TEXT-Fitch affirms Merced UHSD, Calif. GOs at 'AA-'
Jan 23 - Fitch Ratings affirms the following rating for Merced Union High School District, CA's (the district) general obligation (GO) bonds: --$70.8 million GO bonds at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited ad valorem tax on all taxable property within the district. SENSITIVITY/RATING DRIVERS HEALTHY FINANCIAL PROFILE: The district has strong reserve levels and ample financial flexibility. LIMITED ECONOMY: The area's agricultural industry drives low wealth levels and high unemployment. The University of California, Merced (UC Merced) diversifies the local economy. MODERATE LONG-TERM LIABILITIES: The district has a low overall debt burden, but amortization is somewhat slow. Pensions and other post-employment benefits (OPEB) are not expected to pressure the credit due to the district's low carrying costs. REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of Proposition 30 by California voters (increasing income and sales taxes temporarily to fund education) removes the threat of mid-year funding cuts for the district. CREDIT PROFILE Located in Merced County in the northwest portion of San Joaquin Valley, Merced Union High School District serves about 10,000 students. The city of Merced had a 2010 census population of 78,960 and is approximately 110 miles south of Sacramento. STRONG FINANCIAL PROFILE The district's strong financial management and performance is an important mitigant to the limited economy. The district has historically maintained structural balance and strong reserve levels. In fiscal 2011, GASB 54 consolidated existing discretionary special funds with the general fund. Unaudited fiscal 2012 unrestricted fund balance (sum of the unassigned, assigned and committed funds) is a robust 36% of total general fund spending. With the passage of state Proposition 30, which temporarily increases state income and sales taxes, districts were spared mid-year funding cuts in fiscal 2013. The district's fiscal 2013 budget had assumed that Proposition 30 would fail; thus, revenues were budgeted 5% lower than fiscal 2012 budgeted revenues. The first interim report adjusts revenue projections back upwards now that Proposition 30 has passed. However, the first interim report still projects a $2 million operating deficit due projections that enrollment will decrease by 2%, which is conservative relative to recent trends. Fitch expects that the district would at least partially mitigate any reasonable decrease in enrollment through its expenditure flexibility. The district retains the ability to increase class sizes or shorten the school year, if necessary. Historically, management has also under-spent budgeted supply expenditures by 25%-50%. LIMITED ECONOMY SOMEWHAT MITIGATED BY UC MERCED The local economy, which has been historically dependent on agriculture, has become increasingly diversified due to UC Merced's growing presence. UC Merced is a major public university that has created jobs, driven population growth, and increased local investment. The university has contributed $650 million to the San Joaquin Valley economy since the onset of university operations. UC Merced's presence had also contributed to a speculative property boom that sharply reversed course during the recession. Taxable assessed value, which grew during the construction and opening of UC Merced, peaked in 2008 and declined over the last several years. Assessed value appears to have stabilized in fiscal 2013 and based on recent sales data, Fitch expects the housing market continue to improve modestly. WEAK SOCIOECONOMICS DRIVEN BY AGRICULTURAL ECONOMY Wealth levels are low and unemployment is high. Median household income in 2011 equals 67% and 78% of state and national averages, respectively. Merced County's unemployment rate of 14.7% in October 2012 is well above both state and national levels at 9.8% and 7.5%, respectively. Educational attainment levels are below national averages, with only 68% of the population graduating from high school and 14% receiving a bachelor's degree. MANAGEABLE DEBT AND LONG-TERM LIABILITIES Overall debt levels are a low $1,454 per capita and 2.5% of assessed value. Unaudited 2012 debt service, funded from property tax overrides, was equivalent to 4% of general fund spending. A portion of the district's outstanding bonds are capital appreciation bonds (CABs), resulting in a somewhat slow amortization rate of 44% in 10 years. The district participates in two state pension plans, the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS). In fiscal 2011, the district contributed 100% of the required contribution equal to a manageable 5.2% of total general fund spending. CalPERS contributions are actuarial, but the CalSTRS contributions are statutory and have been below the actuarially required contribution for several years, contributing to its low funding level. The district has controlled its OPEB costs prudently. In fiscal 2011, the district over-funded its OPEB annual required contribution of $1 million, which represented 1.1% of total general fund spending. Current OPEB liability is a very manageable $839,000. Total carrying costs, calculated by dividing debt service, pension, and OPEB costs by governmental spending, equals a low 10.7%. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 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, UC Merced, and 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 U.S. Local Government Tax-Supported Rating Criteria