Fitch Downgrades Natomas School Bonds

NEW YORK – Fitch Ratings has downgraded the Natomas Unified School District’s $64.6 million of outstanding general obligation bonds to ‘BBB’ from ‘A-‘ and has placed the bonds on Rating Watch Negative.

The downgrade reflects the district’s deteriorating financial position, as evidenced by a significant structural imbalance and projected year end deficit balances for fiscals 2010-12. With the weakened financial position brought on largely by misestimates of student enrollment and reduced state funding without commensurate spending cuts, Fitch believes the district’s ability to achieve balance and rebuild reserves will be hindered in the future by the area’s significantly impacted housing market and a local moratorium on new home building.

While the district is working with a consultant and the Sacramento County Office of Education to reduce the budgeted fiscal 2010 deficit, Fitch views the level of actions needed to return reserves to levels consistent with the prior ‘A-‘ rating as unlikely in the near-term. Also, the district’s debt amortization is very slow, further reducing financial flexibility.

The placement of the district’s bonds on Rating Watch Negative reflects additional credit risk if the upcoming budget discussions are not able to advance fiscal balance, including the ability to formalize and implement an effective plan for fiscal 2010. Implementation of necessary budget changes will only be able to take place after at least three months of the fiscal year and one month of the school year will have lapsed. Fitch expects to review a formal plan in the near future.

Despite layoffs, furlough days, and other reductions to spending, the district’s unreserved general fund balance declined to an estimated $4.9 million or 5.9% of spending in fiscal 2009 from $9.6 million or 12.4% of spending in fiscal 2008. As a result of declining state and categorical funding, lower than expected student enrollment, as well as rising expenditures, further operating deficits are forecast in the following years.

Consequently, absent significant action to counter these operating pressures, the district currently projects the general fund balance will decline to a negative $2.8 million or a negative 3.4% by the end of the current fiscal year. Fitch views negatively management’s inability to date to adequately reduce expenses, obtain labor concessions, or project student enrollment growth accurately going forward.

Also, current labor agreements require that certain savings be reallocated to labor, an impediment to rebuilding reserves. Debt levels remain moderately high at about $11,499 or 4% of market value, including overlapping debt. Amortization is very slow with 29% repaid in 10 years, limiting financial flexibility.

Enrollment projections of a 350 student increase in fiscal 2010 were not satisfied due to competition from a nearby charter school. Assessed value declined 8% for fiscal 2010, well below the forecast of no growth presented by the district earlier this calendar year.

The December 2008 new home construction moratorium in the district area will make a return to tax base growth slower and more difficult. The moratorium likely will remain in place until the 100-year protection levee improvements are completed in 2011.

While the original rating was assigned July 29, 2004, the ratings on the 1999 refunding GO bond was not reflected on Fitch’s web site. The full rating history is now available there.