NEW YORK - (Business Wire) In the course of surveillance, Fitch affirms Lakeport Unified School District's (the district) approximately $6.5 million outstanding general obligation (GO) bonds at 'A.' The Rating Outlook is revised to Negative from Stable.
Although the district has effectively managed a declining enrollment environment by limiting expenditures, the Negative Outlook reflects the projected deterioration of its financial reserves due to additional enrollment declines, looming state aid budget cuts, and an unfavorable legal settlement over a new multipurpose facility. Fitch will evaluate the district's response to these challenges over the next one to two years in determining the direction of the rating.
School districts across Lake County are experiencing enrollment declines as people move out of the area to more affordable housing markets. The district does not anticipate a reversal of this trend in the near future, necessitating the consolidation of facilities and streamlining of resources. Management has demonstrated a willingness to limit expenditures through both service and staffing reductions. In fiscal 2008, the district reduced its staff by 12 positions and will be closing its alternative education center. The continuation high school, community day school, and home school program, which have been in the adult education center, will be relocated back to the main campus, which has sufficient capacity due to declining enrollment.
Although the district has made aggressive cuts in expenditures to deal with current financial conditions, its reserve levels will be affected due to an unfavorable legal settlement. In November 2005, an architect filed a suit against the district for breach of contract associated with a multipurpose facility and modernization project. In January 2006, the district filed a counter-suit over design, fee and negligence issues associated with the multipurpose facility. In November 2007, the courts ruled in favor of the architect and awarded a settlement of $830,000. A court ruling on June 27, 2008 could permit the district to pay the $830,000 settlement over 10 years with a 7% interest rate. The ruling would be based on the district proving to the court its financial hardship. Under this scenario, the settlement would increase the debt burden to $953 per capita from $878 and from 0.91% of total assessed value (TAV) to 0.99% of total assessed value (TAV), still a low level.
If the district is required to pay the full settlement this year, the fiscal 2008 unreserved fund balance is estimated to decline to $527,000 or 3.5% of expenditures from $1.06 million or 7.0%. Fitch believes this drop would limit the district's financial flexibility at a time when it is vulnerable to state funding reductions and further enrollment declines.
In order to pay the settlement, the district anticipates liquidating $300,000 from a developer fee fund, $200,000 that has been designated for the lawsuit, $30,000 from its unreserved fund balances, and $300,000 currently designated for the district's other post-employment benefits (OPEB) liability. The district's OPEB liability is moderate at $1.8 million or approximately 7% of total expenditures. The district had set aside the $300,000 as its first effort to begin funding the liability.
Located in Lake County, 120 miles north of San Francisco, the district serves a 120 square mile area in the western part of the county around the Town of Lakeport (the county seat) and the western portion of Clear Lake, a major sporting, recreation, and retirement destination. The district has 11,176 residents and its average daily attendance for 2007 was 1,621 students. It operates one elementary school, one intermediate school, one high school and one continuing education school.
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Fitch Ratings
Drake Richey, 212-908-0325 (New York)
Alan Gibson, 415-732-1752 (San Francisco)
Cindy Stoller, 212-908-0526
(Media Relations, New York)
