Fitch Affirms Madera USD, CA's GOs at 'AA-' and COPs at 'A+'; Outlook Stable

Fitch Ratings affirms the following general obligation (GO) bonds and certificates of participation (COPs) of the Madera Unified School District, CA (the district):

--$72.5 million GO bonds at 'AA-';

--$16.2 million COPs at 'A+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by an unlimited pledge of ad valorem tax on all property within the district. The COPs are secured by lease rental payments subject to abatement with a covenant to budget and appropriate. The leased asset is a high school built in 1996 and expanded in subsequent years.

KEY RATING DRIVERS

LIMITED ECONOMY: The district's economy is concentrated in agriculture and related industry, with low wealth and income levels, high poverty rates, and elevated unemployment. Employment levels and home values declined sharply during the recent downturn but have shown notable improvement in the past two years.

SOUND FINANCIAL POSITION: The district has maintained healthy reserves despite recent revenue pressures stemming from cuts in state per-pupil funding and has retained adequate liquidity.

IMPROVED REVENUE PROSPECTS: State funding provides the majority of district revenues, and growth prospects have improved recently with the general improvement in state finances and economy. Revenue gains are also supported by the state's adoption of the Local Control Funding Formula (LCFF) in 2013 and voters' 2012 approval of temporary tax increases under Proposition 30.

MANAGEABLE LONG-TERM OBLIGATIONS: Carrying costs for debt service and employee retirement benefits are affordable, but pension costs will likely rise over the next several years to address substantial unfunded liabilities.

RATING SENSITIVITIES:

ECONOMY LIMITS RATING: The district's sound financial position offsets its limited economy and dependence upon state revenues, credit factors that Fitch believes limit the rating to its current level.

CREDIT PROFILE

The Madera Unified School District is located in California's Central Valley, 24 miles northwest of the city of Fresno, and encompasses the city of Madera and adjacent unincorporated portions of Madera County. While agriculture has long been a mainstay of the Central Valley region, the economy has experienced increasing diversification along with steady population growth. The district has an enrollment of approximately 20,000 students in 27 schools, with a total population of 88,000.

LIMITED ECONOMY

The district's economy is concentrated in agriculture and related industry, and wealth and income levels are correspondingly low. Median household incomes are 71% and 83% of state and national averages, respectively, and poverty rates are elevated.

Local employment and housing markets were hit hard during the downturn, but have seen notable recent improvements. Employment growth of 3.3% in the past year exceeded the state average and was well above the national rate of 1.4%, while home values reported by Zillow.com increased by almost 22% year over year. The unemployment rate remained elevated at 14.8% as of August 2013, and home values are still 50% below pre-recession peaks, reflective of continuing weakness in the local economy despite recent gains.

Taxable assessed values (TAV) increased by 5.9% between 2011 and 2014 following a 15% decline during the recent recession. Non-residential properties, including industrial and agriculture parcels, account for nearly half of the district's tax base, helping to stabilize TAV despite continuing volatility in the local housing market.

SOUND FINANCIAL POSITION

The district maintained a sound financial position throughout the recent downturn and unrestricted fund balance was equal to a strong 27.6% of general fund spending at the end of fiscal 2013. These results were achieved despite a 12% revenue decline between 2009 and 2012, which the district addressed by reducing approximately 200 positions, in addition to implementing furloughs. Cash levels are adequate and have been strengthened by the state's recent repayment of past revenue deferrals.

IMPROVED REVENUE PROSPECTS

State funding provides the majority of district revenues, and growth prospects have improved recently with the general improvement in state finances. Revenues for 2014 are projected to be 11% higher than 2012 levels, with further gains anticipated over the next several years. Approximately 87% of the district's students qualify for free or reduced cost school lunches, which is expected to result in the doubling of the district's per pupil revenues under the LCFF over the next eight years.

A slowdown in state revenue growth could delay LCFF funding increases, but the district appears likely to disproportionately benefit from this program regardless of its implementation schedule. Management plans to use most new revenues to add back teaching positions lost during the recent downturn.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt levels for the district are moderate at 2.5% of TAV and per capita debt levels are a low $1,361. Amortization is below average, with 35% of principal and accreted interest on capital appreciation bonds repaid in 10 years. The district is experiencing moderate enrollment growth and will likely need to expand school facilities within the next several years but retains some proceeds and bonding capacity from a prior GO authorization.

The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. Funding for CalSTRS is a particular concern, as statutory contribution rates remain well below the level required to amortize existing obligations. In addition, the district offers other post-employment benefits (OPEBs) and had an unfunded OPEB liability of approximately $26.6 million (0.6% of TAV) at the end of fiscal 2013. Carrying costs for debt service and retirement benefits are currently low (9.5% of governmental expenditures in 2013) but are likely to rise over the next several years.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816371

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