[February 21, 2013]

Fitch Affirms Atwater Elementary School District, CA's $1.8MM GO Bonds at 'AA-'; Outlook Stable

Fitch Ratings has affirmed its 'AA-' rating on the following outstanding general obligation (GO) bonds issued by Atwater Elementary School District, CA (News - Alert).

--$1.8 million GO bonds, election 2004, series A.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's strong financial profile reflects annual operating surpluses, healthy reserves, a good degree of remaining financial flexibility, and management's conservative financial policies and practices.

VERY WEAK ECONOMY: The local economy is weak with a concentration in agriculture, a high unemployment rate, limited job growth, and below average wealth levels.

VULNERABLE, CONCENTRATED TAX BASE: Assessed value (AV) contracted by 30.4% from fiscal 2008 through 2013 with additional declines likely given the weak state of the local economy. The district's tax base reflects the area's concentration in agriculture.

MIXED DEBT PROFILE: Debt ratios are expected to remain low to moderate with no debt issuance plans. However, outstanding debt amortizes at a very slow rate.

RATING SENSITIVITIES

INCREASED DEBT LEVELS: Increased debt levels from moderate to above average through either continued AV declines or unanticipated debt issuances would likely lead to a downgrade.

FINANCIAL WEAKENING: Maintaining a strong financial profile is necessary to retain the current rating given other credit weaknesses, including the weak local economy.

CREDIT PROFILE

The district provides public education for grades kindergarten through eight to approximately 4,400 students in Merced County. Located in California's San Joaquin Valley, approximately nine miles northwest of downtown Merced, the district covers approximately 50 square miles and includes nearly all of the city of Atwater and some surrounding unincorporated areas.

STRONG FINANCIAL PROFILE

The district's financial performance remained solid in fiscal years 2011 and 2012 with operating surpluses (after transfers) of approximately $493,153 (1.4% of spending) and $1.1 million (3.2%), respectively. Financial results were buoyed by a recent trend of increasing enrollment and by the continuing impact of the district's proactive expenditure reductions in fiscals 2009 and 2010, which reduced staffing levels and healthcare benefits.

The unrestricted general fund reserve (combined committed, assigned, and unassigned balances combined) increased in fiscals 2011 and 2012 with an ending balance of $9.8 million or a healthy 28.2% of spending. Reserve levels are projected to remain at healthy levels despite a projected draw on reserves of up to $720,000 in fiscal 2013, as the district cash funds deferred capital needs.

CONSERVATIVE FINANCIAL PRACTICES

Fitch views management's financial policies and practices as a credit strength. Budgeting practice are conservative, as demonstrated in the district's annual outperformance of budgetary projections. In addition, the district's 15% unrestricted fund balance policy is viewed positively as financial reserves provide an important cushion given the state's history of volatile and uncertain funding levels.

FINANCIAL FLEXIBILITY

The district's financial profile is expected to remain strong based on the district's good degree of remaining expenditure flexibility and the prospect of increased state funding. The district retains the flexibility to increase class sizes, reduce school days, and make other spending adjustments.

In addition, revenue pressures 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. Actual funding will not be determined until the state passes its budget this summer.

WEAK ECONOMY; CONTRACTING TAX BASE

The local economy is very weak. Historically reliant on agribusiness, Atwater's economy has diversified to some extent due to its good access and proximity to the city of Merced and the University of California, Merced. However, Atwater's November 2012 unemployment rate was notably higher at 16% than comparable state (9.6%) and national (7.4%) averages. Wealth levels also appear to be well below average with per capital income at 64% of the state's average and approximately 85% of the student body eligible for the free/reduced school lunch program.

The district's tax base reflects the area's agricultural concentration with seven of the top 10 property tax payers from agricultural and food processing industrial sectors. The district's top 10 taxpayers comprise approximately 17.4% of total AV.

The district's AV declined by 7.5% in fiscal 2013 bringing the cumulative AV loss since fiscal 2008 to a sharp 30.4%. Fitch views additional AV losses as likely given the weak economic conditions in the area, although fewer foreclosures may mitigate future declines to some degree.

MODERATE DEBT BURDEN

The overall debt burden remains moderate at 2.9% of AV despite the significant AV contraction. Outstanding direct debt amortizes at a very slow rate with approximately 17.8% of principal retired within 10 years.

The district has no plans for additional debt issuance and has budgeted to use general fund reserves and accumulated restricted funds towards deferred capital needs, including roof repairs and the renovations of two existing school sites. The district does not expect to have significant capital needs following completion of the improvements scheduled for fiscal 2013.

The district's fiscal 2012 contribution amount for other post-employment benefits and pensions were manageable at 7.5% of general fund spending. Future increases in contribution rates, however, appear likely with the relatively weak funding levels of the OPEB plan and the statewide pension plans.

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 (News - Alert) Global Insight, 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 (News - Alert) 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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