Fitch Affirms El Rancho USD CA's GOs at 'A'; Removes Rating Watch Negative

SAN FRANCISCO--()--Fitch Ratings has affirmed El Rancho Unified School District, California's general obligation bonds (GOs) at 'A' and has removed the Rating Watch Negative on the bonds listed below:

--$13.8 million GOs (election of 2003) series 2003A, 2004, 2005, 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited property tax on all taxable properties in the district.

KEY RATING DRIVERS

IMPROVED FINANCIAL OUTLOOK: Removal of the Rating Watch Negative reflects the district's materially improved financial position, including significant expenditure reductions and rising revenues that are expected to result in structural balance beginning in fiscal 2015.

POSITIVE CERTIFICATION: The Los Angeles County Office of Education (the COE) rescinded the fiscal advisor (FA) it assigned to assist the district in managing its finances and positively certified the district's 2nd interim financial report, reflecting material improvement of the district's fiscal outlook.

FINANCIAL CHALLENGES REMAIN: Although the district's financial profile has improved, fund balances are expected to hover just above the 3% required minimum at fiscal years end 2014 and 2015, and policymakers will need to exercise spending restraint in an environment marked by numerous expenditure pressures.

MIXED ECONOMIC PROFILE: The local economy benefits from its location within the extremely large and diverse Los Angeles employment market, however economic indicators are mixed.

ADEQUATE DEBT PROFILE: Carrying costs are low and capital needs are manageable, but debt amortization is slow, the district participates in the state's weakly funded pension plan that will likely experience significant contribution rate increases, and the district is paying OPEB on a pay-go basis, as is common among California school districts.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE IS KEY: Material deterioration or sustainable improvement of the district's fiscal position may lead to a negative or positive rating action, respectively.

CREDIT PROFILE

The district educates a student population of about 9,300 in the city of Pico Rivera, approximately 25 miles southeast of downtown Los Angeles.

IMPROVED FINANCIAL POSITION

In January the COE negatively certified the district's 1st interim financial report, suggesting the district may not meet its financial obligations by fiscal year end 2014, including maintenance of a minimum 3% general fund balance. The district also assigned an FA to assist the district in convalescing the district's strained fiscal position.

Since then the district's financial position has improved markedly due to board approval of $3.6 million of expenditure reductions, and significant projected revenue enhancements as the state K-12 funding environment continues to improve. As a result, the district is projecting balanced to surplus operations beginning in fiscal 2015.

The COE formerly forecast negative and falling fund balances beginning in fiscal 2015. The district's improved financial projections have led the COE to positively certify the district's 2nd interim report, suggesting the district will meet its financial obligations over a three-year forecast period. The COE also rescinded its FA.

FINANCIAL CHALLENGES REMAIN

The district's financial projections are significantly improved compared to earlier in the year, but management will have to contend with several expenditure pressures. These pressures include continued declining enrollment (offsetting some gains from rising per pupil funding levels), expiring labor concessions in fiscal 2015, likely rising CalSTRS costs, and pent-up wage, service, and deferred maintenance pressures. Fitch expects these spending pressures will significantly narrow out-year projected surpluses. Further, fiscal 2014 is still projected to result in a deficit, lowering the unrestricted fund balance to just $2.5 million (3.0% of expenditures and transfers out). These pressures are incorporated in the district's below average 'A' rating.

MIXED ECONOMIC CHARACTERISTICS

The local economy benefits from its location within the extremely large and diverse Los Angeles employment market. Despite this advantage, economic indicators are mixed. April unemployment of 7.1% was below the state and regional averages of 7.3% and 7.6%, respectively, but above the nation's 5.9% level. The tax base is well diversified, and performed adequately in the housing-led recession in part due to its maturity. Per capita income levels are quite low at just 63% and 66% of state and national averages, respectively. However, household income levels are close to state and national levels, reflective of the area's large household sizes or more workers per household.

ADEQUATE DEBT PROFILE

The district's total net debt burden is moderate at $2,597 per capita, or 4.2% of AV. Amortization is somewhat below average with 18% and 39% of debt maturing over five and 10 years, respectively. Amortization slows even further when accrued capitalized interest is treated as principal among the district's capital appreciation bonds. Carrying costs for debt service, pension and other post-employment benefits (OPEB) are low at 10.4% of governmental fund spending, but likely will rise moving forward due to anticipated OPEB and pension cost increases and potential GO issuances.

The district is preparing a master capital facilities plan that could lead to significant capital improvements over the coming years. The district retains $6 million of unspent bond proceeds and $43 million of remaining GO authorization to meet such needs.

The district participates in weakly funded CalSTRS, as do all school districts in the state. CalSTRS' 2012 funded level was just 67% and falls to an estimated 63.5% when Fitch adjusts the system's 7.5% discount rate to a standardized 7%. CalSTRS contribution rates are set by the legislature and have not been increased in recent years to address significant investment losses.

The governor recently proposed significant pension contribution rate increases over a multi-year period to eventually pay the full annual required contribution. If approved by the legislature, this plan could result in substantial new spending requirements, though it would place the pension plan on a more sustainable financial footing.

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.

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=835720

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com