Fitch Affirms Fowler USD, CA's GOs at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following Fowler Unified School District (the district), California rating:

--$22.6 million general obligation (GO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are supported by an unlimited general obligation pledge of ad valorem tax on all property within the district.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The district has consistently achieved positive operating margins and unrestricted general fund balance rose to a very strong 32.5% of spending at the end of fiscal 2012.

PRUDENT FINANCIAL MANAGEMENT: The district has a strong record of proactively managing expenses to maintain structural budget balance despite a volatile state funding environment. The district is now benefiting from growth in state funding.

GROWING TAX BASE: Taxable assessed value (TAV) continued to increase throughout the recession, in contrast to other inland California communities that suffered deep declines due to the housing market's collapse. The district's TAV is bolstered a significant industrial and commercial sector.

WEAK ECONOMIC PROFILE: The district is located in Fresno County and the economic profile is weak with high unemployment and below average income levels.

MODERATE DEBT BURDEN: The district's net direct and overlapping debt burden is moderate at about 2.9% of TAV or $3,679 per capita. Post-employment liabilities are manageable.

RATING SENSITIVITIES

STRONG RESERVES NECESSARY: Strong reserve levels are necessary to maintain the current rating, given the weak economy and limited revenue base. A deterioration in reserve levels or decline in financial performance would likely result in negative rating action.

CREDIT PROFILE

The district is a kindergarten-to-grade 12 school district, serving about 10,000 residents and 2,300 students in and around the town of Fowler, California. It is located 11 miles southeast of the city of Fresno. It operates three elementary schools, a middle school, and a high school, in addition to alternative education programs.

STRONG FINANCIAL PERFORMANCE

The district's financial position is strong, as demonstrated by high general fund balance levels and a history of prudent management practices. The district posted a net surplus of $213,000, or 1.2% of spending in the fiscal year ended June 30, 2012. The district has posted operating surpluses every year since 2009, a period in which many California school districts were running significant deficits due to weakness in state funding. Unaudited results for 2013 show a slight surplus with unrestricted fund balance holding above 30% of general fund spending. In addition to general fund reserves, the district maintains significant capital reserve funds outside the general fund.

Reasonably conservative multiyear projections show reserves holding near their current level over the next three years amid solid revenue growth expected to come with improvement in the state economy and the implementation of the Local Control Funding Formula that targets additional funds for second language learners, students in poverty and foster youth.

MODERATE DEBT

Debt and other long-term liabilities are manageable with total debt, pension and OPEB carrying costs at 9.5% of governmental funds spending. Direct debt equals about $23.8 million, or 1.9% of TAV. Debt amortization is very slow due to use of capital appreciation bonds, with just 12% of principal retired in 10 years.

Retirement-related liabilities are manageable. The district's unfunded actuarially accrued OPEB liability is quite low at $1.8 million or 0.1% of TAV. The district has begun to make contributions to an irrevocable OPEB trust to prefund the liability.

The district participates in California Public Employees' Retirement System (CalPERS) as well as in the poorly funded California State Teachers' Retirement System (CalSTRS) pension systems. Contribution rates for CalPERS are actuarially based, but those for CalSTRS are set by statute and have been below the level required to amortize the system's unfunded liability. The system reported a funded ratio of 69.3% for the fiscal year ended June 30, 2012. Fitch estimates the funded ratio to be 65.7% based on its more conservative 7% rate of return assumption. Fitch expects the district's CalSTRS contribution rate to rise over the coming years, perhaps significantly, after the legislature begins to address the system's growing unfunded liabilities. However, low overall carrying costs and generally healthy finances suggest the district will be able to manage any increases without deterioration in credit quality.

WEAK CENTRAL VALLEY ECONOMY

Fresno County's economy is large and reasonably diverse, but remains weak compared to the nation. Recent data show improvement in the local labor market with job growth accelerating and the unemployment rate falling 2 percentage points over the past year to a still-elevated 12%. Income levels are weak with median household income at about 82% of the national level.

Tax base growth has slowed, but remains positive. TAV grew by a cumulative 14.5% between 2008 and 2013, and the district has yet to experience a single year of TAV decline. Non-residential properties represent three-quarters of the district's tax base and include numerous enterprises supporting the region's substantial agricultural economy. Warehouses and agricultural processing facilities comprise a majority of the district's moderately concentrated tax base, with the top ten taxpayers accounting for 16% of total AV.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, IHS Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813110

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Andrew Ward, +1-415-732-5617
Associate Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Andrew Ward, +1-415-732-5617
Associate Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com