Fitch Affirms Fullerton School District, CA's GOs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the following Fullerton School District, California (the district) general obligation (GO) bond ratings:

--$12.5 million series 2002A and 2002B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The district's operating results have been largely balanced across a period of economic and funding weakness. Reserves remain sound.

REVENUE VOLATILITY: The district has little revenue raising flexibility and is dependent on the state of California for funding, requiring it to manage significant revenue volatility and uncertainty. The state's funding environment has improved alongside its economic progress with voter approval of additional taxes to support education reducing pressure on the district's budget.

SOLID ECONOMY, TAX BASE: The district is well located in the large and diverse Orange County employment market. Incomes are solid, and the poverty rate is below average. The tax base is diverse and stable with very modest declines in assessed value (AV) during the housing downturn.

LOW DEBT BURDEN: The district maintains a healthy debt profile with low total debt on a per capita basis and relative to the district's AV. The district has no plans to issue additional bonded debt.

PENSION PRESSURES RISING: The district participates in the poorly funded California State Teachers Retirement System (CalSTRS) and is likely to face increased pension costs over time. Other post-employment benefit liabilities are very manageable.

RATING SENSITIVITIES

STABLE RATING: The rating is sensitive to shifts in fundamental credit characteristics, particularly the financial profile. The Stable Outlook reflects Fitch's view that such shifts are unlikely.

CREDIT PROFILE

Fullerton School District serves a 26 square mile area that primarily encompasses Fullerton City in northwest Orange County. The district operates 20 schools with a total enrollment of more than 13,500 students, educating children from kindergarten to 8th grade.

STRONG FINANCIAL PROFILE

Financial performance has been strong, despite significant state revenue weakness following the recent recession due to good expenditure discipline. The district posted operating surpluses in four of the past five years through fiscal year 2012 with only a modest draw on reserves in fiscal year (FY) 2010. California's Proposition 13 property tax limitations significantly limits the district's ability to raise local revenues, leaving its revenues largely dependent on state per pupil funding, which rises and falls with highly cyclical state revenues. The district managed this volatility well in the recent downturn by paring expenditures as needed to maintain budget balance, reducing spending by 10.8% between FYs 2008 and 2011. With stress in the state funding environment easing, expenditures are rising again, but the district expects to maintain balanced operations over the next three years. The unrestricted general fund balance was strong at $25.3 million, or 24.9% of general fund spending in fiscal 2012.

SOUND ECONOMIC PROFILE

The local economy is fundamentally sound, and the district benefits from the large and diverse economies of Orange County and the greater Los Angeles area. Median household income is solid at 135% of national level, albeit lower than the median for Orange County. The individual poverty rate is below state and national rates at 12.6%. The non-seasonally adjusted unemployment rate declined to 6.4% in April from 8.2% a year earlier. The jobless rate was below the national average of 7.1% in April, but tends to track the national rate closely.

The local real estate market has generally outperformed the state, reflecting the mature nature of the housing stock, above average wealth and a relatively strong job market. AV grew by a modest 1.2% to $12.9 billion in 2013. The district only experienced one year of modest tax base decline during the housing downturn (a 1% drop in AV in 2010). The tax base is diverse and largely residential. The top 10 taxpayers account for just 4.6% of AV.

MANAGEABLE DEBT PROFILE

The district's debt burden is low. Overall direct and overlapping debt is low at $1,863 per capita and 1.7% of taxable AV. The district does not have any critical capital needs and has no plans to issue additional bonded debt in the near term, suggesting debt ratios will decline gradually over the next few years. Amortization is solid with 57% of debt repaid within 10 years.

Pension payments are a growing burden on the district. The district participates in the California Public Employees' Retirement System (CalPERS) as well as the poorly funded CalSTRS pension system. 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. The district's unfunded accrued actuarial other post-employment benefit (OPEB) liability is very low at $18.4 million, or 0.1% of AV.

Carrying costs for debt service, pension and OPEB are affordable at 10.4% of governmental (less capital) fund spending, but are expected to rise given CalSTRS' poor funded ratio.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, 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=793808

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Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1 415-732-5617
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Monroe, +1 415-732-5611
Director
or
Committee Chairperson
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1 415-732-5617
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Monroe, +1 415-732-5611
Director
or
Committee Chairperson
Marcy Block, +1 212-908-0239
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com