TEXT - Fitch revises California's Moreno Valley USD rating outlook

Wed Feb 13, 2013 3:04pm EST

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Feb 13 - Fitch Ratings has affirmed its 'AA-' rating on the following Moreno
Valley Unified School District (the district), CA's general obligation (GO)
bonds: 

--$4.7 million GO bonds, election 2004, series A;
--$38.7 million GO refunding GO bonds, series 2007.

The Rating Outlook is revised to Negative from Stable.

SECURITY 

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

KEY RATING DRIVERS

STRUCTURAL IMBALANCE: The Negative Outlook reflects the district's ongoing 
fiscal imbalance reflected in operating deficits. Significant expenditure 
reductions over the past few years have left the district with a relatively 
limited degree of remaining expenditure flexibility. However, revenue pressures 
may ease somewhat in fiscal 2014 if proposed state funding increases are 
enacted.

ADEQUATE RESERVES: The district's unreserved fund balance was satisfactory at 
13.7% of spending at the end of fiscal 2012 and is expected to remain adequate 
in fiscal 2013 despite a modest projected draw. 

WEAK ECONOMY; STABILIZING AV: The local economy remains weak with high 
unemployment, limited job growth, and below average wealth levels. Taxable 
assessed value (AV), however, appears to be stabilizing with a return to growth 
in fiscal 2013. 

RISING DEBT PROFILE: Overall debt ratios are moderate but will likely rise as 
the district pursues a new high school project. Carrying costs for long term 
liabilities is manageable and amortization is above average. 

RATING SENSITIVITY: 

REDUCED FINANCIAL CUSHION: Maintenance of adequate reserve levels is fundamental
to the rating given the weak economy and growing debt burden. The inability to 
correct the ongoing structural imbalance will likely result in a downgrade.

CREDIT PROFILE

The district provides public education for grades kindergarten through 12 to 
approximately 34,000 students in Riverside County. The district's boundaries 
cover approximately 43 miles and include portions of Moreno Valley and Riverside
City.

ONGOING STRUCTURAL IMBALANCE

The district's financial profile has been a key credit positive but appears 
pressured by an ongoing structural imbalance. The unrestricted general fund 
reserve (combined committed, assigned, and unassigned balances under GASB 54) 
was $38.6 million or a satisfactory 13.7% at the end of fiscal 2012. Reserve 
levels should remain adequate at the end of fiscal 2013, given the current 
projected operating deficit (after transfers) of $3-$4 million, but downward 
rating pressure is likely absent restoration of financial balance in fiscal 
2014. 

Financial performance softened in fiscal 2012 with a $6.1 million (2.2% of 
spending) operating deficit compared to a relatively modest operating deficit of
0.9% in fiscal 2011. Significant expenditure reductions, including reduced 
school days, staff furloughs, cuts to transportation funding, and increased 
class sizes have reduced the impact of funding reductions. However, Fitch views 
management's remaining expenditure flexibility as relatively limited given the 
significant reductions already made. 

Financial pressure may ease somewhat in fiscal 2014 if revenue increases are 
realized. The governor's proposed fiscal 2014 budget increases K-12 education 
funding and reduces the amount of funding deferrals. While the district's 
financial balance may be restored by the proposed funding increases, actual 
funding will not be determined until the state passes its budget this summer. 

WEAK ECONOMY; STABILIZING TAX BASE

The local economy remains weak with relatively high unemployment rates and below
average wealth levels. In October 2012, the unemployment rates in Moreno Valley 
and Riverside County were high at 13.9% and 12%, respectively. Wealth levels in 
Moreno Valley are below average with per capita income at 62% of the California 
average. 

Reflecting a stabilizing real estate market, including fewer home foreclosures, 
the district's AV grew a modest 3.1% in fiscal 2013 and was flat in fiscal 2012.
While AV remains 15.6% below its fiscal 2009 peak, Fitch views the return to 
stability as a credit positive.

MIXED DEBT PROFILE

The district's debt profile remains mixed. Overall debt ratios (including 
accreted interest) are a moderate $2,804 per capita and an above average 4.5% of
fiscal 2013 AV. 

The district has tentative plans to seek voter authorization in June 2014 for 
approximately $200 million in additional GO debt to finance a new high school, 
which would double the district's debt load if issued in full. However, 
outstanding direct debt amortizes at an above average rate with 61% of principal
(including accreted interest) retired within 10 years, providing the district 
with some additional debt capacity.

OPEB AND PENSION PRESSURES

The district's fiscal 2012 contribution amount for other post-employment 
benefits and pensions were manageable at 7.7% of general fund spending. Future 
increases in contribution rates, however, appear likely with the relatively weak
funding levels of the OPEB plan (7.4%) and the statewide pension plans. Carrying
costs for debt service, pension and OPEB are manageable at 12% of governmental 
fund (net of capital) spending.
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