OREANDA-NEWS. Fitch Ratings has affirmed the following ratings on Sweetwater Union High School District (CA):

--$168.7 million 2016 general obligation (GO) refunding bonds at 'AAA';

--$97 million 2016 GO bonds, election of 2006, series 2016B at 'AAA';

--Long-Term Issuer-Default Rating (IDR) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.

KEY RATING DRIVERS

The 'AAA' bond rating is based on a dedicated tax analysis without regard to the district's financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered "pledged special revenues" in the event of a district bankruptcy. The 'A+' IDR reflects the district's solid economic base, moderate liabilities, and mixed operating performance. The distinction between the 'AAA' rating on the bonds and the 'AA' issuer rating reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.

Economic Resource Base

The district participates in the broad and diverse San Diego regional economy, which has experienced sustained growth in recent years. Population and assessed values have risen steadily and prospects for further growth appear strong.

Revenue Framework: 'a' factor assessment

Revenues have lagged behind U. S. economic performance, in part due to recent enrollment declines. The district's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

The district, with a moderate fixed cost burden, has demonstrated a solid ability to manage spending at times of economic and revenue decline. On average, growth in spending is likely to be in line with revenue growth over time.

Long-Term Liability Burden: 'aa' factor assessment

The district participates in a two adequately funded state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies, resulting in a long-term liability total that is a moderate burden on resources.

Operating Performance: 'a' factor assessment

The district retains expenditure cutting flexibility but its modest reserves could be strained by a cyclical downturn. Fund balances have declined in each of the last five fiscal years but improved outcomes appear likely over the next several years based on recent revenue gains.

RATING SENSITIVITIES

SOLID TAX BASE AND ECONOMY: The 'AAA' general obligation bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.

IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'A+' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to withstand a moderate economic recession.

CREDIT PROFILE

The Sweetwater Union High School District serves an area of 153 square miles in southern San Diego County (IDR of 'AAA'). The total population of the district is approximately 455,000, including the communities of Bonita, Chula Vista, Eastlake, Imperial Beach, National City, Otay Mesa, South San Diego and San Ysidro. The district provides education for grades 7 through 12 and is the largest secondary district in the state, with enrollment of 40,000 students. District facilities include 12 comprehensive high schools, a continuation high school, 10 middle schools, a junior high school, five adult education programs and four alternative education schools.

Tax Revenue to Repay Bonds Viewed as Pledged Special Revenues

Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U. S. bankruptcy code and therefore the lien on pledged revenues would survive and would not be subject to the automatic stay (i. e., payment interruption) in the event the district were to file for bankruptcy.

Fitch has reviewed and analyzed legal opinions provided by district counsel and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily propositions 13 and 39), which limit and direct the use of pledged property tax revenues for bond repayment.

As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district's bonds eliminates the need for such calculations.

Revenue Framework

State aid and local property taxes provide the majority of district revenues. Overall revenues have been somewhat volatile over the last several years due to a combination of enrollment declines and improving state aid.

Revenue growth has lagged behind U. S. economic performance over the past 10 years, in part due to declining enrollment. Management projections of enrollment gains, in combination with a growing state economy, should support improved revenue growth over the next several years.

State law requires voter approval of tax increases, limiting the ability of the district to control revenues. Property tax growth is constrained by an annual limit on assessed value increases on taxable property absent a change in ownership.

Expenditure Framework

Personnel costs for teachers and staff comprise the vast majority of district expenditures.

Based on the district's current spending profile, such costs are likely to be in line with to moderately above expected revenue growth.

The district's mandate to provide educational services limits its ability to make expenditure reductions in the event of a revenue shortfall. In practice, however, management retains access to layoffs and class-size increases as key tools for reducing expenditures while meeting service mandates.

Long-Term Liability Burden

The district's debt issuance is funded from an unlimited property tax levy restricted to this purpose. Long-term liabilities are moderate relative to the district's resource base, largely due to debt issued by overlapping jurisdictions. State pensions in which the district participates are adequately funded and reforms adopted in 2012 should slow the growth in the liability over time.

The district retains approximately $122 million in GO bond authorization from a 2006 election, but tax rate constraints have limited its ability to issue new bonds. Management plans to issue new debt for building upgrades and maintenance incrementally in coming years as the district's tax base grows. Such issuance is unlikely to have a material effect on overall liabilities.

Operating Performance

The district's financial resilience is founded upon a stable revenue base, expenditure cutting flexibility, and adequate reserves. In an unaddressed moderate economic decline scenario reserves would likely be stressed but would be expected to improve with renewed economic growth.

The district budgets conservatively and Fitch expects that district management would actively manage expenditures to address potential budget gaps.