LOS ANGELES — Fitch Ratings affirmed El Rancho Unified School District, Calif.'s general obligation bond rating at A and removed a negative watch affecting $13.8 million in bonds.
The rating agency placed the school district located in Pico Rivera, roughly 25 miles southeast of downtown Los Angeles, on negative watch in January. The rating change came after the Los Angeles County Office of Education negatively certified the district's first interim financial report. The district also assigned a financial advisor to assist the district in strengthening the district's strained fiscal position.
In the January report, the COE suggested the district might not meet its financial obligation by fiscal year end 2014, including maintenance of a minimum 3% general fund balance. Since then, the school district has turned things around with a "markedly" improved financial position, according to the Fitch ratings report released June 20.
The improvements were due to board approval of $3.6 million of expenditure reductions, and significant projected revenue enhancements as the state K-12 funding environment continues to improve, according to Fitch. As a result, the district is projecting balanced to surplus operations beginning in fiscal 2015, analysts said.
The COE formerly forecast negative and falling fund balances beginning in fiscal 2015. The district's improved financial projections have led the COE to positively certify the district's second interim report, suggesting the district will meet its financial obligations over a three-year forecast period. The COE also rescinded its FA.
The rating outlook change from negative to stable impacts the following GO bonds: series 2003A, 2004, 2005, 2007. The bonds are secured by an unlimited property tax on all taxable properties in the district.
Though the district's financial projections are improved from earlier in the year, management will have to contend with several expenditure pressures, Fitch said.
"These pressures include continued declining enrollment, offsetting some gains from rising per pupil funding levels, expiring labor concessions in fiscal 2015, likely rising CalSTRS costs, and pent-up wage, service, and deferred maintenance pressures," according to Fitch analysts. "Fitch expects these spending pressures will significantly narrow out-year projected surpluses.
"Fund balances are expected to hover just above the 3% required minimum at fiscal years end 2014 and 2015, and policymakers will need to exercise spending restraint in an environment marked by numerous expenditure pressures," analysts said.
The district participates in CalSTRS, which is anticipated to experience significant contribution rate increases, and the district is paying other post-employment benefits on a pay-go basis, as is common among California school districts, according to the report.
CalSTRS contribution rates are set by the legislature and have not been increased in recent years to address significant investment losses. The pension fund has a 2012 funded level of 67%.
"The governor recently proposed significant pension contribution rate increases over a multi-year period to eventually pay the full annual required contribution," Fitch analysts said. "If approved by the legislature, this plan could result in substantial new spending requirements, though it would place the pension plan on a more sustainable financial footing."
Further, fiscal 2014 is still projected to result in a deficit for the school district, lowering the unrestricted fund balance to just $2.5 million, 3.0% of expenditures and transfers out.
The district's total net debt burden is moderate at $2,597 per capita, or 4.2% of AV. Carrying costs for debt service, pension and OPEB are low at 10.4% of governmental fund spending, but Fitch said they are likely to rise due to anticipated OPEB and pension cost increases and potential GO issuances.
The district is working on a master capital facilities plan that could result in increased debt to fund capital improvements. Fitch said the district has $6 million of unspent bond proceeds and $43 million of remaining GO authorization.
