TEXT-Fitch affirms Reef-Sunset School Financing Auth, Calif. GOs at 'A'

Thu Feb 28, 2013 1:34pm EST

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Feb 28 - Fitch Ratings has affirmed Reef-Sunset School Financing Authority,
California's general obligation bonds (GOs) as follows.

--$6.9 million GO bonds, series 2007 at 'A'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

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

KEY RATING DRIVERS

OUTLOOK REVISED TO STABLE: The Outlook revision to Stable reflects the Reef
Sunset Unified School District, California's (the district) recent debt issuance
that substantially slowed principal amortization and somewhat weaker than
anticipated general fund performance.

SATISFACTORY FINANCIAL OPERATIONS: The general fund balance is sound, liquidity
is good, expenditure flexibility is ample, and the outlook for state funding has
improved materially in recent months.

FINANCIAL VULNERABILITIES REMAIN: The district is significantly exposed to
volatile state funding despite recent improvements, management expects fund
balance will be drawn down for a third consecutive year in fiscal 2014, and
state pension contribution rates likely will rise significantly in future years.

WEAK ECONOMY: The local economy is highly concentrated, geographically isolated,
and suffers from high unemployment and low income levels. With a large oil and
gas segment, assessed valuation (AV) has been fairly stable, benefitting from
hikes in oil prices.

WEAKENED DEBT PROFILE: The district's debt profile deteriorated when its recent
GO debt issuance dramatically slowed principal amortization. Amortization likely
will slow further when the district issues its final GO bonds around fiscal
2017. However, the net debt burden is moderate and capital needs are manageable.

SATISFACTORY MANAGEMENT PRACTICES: The district's fund balance policy is double
the state minimum, and the district benefits from the community's strong history
of support for GO authorizations. Like all California districts, the district is
subject to strong financial reporting, forecasting, and oversight provisions.

RATING SENSITIVITY

If the district closes its structural operating deficit and maintains a strong
financial cushion, there could be positive rating action.

CREDIT PROFILE

The district is located in northwest Kings County near interstate 5, about 70
miles southwest of Fresno and 85 miles northwest of Bakersfield. It serves about
2,400 students in grades K-12 in the cities of Avenal and Kettleman.

The regional economy is dominated by oil, agriculture and state prisons. About
one-third of the estimated district population of 17,000 is in the Avenal state
prison, which is also one of the largest employers in the area. Despite the
prison's large presence, management reports that the large majority of local
residents work in agriculture.

WEAK LOCAL ECONOMY

County economic data is weak (data is not available for Avenal) as is common for
agriculturally-concentrated regions. Unemployment is high at 13.9% and income
levels are very low. All of the district's student population are eligible for
free and reduced price lunches.

The district's AV levels generally have fared well despite the weak local
economy due to commodity price gains in recent years. AV fell a substantial 12%
in fiscal 2010 but recovered to record levels the next year and increased
moderately in both fiscal years 2012 and 2013. Despite this strong performance,
Fitch expects AV levels to continue to be susceptible to the volatility of the
energy sector.

Fitch's concerns about AV volatility are partially mitigated by the state's
Proposition 98 funding formula. This formula mandates a minimum per pupil level
of district funding. To the extent that local tax base contraction results in
lost local property tax revenues, the state is obligated to replace those
revenues up to the minimum funding level. However, state revenues have been
subject to significant deferrals in recent years that the state has only
recently begun to pay back.

ADEQUATE FINANCIAL PERFORMANCE TO DATE

The district implemented various expenditure reductions during the funding
downturn, enabling it to grow its general fund balance each year from fiscal
2009-2011. General fund operations produced a $979,000 deficit in fiscal 2012,
however, due to a number of un-planned one-time expenditures on technology
upgrades, travel, and training. The total and unrestricted general fund balances
for fiscal 2012 ended at still sound levels of $6.8 million (26.8% of
expenditures and transfers out) and $4.9 million (22.2%), respectively. The
district's first interim report includes projections of ongoing deficits ranging
from $826,000 to $1.2 million through fiscal 2015. However, the district
historically has out-performed such projections, which are based on conservative
projections.

The passage of Proposition 30, state-wide temporary tax increases, prevented
significant mid-year state funding reductions from occurring, and likely will
result in higher out-year revenues. Further, the governor's budget proposes to
increase Proposition 98 funding (the district's primary revenue source) 5% next
year, and to phase in a new funding formula over seven years that would increase
funding for lower income and English-learning students.

FINANCIAL VULNERABILITIES REMAIN

Depending on future Proposition 98 funding, the district may have to implement
further expenditure reductions to close out-year budget gaps. Fitch believes the
district has a substantial amount of remaining expenditure flexibility,
including the ability to significantly raise class sizes, implement furlough
days, or tap categorical flexibility options. However, political considerations
could make it difficult to implement some or all of these legal options. Also,
the state teachers' pension fund (CalSTRS) contribution rates likely will rise
in future years, and OPEB costs may rise as this benefit is being funded on a
pay-as-you-go basis.

The district's revenues are highly concentrated in volatile state funding that
has been weak and subject to significant deferrals in recent years. Fitch
believes this exposure represents a long-term financial weakness, though the
state funding environment has improved significantly over the past year and
could continue to make progress in fiscal 2014.

DEBT PROFILE WEAKENED

The district's debt profile weakened materially due to a recent GO issuance that
substantially consisted of CABs. This issuance lowered 10-year debt amortization
to a still moderate 41.5% (when final accreted interest is treated as principal)
from a rapid 90% prior to the issuance. The debt profile is also weakened by the
district's participation in poorly funded CalSTRS.

The debt profile benefits from moderate net debt levels equal to $1,880 per
capita, or 3.9% of AV. Also, while the district's identified capital needs are
fully met through its GO bond authorization, the district is currently at the
tax rate cap for new issues. Management expects the remainder of the
authorization to be exhausted around fiscal 2016, and while Fitch does not
believe the issuance will materially increase the district's debt burden, it
could further slow amortization, depending on the structure of the issuance.
Because the district is currently at its tax rate capacity, future issuances
could include substantial use of capital appreciation bonds, which could lower
amortization to slow levels.

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.

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
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