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Fitch Affirms El Rancho Unified School District, CA's GOs at 'A+'; Outlook Stable

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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