OREANDA-NEWS. Fitch Ratings has affirmed the following rating for Edison Elementary School District, California (the district) bonds:

--\$3.7 million general obligation (GO) bonds series 2004A and 2006B at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax levy.

KEY RATING DRIVERS

CONCENTRATED ECONOMY, WEAK SOCIOECONOMICS: The local economy and tax base are highly concentrated in the oil and gas sector, and are characterized by weak income levels and high regional unemployment.

SCHOOL FUNDING FORMULA MITIGATES ECONOMIC SENSITIVITY: Recent and substantial oil price declines have the potential to negatively affect the district's tax base. However, the state's school district funding mechanism ensures that lost local property tax revenues will be entirely back-filled by state funding, mitigating immediate concern.

RESILIENT FINANCIAL PROFILE: Prudent financial management, stable enrollment, and an improving state funding environment have allowed the district to maintain adequate reserve levels, despite challenges.

MANAGEABLE LONG-TERM LIABILITIES: Carrying costs are low and overall debt levels are moderate. However, debt amortization is below average.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's maintenance of general fund reserves appropriate for the rating category. The Stable Rating Outlook reflects Fitch's expectation that general fund reserve declines are unlikely over the coming review cycle.

CREDIT PROFILE
The district serves about 1,100 students and a total 2014 population of 6,071 in Kern County (Fitch implied GO 'A+'), which is located in the southern portion of California's Central Valley, about 100 miles northwest of Los Angeles. The local economy is dominated by agriculture and oil and gas enterprises, the latter of which makes up over one quarter of the district's concentrated tax base.

CONCENTRATED ECONOMY; WEAK SOCIOECONOMICS
The regional economy is heavily concentrated in agriculture and oil. Taxpayer concentration is high, with the district's top 10 taxpayers representing 27% of 2014 total taxable assessed value (TAV). The district's largest taxpayer, Hunter Edison Oil Development LP, represents 12% of total TAV.

The district's weak socioeconomics are typical of rural California communities. Median household income in 2014 equals 84% and 97% of state and national averages, respectively, while per capita money income is much lower at approximately one half of state and national averages. The county's unemployment rate improved to 9.6% in November 2014, from 10.4% a year prior, remaining very high relative to the state (7.1%) and nation (5.5%). Educational attainment is low, with only 7% of the district's population holding a bachelor's degree. Nevertheless, population growth has been triple the national average since 2000.

SCHOOL FUNDING FORMULA MITIGATES ECONOMIC SENSITIVITY
TAV for the district has been relatively stable over the past several years. TAV increased by 12.3% between 2010 and 2014 following moderate recessionary declines. However, Kern County recently reported a preliminary AV loss of over 40% for oil enterprises county-wide. If a 40% loss were applied to the district's largest four oil enterprises, its tax base would contract by a moderate 6.5% in fiscal 2016, assuming no valuation change for non-oil properties.

Due to the state's school district funding mechanism, lost local property tax revenues will be entirely back-filled by state funding. However, over the long run, the district's greater reliance on state funding would leave it more exposed to state funding deferrals, should they be implemented again as they have in the past during times of state fiscal stress.

RESILIENT FINANCIAL PROFILE
Prudent financial management and improved state funding have allowed the district to maintain sound financial reserves, despite a high service demand. Reserve levels have remained sound, with fiscal 2014 unrestricted fund balance equaling 18.6% of total general fund spending, but small in absolute value at \$1.7 million. Total student enrollment has remained stable at approximately 1,100 students, varying moderately due to the small student base.

The district's first interim financial report projects a \$273,000 operating deficit (after transfers) in fiscal 2015. However, the district has a solid history of out-performing such projections and management expects breakeven results. Out-year projections point to continued deficits, but do not include the significant revenue enhancements proposed under the governor's budget or recognize the expenditure flexibility available to the district. Once included, out-year deficits should be greatly reduced or reversed.

The district benefits from blanket increases in K-12 state funding levels over recent years (as determined by Proposition 98) and the state's Local Control Funding Formula (LCFF). LCFF allocates higher proportions of Proposition 98 funding to districts with high unduplicated counts of students who are economically disadvantaged, English-learners, and foster care youths. The district's unduplicated count is a very high 92%, which results in the district receiving significant concentration grant funding. The district's share of overall Proposition 98 funding will continue to grow until LCFF has been fully implemented, the timing of which is dependent on the state's financial position.

MANAGEABLE LONG-TERM LIABILITIES
Overall debt levels are affordable, at \$2,101 per capita in fiscal 2014, and 3.1% of market valuation; however, capital appreciation bonds (CABs) represent approximately one third of total outstanding direct debt, slowing principal amortization to 28% within 10 years. The district does not face any pressing capital needs as student enrollment has remained essentially flat in recent years and modest capital needs are funded from current resources.

The district participates in the California Teachers Retirement System (CalSTRS) and the California Public Employees Retirement System (CalPERS), which report funded ratios of 67.2% and 83.1%, respectively. Fitch estimates the funded ratios of both CalSTRS and CalPERS to be somewhat lower, at 63.7% and 78.8%, respectively, assuming a more conservative 7% investment rate of return. The district regularly contributes 100% of the required pension contributions. CalPERS contributions are actuarial, but the CalSTRS contributions are statutory and have been below the actuarially required contribution for several years. This practice is contributing to the CalSTRS's low funding level and creating significant contribution increases for several years going forward. The district anticipates that its general fund will absorb these contribution cost increases.

Other post-employment benefits (OPEB) for retirees represent a very modest obligation to the district.

Total carrying costs, including fiscal 2014 debt service, pension, and OPEB costs, equal a low 7.3% of governmental fund spending. That said, carrying costs are likely to rise in future years due to escalating CABs debt service and pending pension rate increases.