TEXT-Fitch affirms for El Rancho USD, Calif. GOos at 'A+'

Thu Feb 28, 2013 12:30pm EST

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Feb 28 - Fitch Ratings has affirmed the following rating for El Rancho
Unified School District (the district):

--$13.8 million general obligation (GO) series 2003A, 2004, 2005, and 2007 bonds
at 'A+';

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: Despite several years of structural imbalance, the
district continues to retain adequate reserves and has achieved favorable labor
concessions that should support structural balance over the near term. The
district has been mitigating cash shortfalls due to state deferrals by issuing
short term debt.

MANAGEABLE LONG TERM LIABILITIES: Carrying costs are currently low but are
expected to increase due to ascending debt service resulting from capital
appreciation bonds (CABs) and poorly funded state pension plans.

MIXED SOCIOECONOMIC PROFILE: The district benefits from its location in the
broader Los Angeles County employment market. Per capita income levels and
unemployment rates are weaker than national averages. Median household income is
about equal to the national average.

REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of Proposition 30
tax increases by California voters removed the threat of mid-year funding cuts
for the district in fiscal 2013. The proposed fiscal 2014 state budget, if
adopted, would present a more favorable near term fiscal outlook for K-12 school
districts.

RATING SENSITIVITIES

REVERSAL IN FINANCIAL PROGRESS: Fitch expects the district to remain challenged
in achieving financial equilibrium given its revenue raising constraints and
declining enrollment. A reversal in the district's current level of financial
flexibility and/or active expense management practices would cause negative
rating pressure.

CREDIT PROFILE

The district serves about 10,000 students in the city of Pico Rivera (the city;
implied GO rated 'A+' by Fitch), located about eleven miles east of downtown Los
Angeles.

WEAK FINANCIALS EXPECTED TO STABILIZE IN FISCAL 2014

Fiscal 2012 district operations resulted in a $3.4 million net deficit due to
revenue declines which were not fully offset by expenditure cuts. Reserve levels
remain adequate, with fiscal 2012 unrestricted fund balance (sum of the
unassigned, assigned and committed funds) at 7.0% of total general fund
spending, although down from 12.2% the year prior.

The passage of state Proposition 30, which temporarily increases state income
and sales taxes, allowed the district to avoid a budgeted $4.5 million cut in
state aid in fiscal 2013. The district's fiscal 2013 first interim report (dated
12/14/2012) shows a $2.6 million net operating deficit, but management expects
unrestricted ending fund balance levels to remain adequate, at 6.9% of total
general fund spending.

Fitch believes the district is well poised to achieve structural balance in
fiscal 2014 due to planned expenditure cuts over the next two fiscal years. For
fiscal 2013 and 2014, the district achieved labor concessions of $16 million in
aggregate, representing recurring savings equal to 18.1% of fiscal 2012 general
fund spending. Concessions include staff reduction, furlough days, step and
column freezes, and increased employee contributions for health and welfare. The
district also has flexibility to decrease the number of school days or keep
staff vacancies unfilled, if necessary.

PRESSURED LIQUIDITY

The district has been issuing tax revenue anticipation notes (TRANs) to mitigate
cash shortfalls due to state funding deferrals. In fiscal 2012, the district
issued $15.0 million in TRANs and plans to issue about $21.0 million in the
current fiscal year, totaling 25% of 2012 general fund revenues. Fitch views the
growing trend of cash flow notes borrowing as a credit concern but expects the
district's cash position to improve at least modestly over the next few years.
Fiscal 2013 should benefit from the passage of Proposition 30 and the resultant
paydown of some deferrals. The governor's proposed fiscal 2014 budget includes
an increase in funding as well as a plan to paydown more deferrals over the next
four years.

LONG-TERM LIABILITIES MANAGEABLE BUT GROWING

Overall debt levels are moderately low at $1,728 per capita and 2.8% of assessed
value. However, 24% of the district's $67 million direct debt is in the form of
capital appreciation bonds, which are structured with increasing debt service.
As a result, amortization rates are very low.

Carrying costs for debt service, pension and other post-employment benefit
(OPEB) costs are currently manageable but will continue to rise given the rising
debt service associated with CABs and the poor funded ratios for both state
pension plans. Total carrying costs, calculated by dividing fiscal 2012 debt
service, pension, and OPEB costs by governmental (less capital) fund spending,
equal a low 10.9%.

BELOW AVERAGE SOCIOECONOMICS

Median household income in 2011 equals 91% and 106% of state and national
averages, respectively, but per capita money income is below average at 63% and
67% of state and national averages, respectively. The city's unemployment rate
improved to 9.2% in November 2012 (below the state's 9.6%) from a year prior
largely due to a labor force decline. Population in the district and the city
has declined in recent years, which district management has attributed to
growing costs of living and fewer children per household. Educational attainment
is lower than national levels. Assessed value has remained relatively stable.

MIXED MANAGEMENT PROFILE

Fitch views management's successful negotiation of meaningful large concessions
as a credit positive but Fitch has some concerns about long term financial
planning due to current vacancies in key positions. Management has reversed its
2011 position on future bond issuance, now indicating no imminent plans to tap
its $47 million outstanding GO authorization.

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, 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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