Fitch Affirms King City Union School District, CA's GOs at 'A'; Outlook Negative

Fitch Ratings has affirmed the following ratings for King City Union School District, California (the district):

--$70,000 general obligation (GO) series 2007B bonds at 'A';

--$3.6 million GO series 2007C bonds at 'A'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The GO bonds are payable from an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

OUTLOOK REFLECTS NARROW MARGINS: The Negative Outlook reflects the district's weak financial performance and very low reserve levels. The district completely depleted its reserves in 2014 and is expected to rebuild them very slowly.

WEAK LOCAL ECONOMY: The local economy is heavily concentrated in the agriculture and food processing industries. Economic indicators are below average.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are moderate. Carrying costs are very affordable.

RATING SENSITIVITIES

RESTORATION OF RESERVES: The rating could fall further if the district fails to restore fund balances to meet the state's minimum 3% reserve for economic uncertainty requirement.

RATING SENSITIVITIES

CREDIT PROFILE

The district is located in the agricultural Salinas Valley of Monterey County (the county, implied GO bond rating of 'AA' with a Stable Outlook), which is about 145 miles south of San Francisco. The district serves an enrollment of about 2,500 students.

NEED TO RESTORE OPERATING BALANCE

Financial performance is weak. The district has had significant deficits in each of the past three fiscal years, completely depleting its reserves as expenditure growth outpaced strong revenue gains. Unrestricted general fund balance fell to negative $32,827 in the fiscal year ended June 30, 2014 following a third consecutive year of deficit spending, with shortfalls averaging a very high 5.3% of spending annually.

The district is highly dependent on state funding and has no practical local revenue raising authority. The district has been a winner under the state of California's new Local Control Funding Formula (LCFF), which provides higher funding for students in poverty, in foster care or who are second-language learners. Revenues have increased an average of 5.2% a year over the past five years and are expected to continue to grow strongly in 2015 (the current, nearly complete budget year) and 2016. However, spending growth has outpaced revenue gains, averaging 7.9% over the three years ended June 2014.

The district's multi-year projections show a return to balanced operations and the rebuilding of the state-required 3% reserve for economic uncertainty in the 2015-2017 timeframe. Management plans to hold expense growth below expected robust revenue growth over the period to restore fiscal balance. A failure to rebuild at least the minimum reserve could lead to intervention by the local County Office of Education and/or the state and could lead to further downward pressure on the rating.

WEAK LOCAL ECONOMY WITH BELOW-AVERAGE SOCIOECONOMICS

The local economy is weak, isolated and dominated by agriculture. Socioeconomic indicators are below average. The region is currently experiencing a severe, multiyear drought. Agricultural production continues at a high level due to access to groundwater; however, production could be negatively affected by decreasing groundwater levels if the drought persists.

Per capita money income is about 60% of the national average, while median household income is 88.5% of the national level. The individual poverty rate is elevated at 18.1%. Although the Bureau of Labor Statistics does not provide employment data on communities as small as King City (population 16,428), the much larger and broader Monterey County economy continued to suffer from an above-average unemployment rate of 10.2% in March 2015, suggesting that unemployment is also quite elevated in King City.

The district's tax base is small and somewhat concentrated, but stable. District assessed value (AV) is essentially unchanged from 2009 levels at $1.3 billion. District AV suffered muted declines in the housing downturn, and fully recouped the losses with a 4.5% gain in fiscal 2014. The top 10 taxpayers comprise an elevated 29.4% of total AV with vineyards, farms and food processors dominating the list. The largest single taxpayer, a power plant, equals 5.4% of AV.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt levels are moderate at $2,107 per capita and 2.6% of AV. Amortization is solid with about 50% of principal retired in 10 years. The district has no imminent capital or borrowing plans.

The district participates in the California Public Employees' Retirement System (CalPERS) as well as the more poorly funded California State Teachers' Retirement System (CalSTRS) pension system. Both plans are currently increasing contribution rates, but the costs appear quite affordable for the district. Total carrying costs for debt service, pension, and other post-employment benefits are currently low at 10.2% of governmental funds spending. The district does not offer any post-employment retirement benefits.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985628

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts:

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94103
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Data & News supplied by www.cloudquote.io
Stock quotes supplied by Barchart
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.