Fitch Affirms Oroville Union High School District, CA's GOs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed Oroville Union High School District, California's (the district) general obligation (GO) bonds as follows:

--$19.4 million outstanding GO bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY:

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

SENSITIVITY/RATING DRIVERS:

LIMITED ECONOMY: The district is geographically isolated and the area's economy is limited. Most economic indicators are below state and national averages.

SOUND FINANCIAL POSITION: The district has maintained healthy reserves despite recent revenue declines stemming from reduced state per-pupil funding and enrollment declines. Carrying costs for long-term obligations are affordable and capital needs are limited.

STRUCTURAL CHALLENGES: The district faces an operating deficit in 2013 and management hopes to restore structural balance in 2014 through a combination of expenditure reductions and state revenue increases. Fitch believes expected continued enrollment declines will remain a budget pressure.

REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of Proposition 30 by California voters (increasing income and sales taxes temporarily to fund education) removes the threat of mid-year funding cuts for the district. In addition, improved state finances appear likely to boost school funding in fiscal 2014 and help restore revenues that were deferred during the recent recession.

WHAT COULD TRIGGER A RATING ACTION

An inability to restore structural balance, resulting in operating deficits beyond fiscal 2013, would increase downward pressure on the rating.

CREDIT PROFILE:

The district encompasses approximately 723 square miles of the northern Sacramento Valley and includes the city of Oroville and portions of unincorporated Butte County. Total student enrollment is approximately 2,500 across two comprehensive high schools and two smaller institutions.

LIMITED ECONOMY WITH CONTINUED WEAKNESS

The district is isolated from major population centers and its service-based economy relies on the city of Oroville's role as the county seat. Additional economic contributors include agriculture, light manufacturing, and tourism.

Wealth and income levels for the district are well below state and national averages, consistent with the district's rural economy. The county's unemployment rates have traditionally exceeded state and national averages, and remained high at 11% as of October 2012. Employment recovery following the recent recession has been notably weaker than statewide results. October 2012 employment levels remained 8% below pre-recession peaks and total employment for 2012 was flat relative to the prior year.

The district's tax base has proven more resilient than its overall economy, likely due to the buffer provided by Proposition 13. Taxable assessed values (TAV) declined by 9% between fiscals 2009 and 2013 following a 50% increase over the prior four years. Tax base concentration is minimal as the top 10 taxpayers account for a low 4% of TAV.

SOUND FINANCIAL POSITION WITH LONG-TERM CHALLENGES

The district finished fiscals 2011 and 2012 with strong operating surpluses, raising unrestricted fund balance to $4.5 million, a healthy 20% of general fund spending. A planned drawdown of $1.2 million in restricted fund balance for fiscal 2013 reflects a structural imbalance resulting from revenue declines in combination with expenditure growth. Management expects to address this imbalance in its 2014 budget through a combination of spending reductions and anticipated increases in state revenues. Such efforts will be informed by the district's policy to maintain reserves for economic uncertainty at 17% of expenditures, as compared to a minimum state requirement of 3%.

Enrollment declines have been a contributing factor in the district's recent structural imbalance and present a long-term challenge for management. A majority of the district's revenues are apportioned on a per-pupil basis, resulting in ongoing revenue losses as student populations decline. While the district's reserve policy is strong, Fitch believes it is appropriate given the small nominal amount of reserves, the limited economy, and declining enrollment.

REDUCED RISKS FROM STATE DISTRESS

The district's efforts to restore structural balance will be aided by recent improvements in state funding prospects. The passage of Proposition 30 by California voters in November 2012 removes the threat of new cuts in the current fiscal year, and increased funding levels under Proposition 98 appear likely for fiscal 2014 and beyond. Fitch believes district finances will continue to be challenged despite these improvements, but risks related to the state's finances appear greatly reduced as compared to one year ago. In total, direct state aid and local revenues subject to state revenue limit procedures account for more than 85% of general fund support.

LOW DEBT LEVELS AND MANAGEABLE CARRYING COSTS

Overall debt levels for the district are low at 1.8% of TAV and $1,093 per capita. Carrying costs for debt service and retirement benefits are affordable at approximately 13% of non-capital spending in 2012, while capital needs are minimal.

The district participates in two state-sponsored employee pension plans and is likely to face ongoing increases in contribution rates to address current low funding levels. Funding for CalSTRS is a particular concern, as current contribution rates are substantially below the level required to amortize existing obligations. OPEB costs are funded on a pay-as-you-go-basis, resulting in a growing liability for these commitments.

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, Zillow.com, 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

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Contacts:

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94104
or
Secondary Analyst
Scott Monroe
Director
+1-415-732-5618
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com
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