Fitch Affirms Reef-Sunset SFA CA's GOs at 'A'; Outlook Positive

SAN FRANCISCO--(BUSINESS WIRE)--As part of its routine surveillance process, Fitch Ratings has affirmed Reef-Sunset School Financing Authority, California's bonds as follows:

--$8 million outstanding General Obligation Bonds at 'A'.

The Rating Outlook has been revised to Positive from Stable.

RATING RATIONALE:

-- The 'A' rating reflects Reef Sunset Unified School District's (the district) strong overall financial position, with a solid general fund balance, a good degree of remaining expenditure flexibility and prudent management practices to cut expenditures.

-- The Rating Outlook revision to Positive reflects the district's proactive management practices and projections to maintain high reserve levels through fiscal 2013 in spite of modest drawdowns due to potentially significant state and federal funding reductions.

-- These strengths are mitigated by a deteriorating funding environment and the expected cessation of one-time federal revenues.

-- The local economy is weak, with high unemployment, a strained housing market, and below-average income levels. However, family migration tends to be countercyclical, so the district has benefitted from rising enrollment despite this economic weakness.

-- The district's economic weakness is mitigated by the Proposition 98 funding procedure, under which the state back-fills lost local property tax revenues up to the guaranteed per-pupil funding floor.

-- The tax base is highly concentrated in the top 10 payers, and assessed valuation (AV) levels have fluctuated significantly as oil prices have affected oil-related property values. Nonetheless, average annual AV growth has been brisk over the past several years and AV reached peak levels in fiscal 2011.

-- The district's debt profile is good, with low debt levels, very rapid debt amortization, moderate capital needs, and no plans for additional debt in the foreseeable future.

What Could Trigger an Upgrade:

-- Maintenance of strong general fund balance levels, which may necessitate further significant expenditure reductions if funding levels deteriorate materially from district projections.

-- The district's ability to cope with potential economic softening from already weak levels.

SECURITY:

The bonds are secured by an unlimited ad valorem tax pledge on all taxable property within the district.

CREDIT SUMMARY:

The district is located in northwest Kings County near interstate 5, about 180 miles north of Los Angeles and 200 miles south of San Francisco and Sacramento. It serves about 2,400 students in grades K-12 in the cities of Avenal and Kettleman. The regional economy is dominated by oil, agriculture and state prisons, with about one- third of the estimated district population of 19,000 in the Avenal state prison, which is also one of the largest employers in the area. Most other area residents are employed in agriculture. As is common for an agriculturally-concentrated region, the county's unemployment rate is high at 18%, and household income levels are below average, at 81% and 95% of state and national levels, respectively. King County's housing market was severely affected by the housing-led recession, and foreclosures remain at elevated levels. Further, the tax base is quite concentrated, with the top 10 payers making up 45% of fiscal 2011 AV. AV has tended to be volatile over the past several years, but has grown by a rapid average annual 11% since fiscal 2005. Much of the growth has been linked to the rising price of oil, which has caused significant fluctuations in the value of the district's top taxpayer, Union Oil Company of California (18% of total AV).

The district's financial position is strong despite local economic weakness. Fiscal 2010 general fund operations produced a $140,000 surplus, raising the total and unreserved general fund balances to $7.2 million (35% of expenditures and transfers out) and $4 million (19%), respectively. Management has grown reserve levels in spite of material funding reductions by prudently implementing deep expenditure reductions early in the state-funding downturn. The district's mid-year financial report projects that fiscal 2011 will result in a $518,000 deficit; however, management projections tend to be conservative. Also, categorical flexibility enabled management to sweep certain reserved balances to the district's unreserved general fund, so the district's unreserved financial cushion is expected to grow to a very high $6.2 million (27.9%) by fiscal year end 2011. The school board approved $833,000 of expenditure reductions to be effective in fiscal 2012, which are anticipated to offset the majority of funding reductions the district expects to incur if Prop 98 funding levels fall significantly in fiscal years 2012 and 2013.

The district's debt profile is good. Net debt levels, including the debt of overlapping municipal entities, is low at $1,042 per capita, or 2.3% of AV. Amortization is quite rapid, with 90% of debt maturing in 10 years. Capital needs are moderate; however, management has no plans in the foreseeable future to issue additional debt. As with all California school districts, pension costs likely will rise as prior years' investment losses are smoothed into asset values. The district funds other post employment benefits (OPEB) on a pay-as-you-go basis, and costs are expected to rise over the long term without further actions to fund its liability at a higher level or to cut benefits.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Case-Shiller, IHS Global Insight.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', 16 Aug 2010;

'U.S. Local Government Tax-Supported Rating Criteria', 08 Oct 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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