OREANDA-NEWS. Fitch Ratings has affirmed the following ratings on San Ysidro School District, California (the district):

--Issuer Default Rating (IDR) at 'A-';

--$33.6 million election of 1997 general obligation (GO) bonds series D, E and F at 'A-';

--$6.9 million certificates of participation (COPs) series 2007 at 'BBB+'.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The GO bonds are general obligations of the district, payable solely from the proceeds of ad valorem taxes, without limitation as to rate or amount. The COPs are limited obligations supported by the district's covenant to budget and appropriate lease rental payments for the use of certain district properties, subject to abatement.

KEY RATING DRIVERS

The 'A-' IDR reflects the district's somewhat challenged but improving operating performance, supported by manageable expenditure requirements and liabilities, as well as rising revenues. The Positive Outlook is based on Fitch's expectation of continued improvement in district financial flexibility and reserves, which would support upwards rating movement.

Economic Resource Base

The district participates in the broad and diverse San Diego regional economy, which has seen sustained growth in recent years. However, home values and income levels remain well below citywide and state averages, in part due a high proportion of transient and homeless families within the district's boundaries.

Revenue Framework: 'a' factor assessment

The district's revenues have lagged behind overall U. S. economic performance and inflation over the past 10 years, but it has begun to benefit from state funding increases targeted to schools with high proportions of disadvantaged students. The district's independent legal ability to raise revenues is limited by state constitutional provisions requiring voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

Based on the district's current spending profile and recent funding increases, Fitch expects district expenditures to be in line with revenues. Carrying costs for debt service and retiree benefits are manageable.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities for overall debt and the district's pensions are moderate relative to the district's resource base.

Operating Performance: 'bbb' factor assessment

The district's operating profile has been challenged by low reserve levels, which have rebounded strongly in recent years, but remains below average due to historical revenue volatility. Budget management has improved considerably in recent years.

RATING SENSITIVITIES

SUSTAINED FINANCIAL FLEXIBILITY: Continued improvements in the district's finances and reserve position would support upwards rating movement. The rating would be pressured negatively by operating losses or other actions that reduce reserves closer to state mandated minimums.

CREDIT PROFILE

The San Ysidro School District is located primarily within the southeastern portion of the city of San Diego, adjacent to the international border with Mexico, and includes 43,000 residents within 29 square miles. The district serves approximately 4,800 students from preschool through eighth grade.

Revenue Framework

State aid and local property taxes provide the vast majority of district revenues and are ultimately determined by a formula based on enrollment and overall state revenues.

Historical revenue growth has lagged behind overall U. S. economic performance, but Fitch expects stronger growth over the next few years due to rising enrollment and increases in state funding as a result of state economic gains and the district's high share (98%) of disadvantaged students targeted under the Local Control Funding Formula.

The district has no independent legal ability to raise revenues as a result of California's proposition 13, which requires voter approval for tax increases.

Expenditure Framework

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

Based on the district's current spending profile, Fitch expects expenditure growth 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 was able to reduce costs through negotiated concessions during the last recession and would likely return to such strategies if needed to address new revenue declines.

Long-Term Liability Burden

District employees participate in two state-sponsored pension plans with adequate funding levels. Overall debt and pension liabilities are moderate at approximately 17% of personal income. Outstanding direct debt and accreted interest represent the majority of overlapping debt, but the district has no current plans for additional issuance and expects to fund capital needs on a pay-go basis over the next several years. Amortization is slow as a result of the district's past reliance on capital appreciation bonds.

Operating Performance

The district had a poor record of operating performance through fiscal 2013 before a change in management and improved state funding helped to revise its trajectory. Financial improvements have continued in subsequent years and the district reported a $13 million unassigned fund balance for fiscal 2016 on an unaudited basis (equivalent to nearly one-quarter of general fund expenditures). Although the district will likely utilize a portion of this savings for pay-go capital, Fitch believes that the district's ability to address future economic downturns is much improved relative to its past financial position.

The district's recent budgets have been conservative and year-end results have surpassed expectations. Past financial challenges, however, have left the district with a backlog of deferred maintenance that has yet to be fully addressed.