[May 02, 2012]

Fitch Rates Santa Clarita Community College Dist., CA's $35MM GOs 'AA'; Downgrades Outstanding

Fitch Ratings assigns a rating of 'AA' to the following Santa Clarita Community College District (the district) bonds:

--$35 million general obligation (GO) bonds, election of 2006, series 2012.

The bonds are scheduled to price on May 16, 2012 via negotiated sale. Proceeds will be used to refund a portion of the district's 2006 certificates of participation (COPs) and finance the construction of a student services/administration building.

In addition, Fitch takes the following rating actions:

--$141.7 million outstanding GO bonds downgraded to 'AA' from 'AA+';

--$33.4 million outstanding COPs downgraded to 'AA-' from 'AA'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The GO bonds are general obligations of the district, payable solely from the proceeds of ad valorem taxes, without limitation as to rate or amount.

The COPS are limited obligations secured by lease rental payments for the use of certain district properties, subject to abatement. They are additionally supported by the district's covenant to budget and appropriate lease payments.

KEY RATING DRIVERS

STATE BUDGET IMPACTS: The downgrade to 'AA' for outstanding GO debt and 'AA-' for outstanding COPs is based on the significant operating deficit projection for fiscal 2012, which stems from the district's inability to offset deep cuts in state funding for community colleges.

ONGOING PRESSURE ANTICIPATED: The Negative Outlook reflects uncertainty associated with the district's fiscal 2013 budget and management's plans for restoring balance. Further state revenue cuts, in combination with ongoing cost pressures, will challenge the district's ability to maintain adequate reserves in fiscal 2013.

SHORTFALL IN STATE REVENUES: State revenues, which provide nearly two-thirds of the district's general fund support, declined sharply in fiscal 2012. The potential for greater cuts exists if state voters turn down a proposed tax increase in November 2012.

LIMITED FINANCIAL FLEXIBILITY: The district has little ability to raise revenues and faces rising cost pressures related to employee salaries and benefits despite recent reductions in enrollment.

LARGE, DIVERSE ECONOMY: The district benefits from its access to and participation in the broad Los Angeles regional economy, and appears to be on the path to recovery.

ABOVE-AVERAGE WEALTH: District residents and households exhibit above-average wealth and incomes relative to the county, state, and nation.

MANAGEABLE DEBT LEVELS: Overlapping debt levels are moderate but amortization is slow.

WHAT COULD TRIGGER A RATING ACTION

Management's inability to implement significant recurring solutions to the district's budget gap in fiscal 2013 would likely result in additional negative rating action.

CREDIT PROFILE

STATE CUTS DEPLETE RESERVES

The district's finances have been subject to severe financial pressure over the past several years as a result of repeated cuts to state revenues. Expenditure reductions in 2010 and 2011 enabled the district to add to fund balance despite revenue declines, but state cuts in fiscal 2012 have proven more difficult to offset Management is forecasting a $6.3 million operating deficit (after transfers) in fiscal 2012, which would draw down reserves to $7.1 million, or 8% of general fund spending (operating expenditures plus transfers out).

The planned use of fund balance in fiscal 2012 reflects a reduction in state general fund support of $9.7 million, equivalent to 11% of total general fund revenue. The district faces a further loss of $3.5 million in state revenues for fiscal 2013 should two-thirds of state voters fail to approve a tax measure planned for the November 2012 ballot.

The district has responded to state revenue losses with a reversal of its longstanding trend of enrollment growth, reducing student levels by approximately 20% over the past five years. Cost pressures have continued despite these efforts, in particular for employee salaries and benefits, which are projected to increase by more than $4.6 million in fiscal 2012, 7% above prior year levels.

Further reductions in fund balance appear likely for 2013 unless the district can reduce personnel costs in line with funding cuts, as salaries and benefits account for approximately 80% of general fund expenditures. The district has few options for raising general fund revenues and anticipated revenue growth from recent tuition increases has been offset by increased student eligibility for fee waivers. Additional sources of financial flexibility include a $3 million reserve for other post-employment benefits.

STRONG ECONOMIC BASE, SLOW RECOVERY

The district is centered on the city of Santa Clarita in northern Los Angeles County and includes portions of the city and surrounding unincorporated areas. The tax base of the district is largely residential and has withstood the recent housing crisis better than many outlying communities in southern California. After a long period of steady growth fueled by residential development, district taxable assessed valuation (TAV) fell by 7% between 2009 and 2011, followed by a 0.4% increase for 2012. Ongoing home value declines are likely to depress TAV gains over the next several years but may be offset by continuing large-scale residential development within the district.

Wealth and income indicators for Santa Clarita are well above county, state, and national averages, while poverty levels are much lower. Unemployment rates have historically compared favorably to state and national averages and peaked at a relatively low 7.8% in 2010. As of February 2012 unemployment held steady at 7.4%, as compared to 11.4% and 8.7%, respectively, for the state and nation. Employment levels have shown steady improvement since January 2010, albeit at a modest pace.

MANAGEABLE DEBT LEVELS

Overlapping debt levels for the district are moderate at 2.8% of TAV, but amortization is very slow due to the 40-year maturity of prior GO issuances. The district will retain approximately $45 million in GO authorization following this transaction and expects to issue additional GO debt within the next several years as TAV levels recover from recent declines.

The district is a participant in two state-sponsored defined benefit pension plans and will likely face increased contribution requirements over the next several years due to investment losses and reduced investment return assumptions. Other post-employment benefits (OPEBs) are funded on a pay-as-you-go-basis and the district's unfunded liability was relatively low at $6.7 million as of 2011.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, and 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:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

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