Moody's removes negative outlook on Napa Valley community college

The Napa Valley Community College District, California, saw its negative rating outlook removed by Moody's after its financial situation approved.

Moody's affirmed the district's Aa3 rating.

Moody's had assigned the negative outlook June 13, 2022, after the college came under review by the Fiscal Crisis and Management Assistance Team, which is a state organization charged with fiscal crisis intervention and extraordinary audits of troubled local education agencies, and its accreditation was threatened.

Earlier Moody's had downgraded the district's bonds to Aa3 from Aa2 in June 2020.

"The Aa3 rating reflects the district's improved financial position because of revenue growth and management's ongoing efforts to right size operations and implement appropriate internal controls," Moody's analysts said. "Weak fiscal practices, budgetary underperformance and erosion of reserves had prompted a fiscal review conducted by FCMAT and the placement of the district on enhanced fiscal monitoring by the Accrediting Commission for Community and Junior Colleges."

Since then, the district has implemented a series of corrective actions and been taken off monitoring status by the accrediting commission.

"Based on the unaudited actuals for fiscal 2023, the district's more responsible approach to budgeting and expenses control have contributed to two consecutive years of operating surplus, and we reasonably expect the trend of balanced operations to continue for the near term given management's current practices," Moody's said.

A college district spokesperson could not be reached for comment on the outlook revision.

Moody's didn't assign a replacement outlook, saying it doesn't typically assign an outlook for the amount of debt carried by the district, which had $104.2 million in general obligation unlimited tax debt as of June 30, 2022.

The Aa3 also takes into account the district's favorable resident income as well as large and expanding tax base in the San Francisco Bay Area.

The strong property wealth has supported the district's community funded status since fiscal 2018, which insulates the district from declines or deferrals of state funding as well as fluctuations in enrollment, Moody's said.

Enrollment has experienced continued and significant declines due to the coronavirus pandemic, Moody's said, though in fall 2023, the district saw a slight increase compared to the prior year and anticipates flat enrollment over the near term.

The district's moderate and manageable leverage in the absence of any major near-term debt or capital plans also factored into the rating. The strong security features of California community college district general obligation bonds including collection by Napa County and Sonoma County and direct transfer to the paying agent of property taxes restricted for debt service was also considered a positive feature, according to Moody's.

Material and sustained improvement in reserves and liquidity, further entrenchment in the community funded status and sizable declines in long-term liabilities were included as factors that could lead to a rating upgrade. While significant declines of reserves and liquidity or the loss of community funded status could lead to a downgrade.