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TMCNet:  Fitch Affirms Natomas USD, CA's GOs at 'BBB+'; Outlook Positive

[February 18, 2014]

Fitch Affirms Natomas USD, CA's GOs at 'BBB+'; Outlook Positive

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed the following Natomas Unified School District, California (the district) general obligation (GO) bonds ratings:

--$13.3 million GO refunding bonds, series 1999, and GO bonds (election of 2002), series 2004B at 'BBB+'.

The Rating Outlook is Positive.

SECURITY

The bonds are secured by the district's full faith, credit, and unlimited ad valorem property tax pledge.

KEY RATING DRIVERS

SOLID BUT LOWER GENERAL FUND BALANCES: Despite net operating deficits after transfers in fiscal years 2013 and 2014 (projected), the district has been outperforming its budgets, is benefiting from the state's new local control funding formula (LCFF) for public education, and is projecting stronger out-year results. Also, the district's cashflow/liquidity position has improved greatly since severe liquidity problems in the context of management challenges affected its credit quality several years ago.

ELEVATED TOP MANAGEMENT TURNOVER: While the current superintendent who assumed responsibility in June 2012 (the fifth in three years) remains in position, there is still senior management team turnover. However, management reports improved policy alignment, data-driven decision-making, more productive labor relations, and positive feedback from the community.

MIXED SOCIO-ECONOMIC AND TAX BASE CONTEXT: Although the district's wealth characteristics are above average, regional unemployment remains somewhat elevated, and the district's taxable assessed valuation (TAV) has only begun to stabilize. Further development is currently hindered by changes in flood plain designation requiring federally-funded levee improvements.

HIGH DEBT BURDEN; RISING CARRYING COSTS: The district's debt burden remains very high with moderate amortization. Carrying costs for debt service, pension, and other post-employment benefits (OPEB) are affordable although Fitch expects pension costs to increase due to poorly funded state pension systems.

RATING SENSITIVITIES

An upgrade to the 'A' rating category will depend on the district's ability to achieve general fund structural balance, maintain solid general fund balances and reserves, and protect its improved general fund cashflow and liquidity position.

CREDIT PROFILE

Located in the northwestern portion of Sacramento County, approximately four miles north of downtown Sacramento, the district is home to approximately 72,000 residents.

SOLID GENERAL FUND RESULTS DESPITE STRUCTURAL IMBALANCE
The district ended fiscal 2013 with a lower, but still solid, unrestricted general fund balance of $15.7 million or 22.1% of spending, down from a very strong $19.5 million or 29.7% of spending the year prior. The district outperformed considerably its originally budgeted net operating deficit after transfers of $10.7 million. The district's actual, much smaller, net operating deficit after transfers of $3.2 million was largely caused by a 7.4% increase in general fund expenditures while general fund revenues decreased by 2.5%. A significant portion of the expenditure increase was due to a 6.8% rise in personnel costs (82% of the fiscal 2013 expenditures) as furloughs ceased.

Despite an 11.6% funding increase in fiscal 2014, largely due to the state's implementation of LCFF, current projections indicate that there will be a further $3.2 million general fund drawdown. This would lower the unrestricted general fund balance to $13.8 million or 17.6% of spending. Most of the expenditure increase is being generated by a further 9.1% rise in personnel costs.

However, the district's latest out-year projections are considerably improved since Fitch's previous review. Based on the governor's proposed budget, the district is expecting positive operations in fiscal 2015 which wold strengthen the unrestricted general fund balance to 22.2% of spending if current personnel expenditures remain level. At the time of Fitch's previous review, the district had been conservatively estimating an unrestricted general fund balance of only 4.4% of spending. The district is also projecting positive operations in fiscal 2016, resulting in an unrestricted general fund balance of at least 27.1%. The district's multiyear projections assume general fund revenue growth outstripping expenditure increases. While positive revenue projections appear reasonable given improved state funding generated by LCFF and stabilizing student average daily attendance figures, the outcome of the district's upcoming labor negotiations are not reflected in the forecast and could absorb a significant portion of any revenue gains.


The district ended fiscal 2013 with strong general fund cash and investments and low liabilities, does not anticipate any cash flow weakness in fiscal years 2014-2016, and maintains good access to borrowable resources. Currently, borrowable resources total $23.2 million outside of the general fund. The district also remains committed to its policy of maintaining a minimum 9% general fund reserve through fiscal 2016, which is well in excess of the state's 3% minimum reserve requirement.

MIXED SOCIO-ECONOMIC AND TAX BASE CONTEXT
The regional economy was hard hit by the economic downturn. As a result, the regional unemployment rate remained somewhat high at 8.1% in October 2013, although improved from a year earlier (9.8%). The region is likely to benefit from the ongoing growth in the majority of employment sectors. Post-2010 census data indicate that the district's wealth characteristics are above-average.

After a period of rapid TAV growth resulting from large scale housing development, TAV declined by a cumulative 23.9% in the last four years, including a high 5.5% decline in fiscal 2013. Fiscal 2014 is seeing the first signs of stabilization with a 4.3% TAV increase due to improving residential property prices. Local property development is currently at a standstill, in part due to the de facto moratorium on new construction pending federal funding being secured for levee improvements around the Natomas flood plain to meet certain flood requirements. Although progress has been made on improved flood protection, final levee improvement work cannot be completed until much delayed federal funding is secured to complete the project. Legislative actions taken by the Senate and House of Representative in 2013 indicate that progress is being made to secure the necessary federal funding but the timing remains uncertain. Once such funding is secured, the de facto construction moratorium could be lifted before the levee improvements are actually completed.

SIGNIFICANT DEBT BURDEN
Overlapping debt equals a high $7,941 per capita and 8.1% of TAV. Debt amortization is moderate at 51.5% in 10 years, taking into account the district's limited exposure to capital appreciation bonds. The district is considering future debt issuance plans given its improved debt capacity (given its recent TAV increase) and the anticipated lifting of the construction moratorium.

The district's fiscal 2013 debt repayments, pension costs, and OPEB pay-as-you-go contributions cumulatively totaled an affordable 16.6% of total governmental spending. However, pension costs are expected to rise given the poorly funded state-sponsored pension systems. The district is likely to face ongoing increases in contribution rates to address current low funding levels. Funding for the state-run teachers' retirement system (CalSTRS) is a particular concern, as statutory contribution rates have been substantially below the level required to amortize existing obligations.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, and National Association of Realtors.

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=820931
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 (News - Alert) 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.


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