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Fitch Rates Mt. Diablo Unified School District, CA GO Bonds 'AAA'
[October 25, 2016]

Fitch Rates Mt. Diablo Unified School District, CA GO Bonds 'AAA'


Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by Mt. Diablo Unified School District, California (the district):

--Approximately $38.5 million general obligation (GO) bonds, election of 2010, series G.

Fitch has also assigned an Issuer Default Rating (IDR) of 'AA-' to the district. The distinction between the 'AAA' rating on the bonds and the 'AA-' IDR reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.

KEY RATING DRIVERS

Special Revenue Analysis: The 'AAA' rating on the GO bonds, election of 2010, series G, is based on a dedicated tax analysis without regard to the district's financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered "pledged special revenues" in the event of a district bankruptcy.

Strong Tax Base; Low Debt: The economic resource base supporting the GOs is strong and diverse. The unlimited nature of the tax offsets concern about tax base volatility. Overall debt is low relative to the tax base.

RATING SENSITIVITIES

Tax Base Drives GO Rating: The 'AAA' GO bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.

IDR Sensitive to Financial Performance: The 'AA-' IDR could come under downward pressure if the district fails to maintain strong financial flexibility and sufficient levels of reserves throughout a moderate economic recession.

CREDIT PROFILE

The district operates 45 schools in the northwest portion of Contra Costa County, a diverse and growing economy. Fiscal 2015 enrollment of 32,043 students reflects the district's maintenance of essentially flat enrollment since fiscal 2013 when a charter school opened. The redevelopment of the Concord Naval Weapons Station into neighborhoods, business areas, institutions and community facilities may support future enrollment growth. The district is not aware of any new charter schools in the area.

Tax Revenue to Repay Bonds Viewed as Pledged Special Revenues

Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code, and therefore the lien on pledged revenues would survive and would not be subject to the automatic stay (i.e. payment interruption) in the event the district were to file for bankruptcy. Fitch has reviewed and analyzed legal opinions provided by district counsel and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily Proposition 13) which limit and direct the use of pledged property tax revenues for bond repayment.

As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district's bonds eliminates the need for such calculations.

The $37 billion tax base provides strong fundamental support for the 'AAA' 2016 GO rating. The district's economy and taxable assessed values (TAV) have increased after the previous recession. The 10-year CAGR for the district's TAVs is 2.7% with more robust growth of 8.9% over the past three years. Future AV growth is likely, given some ongoing development and the potential for increases to AV when properties are sold and reassessed at current price versus the Proposition 13 value, which can only be inflated 2% per year.

IDR Expands Analysis to Include Operating Performance and Framework

The 'AA-' IDR reflects the district's strong gap-closing capacity with moderate reserves relative to historical revenue volatility. The rating also reflects the district's weak revenue framework with modestly growing historical revenue growth and no independent legal ability to raise revenues without a vote of the people. These weaknesses are partially offset by the district's low long-term liability burden, solid expenditure flexibility and stabilized enrollment.

Economic Resource Base

Mt. Diablo encompasses approximately 150 square miles and is located in and serves the cities of Concord, Pleasant Hill and Clayton, as well as portions of the cities of Walnut Creek, Pittsburg and Martinez and unincorporated areas of the County, all located about 30 miles northeast of San Francisco. The 2015 unemployment rate in the district was a relatively low 4.5% compared to the county and state's 5.0% and 6.2%, respectively. The district's per capita personal income is 4.8% lower than Contra Costa county and 13% higher than in the state.

Revenue Framework: 'bbb' factor assessment

The district is largely reliant on formulaic per pupil funding from the state of California, and policymakers have no meaningful independent revenue raising flexibility due to tax limitations. The combination of stabilized enrollment and the state's strong revenue growth should result in revenue growth at least at the level of inflation.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending is likely to remain in line with or rise marginally above revenues. The district's carrying costs of 15.8% are moderate and management retains the ability to control labor costs and staffing levels after engaging in a structured bargaining framework.

Long-Term Liability Burden: 'aaa' factor assessment

The district's overall debt and long-term liabilities are low relative to its personal income. The district participates in two adequately funded state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies.

Operating Performance: 'aa' factor assessment

The district's gap-closing capacity is strong and its budget management is sound.

Revenue Framework

Historical reenue growth was below U.S. economic performance and inflation; however, given stabilized enrollment and positive trends in state per pupil funding, the district should see revenue growth at or above the level of inflation. Currently the district has a low proportion of students - 47% of total student population - targeted under the state's Local Control Funding Formula (LCFF) which provides additional funding for such students. The district received 9% additional LCFF revenues in fiscal 2015-16 and is projected to receive an additional 12% in fiscal 2016-17.



California's Proposition 13 requires a vote of the people to raise taxes, which leaves the district with no independent ability to raise revenues.

Expenditure Framework


Expenditure control is solid. Personnel costs for teachers and staff comprise the vast majority of district expenditures. Fitch expects expenditure growth to be in line with, to moderately above expected revenue growth based on the district's current spending profile.

The district's mandate to provide educational services places some limitations on its ability to make expenditure reductions in the event of a revenue decline. Nonetheless, the district's moderate carrying costs and ability to raise class sizes from currently low levels, negotiate salary freezes, reduce personnel, adjust curriculum, and make other cuts if needed, provides solid expenditure flexibility.

Long-Term Liability Burden

The district's combined debt and pension liabilities relative to personal income is low at under 10% with direct debt accounting for about 2.7%, and the rest consisting of overlapping debt and direct pension liabilities. This issuance exhausts the district's bond authorization and it has no current plans to seek additional authorization. The district participates in both CalPERS and CalSTRs. The estimated Fitch-adjusted ratio of assets to liabilities for its pension plans is adequate at 73.8% (assuming 7% investment returns). The district's liability related to other post-employment benefits (OPEB) is 1% of personal income.

Operating Performance

Current reserve levels at about 20% of spending at fiscal year-end 2015 are above the district's target of 17% of spending. Given Fitch's estimated revenue decline in a 1% GDP decline scenario of 4.6% and the need to make all budget adjustments on the expenditure side, Fitch assesses the district's gap-closing capacity as strong. This assessment is based on the expectation that, supported by its solid expenditure flexibility, the district would make the necessary budgetary changes to maintain an adequate reserve safety margin, as is evidenced by its performance in the last recession.

Budget management is sound and is supported by California's robust Assembly Bill 1200 (AB 1200) school oversight framework, which requires conservative budgeting and multi-year forecasting with oversight from the county office of education.

Additional information is available at www.fitchratings.com

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013739

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013739

Endorsement Policy

https://www.fitchratings.com/regulatory

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