Fitch Downgrades Merced City School District, California GOs to 'A'; Outlook Stable

NEW YORK--(Business Wire)--
In the course of routine surveillance, Fitch Ratings downgrades Merced City
School District's (the district) $25.5 million in outstanding general obligation
bonds (GOs) to 'A' from 'A+'. The Rating Outlook is Stable.

The downgrade reflects the district's significant economic change and Fitch's
expectation that the economic pressures will continue. Weakness is evidenced by
very high foreclosure and unemployment rates. While the district's financial
position remains sound to date, Fitch expresses concern regarding future
financial flexibility, given the district's declining enrollment and pending
state funding constraints.

The district is located in the economically distressed county of Merced,
California, where April 2009 unemployment reached 20.4% (versus state and
national levels of 11.5% and 9%, respectively). The county's mortgage
foreclosure levels are extremely high and are among the highest in the state and
nation. The declining economic condition has impacted enrollment, which has
fallen from 11,249 in fiscal year 2005 to 10,981 in fiscal 2008, with management
projecting further declines of 100 students per year over the next few years.
These declines could exacerbate the downward pressure on operations caused by
pending state funding reductions. The district encompasses 90 square miles,
serving a large portion of the city of Merced, part of the city of Atwater, and
unincorporated areas of Merced County. The district operates 13 elementary
schools, one charter school and four middle schools.

The district's financial position remains sound due to strong management
practices. During fiscal 2009, management instituted two rounds of layoffs and
significantly reduced expenditures. The district projects using $2.2 million in
reserved general fund balance for operations in fiscal 2009, ending the year
with a still a satisfactory unreserved balance, equaling about 4% of spending.
In recent years the district has elected to contribute funds to a reserve for
post-employment health care costs, which Fitch views as a credit positive and a
source of financial cushion.

The district's debt levels remain low at $1,224 per capita and 1.9% of market
value including overlapping debt. With economic growth halted, the district's
near-term capital needs are minimal.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Jonathan Bodner, 212-908-0803, New York
Amy Doppelt, 415-732-5612, San Francisco
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com

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