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MOODY'S ASSIGNS A1 RATING TO SEBASTOPOL UNION SCHOOL DISTRICT, CA G.O BONDS; $2.2 MILLION OF DEBT AFFECTED

01 Sep 2011

Primary & Secondary Education
CA

Moody's Rating

ISSUE

RATING

General Obligation Refunding Bonds, Series 2011

A1

  Sale Amount

$2,250,000

  Expected Sale Date

09/07/11

  Rating Description

General Obligation Bonds

 

Opinion

NEW YORK, Sep 1, 2011 -- Moody's Investors Service has assigned an initial A1 rating to the Sebastopol Union School District, California, 2011 General Obligation Refunding Bonds expected to be issued in the approximate amount of $2.2 million. The bonds are secured by an unlimited tax pledge of the district. Proceeds from its current offering will refund callable portions of the district's outstanding 2001 General Obligation Refunding Bonds of which $2.1 in principal is currently outstanding.

RATING RATIONALE

The rating primarily reflects the district's maintenance of adequate reserves despite a recent history of operating losses, slightly above-average wealth levels, and below-average debt burden. The rating also incorporates the district's history of declining enrollment and its modestly-sized tax base.

STRENGTHS

- Adequate, though declining, reserves

- Slightly above-average wealth levels

CHALLENGES

- History of declining enrollment

- Recent trend of operating losses

DETAILED CREDIT DISCUSSION

SMALL AND MOSTLY RESIDENTIAL TAX BASE; SLIGHTLY ABOVE-AVERAGE WEALTH LEVELS

The district's tax base is primarily composed of residential properties in the City of Sebastopol and some surrounding unincorporated areas of Sonoma County (Aa1 GO rating), approximately 45 miles north of San Francisco. In 2012 the district's assessed value (AV) grew by 0.1% to $1.6 million. While AV growth is small, it is notable given the 1.6% and 0.2% declines in 2010 and 2011, respectively. The top ten tax payers are diverse and are not concentrated (comprising only 4.4% of total AV). The district's economy is largely supported by employment in the San Francisco Bay Area, tourism, small high-tech firms, and agriculture including vineyards and an expanding boutique organic farming industry. The district's AV is modestly-sized compared to similarly-rated California districts, but above-average relative to A1 districts nationwide.

This district's socioeconomic profile is slightly above the state and national average. Median family income in the district (2000 census) is $59,851, 112.9% of the state and 119.6% of the national averages. Similarly, per capita income was $25,669, 113% of the state and 118.9% of the national averages.

CONTINUED FISCAL STRESS OFFSET BY CONSERVATIVE MANAGEMENT AND ADEQUATE RESERVES

Since fiscal 2008, the district has experienced several operating deficits and has slowly drawn down General Fund reserves. Though General Fund reserves are still at adequate levels, they nonetheless are below average for A1-rated school districts. The Fiscal 2010 General Fund balance fell to $632,000, or 9.5% of revenues. However, the district established a special reserve fund of $302,000 that same year. The special reserve fund is unrestricted and available to the General Fund. Combined, both funds provide an available fund balance of $934,000, or 12.3% of revenues. Based on unaudited estimated actuals for fiscal year 2011, the district experienced a $158,000 operating deficit, and drew the available fund balance down to $778,000, or 13.4% of revenues.

The district has experienced fiscal stress for several years due to enrollment declines and state funding cuts. Enrollment has declined steadily, with a five year average annual decline of 3.2%. The district attributes its enrollment decline to students transferring to charter and private schools in the area, and an aging population and declining birthrates. Enrollment declines decrease the district's annual revenue limit funding from the state. In Fiscal 2011, revenue limit funding represented 66.8% of the district's General Fund revenues. State funding cuts, which affect all California school districts funded by the revenue limit formula, have also contributed to the district's declining revenues.

Declining enrollment and revenues are credit negatives for the district which are offset by timely management efforts. District management has proactively sought measures to reduce expenditures and serve the changing needs of the district. In fiscal 2011, the district closed an elementary school and created a combined school serving K-8, saving approximately $355,000 annually. The unique school has actually attracted more students back to the district and is expected to outperform its enrollment projections, although significant long-term growth remains unlikely. Most recently the district has negotiated increased staff contributions to health benefits, staffing reductions, and five furlough days. These measures result in approximately $702,000 in annual saving.

As per state AB 114, districts are required to budget fiscal 2012 state revenue limit funds equal to fiscal 2011. However, school districts are exposed to mid-year trigger cuts to revenue limit funds that are set to occur if state tax revenues do not meet projected levels by December 2011. If the full trigger cuts occur, it would reduce revenues by approximately $215,000, or $250 per average daily attendance (ADA) as calculated by the revenue limit funding formula. The trigger cuts would likely affect receipts received near the end of the fiscal year. From a cash-flow perspective, the district has sufficient cash and alternate liquidity to manage any possible cuts. In fiscal 2010, the district ended the year with $604,000 in unrestricted cash and investments, representing a net cash level at 9.1% of revenues. Additionally the district could pursue short-term borrowing options made available by the Sonoma County Treasurer. Moody's expects that the district will successfully manage any cash-flow challenges associated with the possible trigger cuts.

Any losses from the trigger cuts could be offset by unbudgeted revenues, which would stabilize the district's financial profile. The district has few options to reduce expenditures mid-year if the cuts occur. Instead, they would likely result in the use of reserves, already designated for this purpose. Without the trigger cuts, the district is already budgeted for a $363,000 operating deficit in fiscal 2012, resulting in a year end budgeted available fund balance of $416,000, or 8.6% of revenues. Based on the current budget and maximum projected loss due to trigger cuts, total available fund balance could be drawn down to $200,000, or 4.1% of revenues. However, the district expects to realize an additional revenue of $150,000 per year from a lease with a charter school beginning in fiscal year 2011. The lease revenue, in addition to any unbudgeted revenue from new enrollment, will likely offset the possible losses from the trigger cuts. Moody's expects that the district will maintain fund balances comparable to its current levels in the near-term. Any significant fund balance declines will be a credit negative for the district and make them more comparable to lower Moody's rated California school districts.

DEBT LEVELS REMAIN RELATIVELY LOW

The district's direct debt burden is low at 0.5%, while overall debt is 1.3%, which is low relative to similarly-rated school districts. The district has no lease debt. Proceeds from the current offering will refund the callable portion of the outstanding amount of the District's 2001 General Obligation Refunding Bonds of which $2,070,000 principal amount is currently outstanding. The refunding will generate an estimated $92,730.76 in interest savings for the district's tax base.

WHAT COULD CHANGE THE RATING - UP

- Significant growth of assessed value

- Material improvement of socioeconomic indicators

WHAT COULD CHANGE THE RATING - DOWN

- Sizable declines of assessed value

- Further erosion of General Fund reserves

KEY STATISTICS

Assessed Value, FY 2012: $1.6 billion

Average annual growth, assessed value, 2007-2012: 0.1%

Median family income, 2000 census: $59,851 (119.6% of US)

Per capita income, 2000 census: $25,669 (118.9% of US)

General Fund balance, FY 2010: $632,701 (9.5% of General Fund revenues)

Total available fund balance, FY 2010: $933,643 (12.3% of General Fund revenues)

General Fund balance, FY 2011, unaudited actual: $476,084 (8.2% of General Fund revenues)

Total available fund balance, FY 2011, unaudited actual: $778,217 (13.4% of General Fund revenues)

Average daily attendance, FY 2011: 727 students

Direct debt burden: 0.5%

Overall debt burden: 1.3%

Payout of principal (10 years): 91.1%

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Julian Metcalf
Analyst
Public Finance Group
Moody's Investors Service

Andrea Unsworth
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO SEBASTOPOL UNION SCHOOL DISTRICT, CA G.O BONDS; $2.2 MILLION OF DEBT AFFECTED
No Related Data.
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