OREANDA-NEWS. Fitch Ratings has affirmed Bonita Unified School District, California's general obligation bonds (GOs) at 'AA' as follows:

--\$29.4 million GOs (election of 2004) series A, (election of 2008) series A, B, A-1 (federally taxable - Build America Bonds), B-1 (Qualified School Construction Bonds- federally taxable).

The Rating Outlook is revised to Negative from Stable.

SECURITY

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

KEY RATING DRIVERS

WEAKENING FINANCIAL OPERATIONS: The Negative Outlook reflects two audited years of operating deficits and Fitch's concern that continued fund balance drawdowns may lead to a reserve level that is inconsistent with an 'AA' rating.

STRONG ECONOMY, TAX BASE: The local economy is strong, as exhibited by low unemployment, high income levels, and low poverty levels. The well-diversified tax base fared well during the recession and has grown steadily for the last four consecutive years.

ADEQUATE DEBT PROFILE: Debt amortizes very slowly and the district participates in the weakly funded State Teacher's Retirement System (CalSTRS), for which multi-year contribution increases are forecasted, with the intention of improving funding. These weaknesses are somewhat mitigated by manageable carrying costs, a small other post-employment benefit (OPEB) liability, and limited capital needs with no planned debt issuances.

GOOD FINANCIAL OVERSIGHT FRAMEWORK: Like all school districts in California, the district is subject to extensive financial reporting and oversight provisions, per state law, which Fitch views positively.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: A significant additional reduction of the district's unrestricted fund balance from current levels, leading to material financial deterioration, likely would trigger a downgrade.

CREDIT PROFILE

Located in eastern Los Angeles County, the district covers a 49-square mile area comprising the cities of La Verne and San Dimas, portions of the cities of Glendora and Pomona, and unincorporated areas of Los Angeles County. With a population of about 62,500, the district provides services to almost 10,000 students.

SHRINKING RESERVES DESPITE RISING REVENUES

The district's financial operations are satisfactory overall with mixed trends over the past few years. Although revenues and liquidity have improved significantly, expenditure growth has outpaced revenue growth over the past few years, leading to two audited operating deficits and shrinking reserves. Fiscal 2014 general fund operations produced a \$381,000 deficit, lowering the total and unrestricted general fund balances to still sound levels of \$13.6 million (16.6% of expenditures and transfers out) and \$10.3 million (12.6%), respectively.

The district's second interim financial report points to a \$6 million deficit in fiscal 2015, which would lower unrestricted reserves to just 7.9%. Much of the projected deficit stems from service level and wage enhancements following years of reduced state funding levels. Management forecasts that related ongoing expenditures will be funded with projected revenue gains in fiscal 2016. Based on the state's revenue and related Prop 98 projections, Fitch views this assumption as reasonable, while noting the historical volatility of state support for education. Although the district has a history of financial results outperforming earlier estimates, a significant drawdown in its fund balance from the current level would leave it with materially lower flexibility and would be inconsistent with the current rating level.

STRONG AND DIVERSE LOCAL ECONOMY AND TAX BASE

The district's strong local economy benefits from its location within the large and diverse Los Angeles employment market. The district area is predominantly residential and built-out, with a relatively stable population and enrollment base. The well-diversified and mature tax base held up well during the recession and has grown steadily over the last four consecutive years. Income levels are high and unemployment is low.

ADEQUATE DEBT PROFILE

The district's debt profile is weighed down by its participation in CalSTRS and its very slow debt amortization, which may limit future debt issuance flexibility. In fiscal 2015, the state implemented a multi-year pension contribution rate hike that would more than double current rates through fiscal 2021.

These weaknesses are partially mitigated by manageable carrying costs (debt service, pension contributions, and OPEB payments over total governmental spending) of 12.8%, a very small OPEB liability, and moderate debt levels of \$3,207 per capita (2.7% of assessed value [AV]). Capital needs are limited, consisting of technological upgrades and possibly portable classrooms as enrollment rises from current levels. The size of the district's capital program has not yet been determined, and could be partly funded with \$1.5 million in a developer fee fund.

GOOD FINANCIAL MANAGEMENT PRACTICES

Like all California school districts, the district is held to strict and extensive financial reporting and oversight requirements, per Assembly Bill 1200. Requirements include multi-year forecasts, financial intervention triggers, and other standards that Fitch views as strong and effective. The district's 7% minimum total fund balance policy compares favorably to the state's minimum 3% unrestricted balance requirement.