2009-07-27 22:55:06 -

Fitch Ratings assigns an 'A-' rating to West Contra Costa Unified School District (Contra Costa County), California's $120 million 2009 general obligation (GO) bonds, consisting of election of 2005, series C, and election of 2005, series D (federally taxable - issuer subsidy - Build America Bonds). Fitch also affirms the district's approximately $626 million in outstanding GO debt at 'A-'. The new bonds will sell via negotiation on Aug. 12, 2009. The Rating Outlook on all the bonds is Negative.

The 'A-' rating reflects the district's adequate but challenged financial operations, declining revenues, and a challenging and inflexible labor environment, balanced by good voter support for capital and operating taxes, deteriorating local economy, declining assessed valuation, above-average debt levels, and mixed

demographic information and location within the greater Bay Area economy. The Negative Rating Outlook continues to reflect the district's current year and projected budget deficits and the difficulty in achieving savings given strong labor groups. Also, continued deterioration in the regional housing market and employment base could exacerbate financial strain if enrollment declines. A downgrade would be triggered if the district is unable to achieve union support for the labor agreement in place and significantly reduce its structural deficit for fiscal 2011 and beyond.

The district operates 58 K-12 schools, in addition to adult education centers and preschools, and serves a large population estimated at 227,040 in western Contra Costa County. Its territory encompasses the cities of Richmond (46% by assessed valuation [AV]), Hercules (11%), El Cerrito (10%), Pinole (8%), San Pablo (14%), and unincorporated areas (11%). The district also includes several petroleum and petroleum-related companies; the largest is Chevron Corporation, the district's top taxpayer at 12.8% of AV. Despite pockets of wealthier areas, the majority of the district is economically disadvantaged, as indicated by the 61% of students eligible for free or reduced-price meals, above-average unemployment rates and very high foreclosure rates.
High foreclosure rates have caused and contributed to falling home prices resulting in a projected 12% decline in district AV for fiscal 2010.

The district's financial position at the end of fiscal 2009 is adequate, but forecasts for future years show that the district's unreserved fund balance could decline to very thin levels if anticipated declining revenues are not completely offset by reductions in spending. The district has made significant progress in reducing its budget, although due to unfinished labor negotiations, it may not be able to realize all of the spending cuts the board adopted. These include capping employee and new retiree health care benefits and closing eight schools over the next two fiscal years. Nonetheless, the district's fiscal 2010 budget includes about a $5.5 million structural deficit, bringing the unreserved fund balance down to $14.3 million, or a still adequate 5.4% of spending. Inability to reach targeted savings levels this year also will cause a projected $6.4 million reduction in unreserved fund balance in fiscal 2011, ending the year with just 3.1% of spending.

On a positive note, the district has received community support; in addition to approving several bond measures in recent years, voters renewed the parcel tax for five years which generates about $10 million per year. The new parcel tax expires in fiscal 2014.

These bonds are the third series of a 2005 $400 million voter-approved authorization (Measure J) under Proposition 39. Bond proceeds will be used primarily to fund the renovation of a high school and other reconstruction and modernization projects. Other sources for the capital improvement plan include state matching funds and developer fees. Direct debt is high particularly given the district's low income levels at about $3,400 per capita and 3.3% of market value. California unified school districts are limited to outstanding GO debt totaling 2.5% of market value, but the district has received a waiver increasing its limit to 3.5% through May 2014. Including overlapping municipal entities, debt is a high $5,700 (5.5%). In addition, under proposition 39, the district may not expect to exceed a tax rate of $60 per $100,000 in AV resulting from the Measure J bonds. With the 12% decline in AV expected for fiscal 2010, these bonds can only begin amortizing in fiscal 2013 in order to remain within the expected tax rate. The resulting rate of amortization for all district debt is slow at 25% in 10 years.

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Fitch Ratings, San FranciscoKaren Ribble, 415-732-5611Alan
Gibson, 415-732-5770Scott Monroe, 415-732-5618orMedia
Relations:Cindy Stoller, 212-908-0526, New YorkEmail: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com