THE NATOMAS BUZZ | @natomasbuzz

SAN FRANCISCO- Fitch Ratings has revised $58.8 million Natomas Unified School District general obligation bonds from negative to stable.

The bonds are secured by the district’s full faith, credit, and unlimited ad valorem property tax pledge. Repayment of the GO refunding bonds series 1999 is made from special parcel tax revenues levied in connection with that bond issue.
GO bonds series 2001 and (election of 2002), series 2003A maturing on or after Sept. 1, 2013 are due to be refunded when the district issues 2012 GO refunding bonds in June.
KEY RATING DRIVERS
IMPROVED FINANCIAL MANAGEMENT POSITION: The revision in Rating Outlook to Stable from Negative reflects the district’s stabilized financial management position now that it is no longer under direct county office of education financial oversight or facing the threat of a state takeover.
ONGOING FINANCIAL HEADWINDS: Maintenance of the ‘BBB’ GO bond rating recognizes that while the district’s unrestricted general fund balance is currently strong and its liquidity position is adequate, both remain pressured by an ongoing structural deficit resulting from limited spending flexibility, declining student enrolment, and a difficult state funding environment.
PROBLEMATIC LABOR RELATIONS: While negotiated labor concessions in fiscal years 2011 and 2012 provided important budgetary relief, the district might have to unilaterally impose further concessions on an unwilling workforce in fiscal years 2013 onwards, potentially worsening already contentious labor relations.
HIGH TOP-MANAGEMENT TURNOVER: The fifth superintendent in three years assumes responsibility on June 1, 2012 and will lead a new senior management team which has, so far, demonstrated a desire to improve the district’s financial and educational operations.
CHALLENGING SOCIO-ECONOMIC AND TAX BASE CONTEXT: The district’s socio-economic characteristics are below average, the district has experienced significant taxable assessed valuation (TAV) declines, and further development is currently hindered by a flood plain moratorium that is expected to be lifted in 2013.
CREDIT PROFILE
FINANCES REMAIN PRESSURED
Financial operations are strained, and Fitch expects the pressure will continue. While the district currently has a strong unreserved general fund balance, it is projecting significant general fund balance drawdowns and cash flow shortfalls over the next two fiscal years. These projected drawdowns are attributable to limited spending flexibility, declining student enrolment, and a difficult state funding environment. The ongoing loss of students to local charter schools has had a particularly severe financial impact, since the resulting loss of attendance-related revenue is felt immediately. Nevertheless, the district plans to implement new programs, such as an international baccalaureate program, in an effort to stem the rate of student enrollment decline.
As in fiscal years 2011 and 2012, the district must rely on further labor concessions from bargaining units to close its structural gap in fiscal years 2013 and 2014. The district already has a contentious relationship with its bargaining units, as evidenced by prolonged labor negotiations for fiscal 2012 and the current state of impasse for fiscal 2013, and excessive staff absenteeism. Further labor concessions might have to be imposed unilaterally by the district, potentially further worsening the relationship with labor. Teachers have the option to strike in response to unilaterally imposed labor concessions which could endanger the district’s ability to meet its educational goals. By means of a recent restructuring, the district is seeking to address some of the management-labor issues identified by independent consultants (overly narrow job descriptions, inadequate staff evaluations, reduced service levels, workload inequities, inadequate human resources data, lack of accountability, and special education program costs).
Thanks to past labor concessions, better than expected state aid, and improved budgetary practices, the district achieved a strong unrestricted general fund balance of $16.8 million or 25.8% of spending in fiscal 2011. The district is projecting an even stronger result in fiscal 2012, estimating that its ending unrestricted general fund balance will be $19.2 million or 28.8% of spending. However, the district’s projections for fiscal years 2013 and 2014 indicate considerable pressure, assuming general fund cost increases, failure of the Governor’s November 2012 tax initiatives, ongoing student enrolment declines, and reduced federal funding, only partially offset by increased state and local revenues. Under these assumptions, which Fitch views as conservative but realistic, the unrestricted general fund balance could drop as low as negative $2.8 million or negative 4% of spending in fiscal 2014, with cash resources exhausted in February 2014.
Based on recent years’ financial performance, Fitch expects the district to continue to significantly outperform its outyear projections, but notes that most of the solutions available to the district will be difficult to implement.
CHALLENGING SOCIO-ECONOMIC AND TAX BASE CONTEXT
Located in the northwestern portion of Sacramento County, approximately four miles north of downtown Sacramento, the district is home to approximately 28,000 residents. The regional economy has been hard hit by the economic downturn. As a result, the local unemployment rate remains elevated at 13.1% in February 2012 although improved compared to a year prior (14.6%). Wealth indicators are below average. After a period of rapid TAV growth resulting from large-scale housing development, TAV declined significantly in the last three years, by 7.6% in fiscal 2010, 7.8% in fiscal 2011, and 5.4% in fiscal 2012. Local property development is currently at a standstill, in part due to the de facto moratorium on new construction while levees around the Natomas flood plain are improved to meet certain flood requirements.
SIGNIFICANT DEBT BURDEN
Overlapping debt equals a high $8,415 per capita or a more moderate 3.1% of TAV. Debt amortization is very slow with only 32% of debt repaid in 10 years. At this time, the district does not plan to issue additional debt other than the refunding mentioned above.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.