News Column

Fitch Downgrades Burbank Unified School District, CA's GO Bonds to 'AA-'; Outlook Stable

June 26, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the following rating for Burbank Unified School District (the district):

--$44.9 million general obligation (GO) bonds, series 1997A, 1997B, and 1997C to 'AA-' from 'AA'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by an unlimited ad valorem property tax pledge.

KEY RATING DRIVERS

DOWNGRADE REFLECTS WEAKENED RESERVE POSITION: The rating downgrade reflects the district's planned deficit spending in fiscal 2014 and fiscal 2015 that will result in significantly weakened general fund reserves. The Stable Outlook reflects expectations that the district will return to balance in fiscal 2016.

ABOVE-AVERAGE SOCIOECONOMIC PROFILE/RESILIENT TAX BASE: Socioeconomic indices are generally favorable, with above-average wealth levels and below-average unemployment, and the tax base has been generally stable throughout the economic downturn.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt ratios are moderate. The district's total carrying costs of debt service, actuarially required pension contributions, and other post-employment benefit (OPEB) as a percentage of spending are affordable. Pension costs will increase as the state implements its plan to increase contributions to the poorly funded state pension plan for teachers.

RATING SENSITIVITIES

SUCCESS OF OUTYEAR BALANCING PLAN: The Stable Outlook assumes that the district will achieve balanced operations and begin stabilizing financial reserves in fiscal 2016 as currently planned.

CREDIT PROFILE

The district is coterminous with the city of Burbank in Los Angeles County. It encompasses approximately 17 square miles and serves a population of over 15,000 students.

GENERAL FUND DEFICIT CONTINUED IN FISCAL 2013

Following a $4.6 million general fund deficit in fiscal 2012 (4% of general fund spending), fiscal 2013 operations resulted in a general fund deficit after transfers of $1.2 million (1% of general fund spending), dropping the unrestricted general fund balance to a still strong $17.9 million or 16% of spending. The deficit in fiscal 2013 was less than the $4.4 million budgeted deficit due to better than anticipated revenues and $600,000 less in expenditures.

REDUCTION OF RESERVE LEVELS TO CONTINUE IN FISCAL 2014 & 2015

Although the improved state revenue picture has positively impacted the district's general fund revenues in fiscal 2014, the increased state funding has been passed on to employees in the form of salary increases. Management is estimating a fiscal 2014 general fund deficit of $6.4 million (5.2% of budgeted fiscal 2014 spending), which was larger than what was previously expected, and drops the unrestricted general fund balance to 10.7% of spending.

A smaller deficit of $2 million (less than 2% of spending) is projected for fiscal 2015 and lowers the unrestricted fund balance further, although management maintains the district will remain compliant with its 6% unrestricted fund balance policy. Fitch considers unrestricted general fund reserves at or slightly above policy as adequate for the current rating level, but substantially weakened from historically strong levels. District projections include negotiated salary increases ranging from 4% to 5% in fiscal 2014 and a 1% salary increase for teachers in fiscal 2015. The total cost of these increases is $3.8 million over the two fiscal years.

Management indicates the district will return to balanced operations in fiscal 2016, and projections call for a $2.2 million surplus. The fiscal 2016 projections do not include any increase in employee compensation other than step and column costs, though Fitch believes that future state funding increases will continue to at least be partially offset by wage pressure. A return to structural balance in fiscal 2016 is key to rating stability.

STRONG SOCIOECONOMIC CHARACTERISTICS/STABLE ECONOMY AND TAX BASE

The city's economy has long been tied to the media and entertainment industry with Warner Bros. Entertainment, Walt Disney Productions, and NBC/Universal among the largest taxpayers and employers. The city also has a healthy technology and healthcare presence, and its proximity to the broader economic base of the Los Angeles metropolitan area has contributed to consistently below-average unemployment. The city recorded an unemployment rate of 6.1% in March 2014, which was well below the county and state levels, and just slightly higher than the national level of 5.9%. Wealth levels in the city are above average and the individual poverty rate has historically been well below the national average.

The district's taxable assessed value (TAV) has proved resilient throughout the economic downturn, with only a slight 0.7% dip in fiscal 2012 followed by growth of 1.6% and 3% in fiscal years 2013 and 2014. The market value per capita is a high $176,000.

MANAGEABLE LONG-TERM LIABILITIES

The district's overall debt levels are moderate, at $2,691 per capita and 1.5% of TAV. Principal amortization of direct debt is average, with 52% of debt retired in 10 years. The district plans to issue approximately $34 million of GO bonds in 2015 for various capital improvements and school technology upgrades.

District employees are covered under the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS). Estimated funding levels for the plans are a low 63.7% for CalSTRS and 78.8% for CalPERS, based on Fitch's more conservative 7% rate of return.

The district's total carrying costs, including debt service, actuarially required pension contributions, and OPEB pay-as-you-go payments are considered affordable by Fitch at 13.5% of governmental spending. Carrying costs are expected to rise sharply as the state addresses substantial unfunded liabilities in the CalSTRS. Statutory contribution rates for CalSTRS have been well below the level required to amortize existing obligations. The Governor's proposed fiscal 2015 budget includes a long term plan to close the funding gap which would result in substantially higher pension costs.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836778

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 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.



Fitch Ratings

Primary Analyst

Nicole Wood, +1-212-908-0735

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Alan Gibson, +1-415-732-7577

Director

or

Committee Chairperson

Karen Ribble, +1-415-732-5611

Senior Director

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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