TEXT-Fitch affirms Merced UHSD, Calif. GOs at 'AA-'

Wed Jan 23, 2013 4:09pm EST

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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
FILED UNDER:
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