Fitch Rts West Contra Costa USD, CAs $100MM GOs 'A-'; Neg Outlook

Business Wire, August 8, 2003

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Aug. 8, 2003

Fitch Ratings assigns an 'A-' rating to West Contra Costa Unified School District, CA's $100 million general obligation bonds, election of 2002, series B. Fitch also assigns an 'A-' rating to $216 million of outstanding general obligation debt. The Rating Outlook is changed to Negative from Stable on all series of bonds. The bonds will sell competitively on August 11.

The rating reflects West Contra Costa Unified School District's (the district) manageable, though increasing, debt levels, good assessed value growth, and a positive settlement of the state's audit challenge. The Negative Outlook is predicated largely on the district's weakened financial position given the projected 2003 general fund operating deficit. In addition, the district projects another large operating loss in its proposed fiscal 2004 budget, despite all of the district's unions agreeing to a 2% salary increase deferral for fiscal years 2004 and 2005. Although the 2% salary increase deferrals provide some short term budgetary relief, the deferrals could create fiscal pressure for 2006 and beyond.

In addition, uncertainties surrounding future state appropriations remain and the district's extensive capital needs could potentially pressure district resources further. Fitch Ratings believes the maintenance of the district's current rating depends largely on its ability to balance future operations and preserve its fund balances while maintaining a positive relationship with the state-approved administrator.

The district is located in western Contra Costa County, encompassing four cities and two unincorporated communities. The district also includes several petroleum and related companies led by Chevron Corp., the district's top taxpayer at 12.2% of assessed valuation. Overall property valuation has been improving, showing strong increases in recent years. In 2003, assessed value grew a sound 5.6%, following a strong 11.4% increase in 2002.

Financial operations are adequate but stressed, marked by a recent reduction in the healthy general fund reserves. The district projects a $5 - $7 million drawdown for fiscal 2003, due largely to spending prior years' reserves, a retroactive teachers' salary increase, and the inability to offset all of the state mid-year budget cuts. Based on the more conservative drawdown estimate, the fiscal 2003 unaudited general fund balance is projected to be a still sound 7.6% of expenditures and transfers out, a decline from 10.8% in the prior year. The unreserved general fund balance would also remain ample, at 7.1% of spending. However, another large operating deficit is budgeted for fiscal 2004, despite all four of the district's unions agreeing to defer 2% salary increases for both fiscal 2004 and 2005. Management has identified potential savings to reduce the deficit and fund balance drawdown, although it is uncertain to what extent. The total general fund reserve is, however, projected to remain above the 5% fund balance policy. Like most California school districts, the district depends heavily on state funding, which accounted for 58.5% of general fund revenues in fiscal 2002.

The district's direct and overall debt levels are moderate, but will continue to increase due to slow debt amortization and expected future debt issuance. After this sale, overall debt will be $3,362 per capita, or 4.2% of market value.

The bonds are the second series of a $300 million voter-approved authorization under proposition 39 in 2002. Proceeds will be used primarily for construction and modernization of schools, which are part of a large $900 million capital plan through 2012. State matching funds and additional voter-approved debt are expected for capital plan completion; the district plans to go to voters in September for an additional $450 million authorization.