs are scheduled to rise steeply as the state addresses
underfunding in its teachers retirement system (CalSTRS).
RATING SENSITIVITIES
MATERIAL REDUCTION IN RESERVES: Fitch expects the district to
remain structurally balanced and to maintain reserves comfortably
above its 10% target. Material reduction to fund balance or deficit
operations would result in negative rating pressure.
CREDIT PROFILE
The district encompasses approximately 295 square miles of
northeastern Kern County (the county), almost 50 miles northeast of
Bakersfield. The district is centered around the city of Lake
Isabella.
SOUND FINANCIAL PERFORMANCE WITH NEAR TERM SPENDING PRESSURE
The district's financial performance has been sound,
characterized by several years of moderate net operating surpluses
despite volatile state funding. The district ended fiscal 2014 with
a $153,516 surplus (2% of spending), bringing its unrestricted fund
balance to a solid $2.4 million, or high 30% of spending. Despite
increasing per pupil funding and increased enrollment, the district
expects to draw on fund balance in fiscal 2015 to provide salary
increases. The estimated deficit would bring unrestricted fund
balance down to about $2 million, or 22% of spending.
In addition, in fiscal 2016, the district plans to use about
$800,000 of accumulated reserves for a portion of its primary
capital project, the kindergarten complex modernization. This,
along with a conservatively forecast, modest operating deficit,
could bring unrestricted fund balance to about $1.1 million, or an
adequate 13% of spending in fiscal 2017. Given the district's
history of conservative budgeting, Fitch expects fund balance to
remain comfortably above the district's 10% target.
District forecast revenues are aided by growing state per pupil
revenues, particularly for districts that have a large proportion
of students targeted under the state's relatively new Local Control
Funding Formula (LCFF). In addition, the district's enrollment has
reversed its decline, contributing to growing revenues.
Furthermore, the district's revenue assumptions are fairly
conservative so its actual results are likely to continue to
outperform budget.
LIMITED LOCAL ECONOMY
The district had experienced sustained enrollment declines over
the past decade largely as a result of the limited local economy.
The trend appears to have reversed in fiscal 2014. Current school
enrollment of approximately 869 is up from about 786 in fiscal
2012. The district is forecasting stable to growing enrollment as
recent kindergarten classes have been larger than outgoing 8th
grade classes. The local economy remains tourism-dependent given
its proximity to Lake Isabella and Sequoia National Forest. Most of
the county's economy is natural resource based; Kern is among the
largest oil- and agricultural-producing counties in the nation. As
a result of these two volatile sectors, county unemployment rates
are consistently well above state and national levels (9.6% in
November 2014).
The district reports that fiscal 2015 assessed valuation (AV)
declined about 6.8% due to reductions in AV pursuant to proposition
8 which requires the assessor to reduce AV to the market value.
This reduction reportedly reflects declines in value over several
years which were not able to be incorporated because the number of
sales had previously been below threshold levels to make
adjustments. Prior to fiscal 2015, district AV had been quite
stable.
According to Zillow, home prices were flat in the past year in
the Lake Isabella area, supporting stable AV trends going forward.
The top 10 taxpayers are a diverse mix of commercial, residential
and agricultural businesses led by California Water Services Co., a
private water company serving the region, which comprised 4.9% of
district assessed value (AV) in 2014.
MIXED LONG-TERM OBLIGATIONS
Using estimates for overlapping debt and the full value of
capital appreciation bonds (CABs), the district's overall debt
burden is moderate at $3,257 per capita or 3.9% of market value.
The use of CABs with a rising debt service schedule reduces
amortization to a very slow 24% in 10 years. Furthermore, maximum
annual debt service [MADS] (fiscal 2040) on GO bonds of $1.5
million (compared to $355,864 in fiscal 2014), equals a high 17% of
fiscal 2014 governmental spending, compared to 4% for fiscal 2014
GO debt service. Including the district's certificates of
participation (COPs), debt service totals 7% of fiscal 2014
governmental spending.
The district is planning to issue its remaining authorization
shortly to repay a portion of the COPs and to modernize its
kindergarten complex. In addition, about $800,000 in reserves on
hand is expected to be used. Once this project is complete, the
district reports not having additional capital needs.
The district participates in two state-sponsored employee
pension plans and is likely to face ongoing increases in
contribution rates to address current low funding levels. Funding
for CalSTRS is a particular concern, as statutory contribution
rates have been substantially below the level required to amortize
existing obligations and most district employees are in this
plan.
Total carrying costs including fiscal 2014 debt service, pension
and OPEB costs consume a manageable 15.5% of governmental less
capital spending. Using MADS, carrying costs would be a high 28% of
fiscal 2014 governmental.
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.com.
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=982272
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Fitch RatingsPrimary AnalystKaren RibbleSenior
Director+1-415-732-5611Fitch Ratings, Inc.650 California Street,
4th FloorSan Francisco, CA 94108orSecondary AnalystGeorge
StimolaAnalyst+1-212-908-1770orCommittee ChairpersonAmy
LaskeyManaging Director+1-212-908-0568orMedia RelationsElizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com