Fitch Downgrades Imperial Community College District, CA's COPs to 'A-'; Outlook Negative.
--$1.4 million of certificates of participation (COP), series 2004.
The Rating Outlook is revised to Stable from Negative.
The certificates are secured by lease payments subject to annual appropriation by the district and abatement risk. The leased assets consist of multiple district buildings located on a 160-acre site on the campus of Imperial Valley College, which were valued at $4.1 million at the time of issuance.
KEY RATING DRIVERS
WEAKENING STATE SUPPORT: The downgrade of the district's COPs to 'A-' from 'A' reflects continuing significant declines in state support that have outpaced spending cuts, creating an ongoing structural budget imbalance that will draw district reserves to a low level at the end of the current budget year.
RATING INCORPORATES SIGNIFICANT STRESS: The Stable Outlook means that Fitch does not expect to downgrade the rating again over the next two years. The 'A-' rating is significantly below average for a tax-supported debt and incorporates Fitch's view that the district remains under significant fiscal stress.
DECREASING EXPENDITURE FLEXIBILITY: The district has cut operations to a degree that continued reductions may be very difficult to achieve. The district cut its full-time equivalent student enrollment by 12.5% and has embarked on negotiations to reduce its labor costs to match its reduced size, but such negotiations are inherently difficulty.
REVENUE CONSTRAINED: The district is highly dependent on aid from the state of California, which has slashed community college funding due to ongoing budget gaps. The district has no meaningful local revenue raising flexibility. It cannot raise tuition, and increases in tuition revenues from enrollment gains are netted out of state aid payments, eliminating any benefit.
WEAK, NARROW ECONOMY: The community college serves a vast, rural service area in the desert on California's southeastern border with Mexico and Arizona. The area's economy is dominated by agriculture, fed by imported water, but it has diversified somewhat as energy producers sought to tap its geothermal and solar energy resources. The unemployment rate has averaged about 30% for the past two years.
MODERATE DEBT: District debt ratios are moderate with net overlapping and direct debt totaling 3.5% of assessed value. District voters have approved the sale of another $56 million of general obligation bonds, which will add modestly to the debt burden in the coming years.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO BALANCE BUDGETS: A failure to realign ongoing expenditures to match ongoing revenues could put further downward pressure on the rating.
The district serves a population of 175,000 in Imperial County, California about 200 miles southeast of Los Angeles and 120 miles east of San Diego on the border with Mexico and Arizona. The economy remains very weak despite diversification as the region's population has increased in recent decades. The area has developed a significant renewable energy sector in addition to its traditional farming economy. The tax base came under pressure during the economic downturn and housing bust. Assessed value (AV) dropped 5.7% from 2009 to 2012 and has not yet shown signs of stabilization. The top 10 taxpayers represent a moderate 11.3% of AV, with geothermal power utilities accounting for about two-thirds of that amount.
District finances have deteriorated over the past two years amid state-wide budget issues. Revenues are highly dependent on the state of California with the state providing about three-quarters of unrestricted general fund revenues and 50% of all revenues government-wide. State dependence is further exacerbated by a state funding formula that nets local tuition and tax revenues from state funding, making district revenues almost wholly dependent on the state decisions about the number of students funded and the level of funding per student. California has reduced the number of students supported in recent years, forcing the district to trim full-time equivalent students from about 7,400 in 2009 to an estimated 6,100 in the upcoming fiscal 2013 budget year.
The district has implemented significant expenditure reductions, including pay freezes, staff reductions, employee furloughs, elimination of summer school, and other course reductions. However, the district has yet to regain ongoing structural budget balance. Its fiscal 2012 budget shows a drawdown of the unrestricted general fund balance to a low 4.5% of expenditures from 9.4% in 2011. Fitch has historically viewed the district's expenditure flexibility as offsetting its lack of revenue flexibility because the district relied on part-time faculty, whose numbers could be adjusted with demand, to teach a significant number of courses. Three years of budget cutting and reductions in course offerings has largely used up this flexibility. Management estimates that just $2 million of adjunct faculty salaries remain out of a $73 million budget government-wide. Management expects to further reduce adjunct staff next year and believes the district will need to secure significant and painful concessions from permanent, full-time faculty to regain fiscal balance. The unionized faculty has not yet agreed to the cuts, and Fitch believes they may be difficult to achieve.
The district's debt profile is mixed. While the direct and overlapping debt burden is moderate with $81.9 million of direct district debt and $269.4 million of overlapping debt, amortization of direct debt is slow, and post-employment liabilities (OPEB) add significantly to long-term liabilities. The district had an unfunded retiree health liability of about $33 million at the end of fiscal 2010. About $6.8 million of the OPEB liability has been booked on the district's statement of net assets, creating a negative net asset position. Pensions are less of a concern because of the district's participation in state pension plans that are at or near adequate funding levels, which Fitch defines as a 70% funded ratio. No breakdown of the unfunded pension liabilities is available because the plans are cost-sharing, multi-employer plans that do not report local unfunded liabilities.
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, the S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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|Comment:||Fitch Downgrades Imperial Community College District, CA's COPs to 'A-'; Outlook Negative.|
|Date:||Mar 27, 2012|
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