OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Fullerton Joint Union High School District, CA (the district):

--\$1.7 million, 2002 Election series A general obligation (GO) bonds at 'AA+';
--\$22.3 million certificates of participation (COPs) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from an unlimited ad valorem tax on all taxable property within the district.

The district has pledged to include all lease payments for the COPs in its annual budgets and to make lease payments from all sources of available funds. The district also pledges to maintain 24 months of rental interruption insurance and maintains a cash-funded debt service reserve.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The 'AA+' rating reflects the district's strong financial position, with a solid financial cushion and prudent management practices. Fitch expects the district to spend down some fund balance in future years, but to maintain reserves at satisfactory levels for the rating category.

STRONG LOCAL ECONOMY: The district benefits from its proximity to the Orange and Los Angeles County employment markets. Socioeconomic indicators are above average.

MANAGEABLE LONG TERM LIABILITIES: Overall debt levels are low, although expected to rise with a new bond authorization. Carrying costs are affordable but growing, given future debt plans and expected increases in pension contributions.

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 DISTINCTION: The 'AA' rating on the COPs reflects the district's general creditworthiness, the abatement risk, and the essentiality of the leased asset under the lien.

RATING SENSITIVITIES

STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely over the coming review cycle.

CREDIT PROFILE

The district serves about 15,000 high school students primarily in northern Orange County (Fitch implied GO rating of 'AA+', Stable Outlook).

RETURN TO STRUCTURAL BALANCE

After drawing down reserves in fiscal 2011 - 2013, the district regained structural balance in fiscal 2014 and 2015 due in part to negotiated labor concessions (furloughs and increased class sizes) as well as to an improving funding environment for California school districts.

The labor contracts included re-openers based on actual revenues, and given improved Proposition 98 funding the district was able to add back the furlough days and return to the previous class sizes over the two year contract period which expires in June 2015.

The district ended fiscal 2014 with a modest operating deficit (\$827,000) and a solid unrestricted general fund balance of \$28.1 million, equal to about 23% of spending. The district's second interim financial report for fiscal 2015 points to another year of essentially break-even operations, maintaining available reserves at about 28% of spending.

The district and employees are just beginning contract negotiations. After seven years of no salary increases, Fitch expects pent up wage pressure may result in some salary increase. Despite this pressure, and in light of its history of prudent financial management, Fitch expects the district to retain solid reserves and largely balanced operations.

STRONG LOCAL ECONOMY

The district benefits from a fundamentally sound local economy that is linked to the diverse regional economies of Orange County and the greater Los Angeles area. The city of Fullerton (the city) is home to a university, medical centers, and large businesses specializing in defense, aerospace, and engineering. Taxable assessed value (AV) experienced only moderate declines during the recent recession, and growth has since resumed--increasing 6.2% for fiscal 2015 to \$28.8 billion (about 9% above its pre-downturn peak).

Socioeconomics are generally above average. Median household income in 2013 was 110% and 127% of state and national averages, respectively. City unemployment was down to 5.0% in December 2014, which is lower than state and national unemployment levels. City labor force growth for the twelve months ending December 2014 was slightly greater than national trends.

MANAGEABLE LONG TERM LIABILITIES

Overall debt levels are low at about \$1,300 per capita and 1.3% of AV. Amortization is moderately slow, with roughly 40% of principal retired in 10 years. The district received voter authorization for \$175 million in GO bonds in November 2014 to address all of its identified capital needs.

The district participates in California Public Employees' Retirement System (CalPERS), as well as the more poorly funded California State Teachers' Retirement System (CalSTRS). In fiscal 2015, the state implemented a multi-year pension contribution rate hike that would more than double current CalSTRS rates through fiscal 2021. Contributions to CalPERS are also expected to increase by 50% over the next five years. Fitch expects these increased contributions to generate moderate but manageable budgetary pressure on the district.

Total carrying costs, calculated by dividing debt service, pension, and other post-employment benefits (OPEB) costs by governmental fund spending, equal a relatively low 9% in fiscal 2014. However, Fitch expects total carrying costs to rise to more moderate levels given future growth in pension costs and debt service.