Fitch Affirms Menifee Union School District, CA's GOs at 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following outstanding Menifee Union School District (the district), CA's general obligation (GO) bonds at 'A+':

--$8.8 million series 2013;

--$0.5 million series 2002A;

--$0.2 million series 2002B.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STRUCTURAL BALANCE RESTORED: The district recorded a small operating surplus in fiscal 2015 and is on track for a second year of positive results in 2016. Projections for fiscals 2017 and 2018 reflect continued balance after accounting for one-time spending of restricted funds, despite ongoing growth in pension and labor costs.

REVENUE GROWTH: Continued enrollment gains, in combination with improved state funding, have contributed to steady increases in revenues.

IMPROVING ECONOMY: The district's taxable assessed value (AV) has rebounded after modest declines during the last recession, supported by residential development and increases in home values. Menifee employment levels improved notably in 2013 and 2014, but unemployment remains elevated relative to the state average.

ABOVE AVERAGE OVERALL DEBT LEVELS: Overall debt levels are above average, largely due to overlapping debt issuances. Capital needs for the district include several new schools over the next five to six years and would require voter authorization of new debt for their construction.

RATING SENSITIVITIES

RENEWED IMBALANCE: A return to operating imbalance with deteriorating unrestricted fund balance would put downward pressure on the rating.

CREDIT PROFILE

The district serves approximately 9,750 students in western Riverside County, largely covering the city of Menifee and some of the surrounding areas. District facilities include nine elementary schools, three middle schools, and one preschool.

STABILIZING OPERATIONS

The district's operations have begun to stabilize after several years of increasing pressure. Unaudited results for fiscal 2015 reflect a small operating surplus, and multi-year projections through fiscal 2018 show continuing balance.

Management projects draws on fund balance in fiscals 2016 and 2017 due to spending of restricted revenues on one-time technology projects and deferred maintenance. Unrestricted fund balance is projected to fall close to the state's 3% minimum requirement ($5.4 million) over this period, although the district has frequently out-performed its forecasts.

Key challenges to ongoing operating balance include pension contribution increases and rising labor demands. Management has included expenditure increases for these items in its multi-year projections, but growth above assumed levels could challenge the district's financial flexibility.

REVENUE GROWTH

Ongoing strong enrollment gains have generated additional per-pupil revenue for the district and helped to offset rising expenses. Management estimates enrollment growth at 4% in fiscal 2016 and has conservatively estimated growth at 2% in fiscals 2017 and 2018.

Improved state finances have also benefited the district. Management reports that the district is not eligible for concentration funding under the Local Control Funding Formula due to its relatively low unduplicated count (46%), but state revenues have increased in line with an improving economy.

IMPROVING ECONOMY

The local economy remains somewhat challenged but has recorded notable improvements over the past several years. Employment levels in the city of Menifee increased at rates well above the state in 2013 and 2014, resulting in a corresponding decline in unemployment. Unemployment rates remain elevated despite these gains at 9.6% in 2014, as compared to 7.5% for the state. Median household incomes for Menifee are close to the state average.

The district's AV has shown steady increases over the last four years, supported by new development and a recovering housing market. Further growth appears likely based on rising home values; Zillow Group reports 5.1% growth year-over-year for Menifee as of November 2015.

ABOVE AVERAGE OVERALL DEBT LEVELS

The district's overall debt burden is above average at 6.4% of AV. The district's direct debt comprises a relatively small portion of the overall debt burden at 0.8% of AV. Future capital needs include several additional schools over the next five to six years to address enrollment growth. Voter approval of new debt would likely be required to finance such projects, but potential new borrowing is not expected to materially affect the district's debt profile.

Carrying costs for retiree benefits and debt service were a modest 8.8% of general fund expenditures in fiscal 2014 but will be pressured by planned pension contribution increases and ongoing growth in debt service requirements over the next several years.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995917

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995917

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com