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Rating Action:

Moody's downgrades West Contra Costa USD, CA to A1, Assigns A1 to 2010 Election, 2020 Series F and 2012 Election, 2020 Series E General Obligation Bonds; Outlook remains negative

13 May 2020

New York, May 13, 2020 -- Moody's Investors Service has downgraded the rating on West Contra Costa Unified School District, CA's outstanding general obligation debt to A1 from Aa3 affecting approximately $1.1 billion in Moody's rated GO Bonds. We have also downgraded the rating on the district's outstanding Moody's rated Certificates of Participation to A3 from A2 affecting approximately $8 million in debt outstanding. Concurrently we have assigned a A1 rating to the district's General Obligation Bonds, 2010 Election, 2020 Series F and General Obligation Bonds, 2012 Election, 2020 Series E, with a collective approximate principal value of $130 million. Our outlook on the district's long-term ratings remains negative.

RATINGS RATIONALE

The downgrade to A1 reflects the district's materially weakened financial position resulting from its large structural deficit, which leaves the district more vulnerable to anticipated changes in state funding for fiscal 2021. In addressing its current budget crisis the district has already made significant expenditure cuts leaving it with a more limited range of options to respond to any state funding reductions in fiscal 2021. Additionally, the district's recent drawdown in its reserves, which has accelerated substantially in fiscal 2020 means the district has less flexibility to spread out the impact of any state funding cuts over a longer time period.

The A1 rating also reflects the district's very large, mildly concentrated tax base with solid socioeconomic indicators, which benefits from participation in the San Francisco Bay area economy and has seen steady growth in recent years. It also incorporates the district's projected weakening financial profile and consecutive reserve drawdowns. These drawdowns have been driven by a combination of declining enrollment and rising pension and salary costs, which have not been offset by commensurate growth in revenue or expenditure reductions. The rating also reflects the district's very high debt burden compared to its peers, as well as its moderate pension and above average OPEB burdens.

The district's A3 COP rating is two notches lower than the district's A1 GO rating. The two notch distinction reflects the absence of California GO bond security features for the COPs and the contingency inherent in a standard abatement lease. The essentiality of the leased asset and largely standard legal and insurance provisions, including the provision of a debt service reserve, also benefit the rating on the certificates.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We do not see any material immediate credit risks for West Contra Costa USD. However, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of West Contra Costa USD changes, we will update our opinion at that time.

RATING OUTLOOK

The negative outlook reflects the district's large structural deficit and the need to identify and enact sufficient expenditure cuts to balance its budget in the short term. The district has made some progress towards reducing these shortfalls, however additional cuts are still required to reach structurally balanced operations. The district's efforts to balance its budget will made more difficult by anticipated cuts to state aid stemming from the current economic downturn. Failure to identify and credibly commit to sufficient expenditure cuts to restore operating balance, after accounting for any reduction in state aid, without significant reliance on reserve draws would place downward pressure on the rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Substantial improvement in the financial position as evidenced by closing the structural deficit and growing reserves

- Increased diversity in major taxpayers

- Reduction in debt levels

- Considerable progress in reducing the district's unfunded pension and OPEB liability

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Failure to enact sufficient expenditure reductions to bring the district's spending into structural balance

- Substantial decline in assessed valuation

- Inability to manage retirement costs

LEGAL SECURITY

The general obligation bonds are secured by an unlimited property tax pledge of all taxable property within the district boundaries. The county rather than the district levies, collects and disburses the district's property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds.

The district's bonds are covered under Contra Costa County's Teeter program, whereby the district will receive its full property tax levy, including that for debt service, with the county covering any short falls due to delinquencies. The county levies its debt service property tax based on a 15 month period annually, allowing it to build up a reserve to smooth out any required tax rate changes.

The leases are standard California abatement leases for essential property, namely the Lavonya DeJean Middle School in Richmond.

USE OF PROCEEDS

Proceeds from the bond issuance will be used to fund ongoing upgrades and modernization projects throughout the district's schools.

PROFILE

The district is located approximately 15 miles northeast of San Francisco and covers 110 square miles of Contra Costa County (Aa2, stable). The district serves the cities of El Cerrito, Hercules, Pinole, Richmond and San Pablo as well as the unincorporated communities of El Sobrante, Kensington and North Richmond. The district serves TK through 12th grade and currently maintains 36 elementary schools, two K-8 schools, six middle schools, six high schools and six alternative /continuation programs, 60 adult education sites, nine operation sites and 17 State funded preschools. The estimated enrollment for 2020 year is about 28,000 students.

METHODOLOGY

The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1191097. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Austin Harris
Lead Analyst
Regional PFG West
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco 94111
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alexandra Cimmiyotti
Additional Contact
Regional PFG West
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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