OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for South Whittier Elementary School District (the district):

--$2.9 million general obligation (GO) bonds, series 1998A at 'AA-';
--$6.3 million GO bonds, series 2004A at 'AA-'.

The Rating Outlook is Stable.

SECURITY
The GO bonds are payable from an unlimited ad valorem tax pledge.

KEY RATING DRIVERS:

SATISFACTORY FINANCIAL PROFILE: General fund reserves remained adequate in fiscal 2014 despite a modest operating deficit. Estimated actual results for fiscal 2015 show a return to balanced operations. The district retains a moderate degree of expenditure flexibility.

REVENUE VOLATILITY: The district has little revenue raising flexibility and is dependent on the state of California for funding, requiring it to manage significant revenue volatility. State funding is currently rising rapidly with improved state revenues; however, the district's declining enrollment will temper such increases.

MANAGEABLE LONG-TERM LIABILITIES: Carrying costs of debt service and retirement liabilities are affordable but rising with increases in pension costs. Above-average amortization and lack of additional debt plans somewhat offset this concern.

STABLE LOCAL ECONOMY: The district benefits from its access to the diverse Los Angeles employment market. This partially offsets the district's weaker economic profile.

RATING SENSITIVITIES

BALANCED OPERATIONS: Fitch expects the district to maintain essentially balanced operations in fiscal 2015 and fiscal 2016, largely a result of growth in per pupil state funding. The lack of budget balance and maintenance of adequate reserves could put downward pressure on the rating as the district is highly dependent on per pupil state funding, and district projections call for continued enrollment declines.

CREDIT PROFILE
The district is located approximately 10 miles east of the city of Los Angeles. The district serves more than 3,000 students in a four square mile area that includes parts of the cities of Whittier and Santa Fe Springs.

District enrollment continued to decline in fiscal 2015, dropping 2.8% over the prior year. Management is anticipating a continuation of this trend, projecting a 2.6% decline in fiscal 2016. Enrollment declines have been offset by state funding gains; however Fitch views declining enrollment as a credit negative because of its reliance on state per pupil funding and its limited ability to raise local revenues.

SATISFACTORY FINANCIAL PROFILE

Following two years of general fund operating surpluses in fiscals 2011 and 2012, the district posted two modest consecutive operating deficits in fiscals 2013 and 2014, dropping the unrestricted general fund balance to an adequate 5.3% of spending in fiscal 2014. The deficit in fiscal 2014 was a result of the spend down of carry over funds.

The district is highly dependent on state funding and has no practical local revenue raising authority. Per pupil state funding comprises over 80% of total general fund revenue. The district is benefiting significantly under the state of California's new Local Control Funding Formula (LCFF), which provides higher funding for students in poverty, in foster care or who are second-language learners. LCFF revenue sources increased 14% ($3 million) in fiscal 2014 and 15% ($3.6 million) in fiscal 2015.

Estimated actual results for fiscal 2015 show a return to balanced operations, increasing the unrestricted fund balance to about $2 million, equal to 6.8% of spending. The district's fiscal 2016 budget and multiyear projections show continued strengthening of the unrestricted fund balance through fiscal 2018, based on reasonable assumptions about continued state revenue growth. Projections include a 4% salary increase in fiscal 2015 followed by a 3.9% salary increase in fiscal 2016 (approximately $952,105 over the two years), which restores employee's salaries to the fiscal 2009 level. Additionally, in fiscal 2016, the school year is increasing by 4 days which equates to a 2.2% salary increase (approximately $300,000).

Continued state revenue growth should improve the district's financial position over the near term. The district also has flexibility to increase class sizes or cut spending by adjusting the school year. A return to structural balance and a moderate increase in unrestricted reserves, as expected in fiscal 2015, is key to rating stability.

IMPROVED LIQUIDITY

The district's liquidity had been weak, stemming from state funding deferrals. District liquidity has improved as the state has paid down these deferrals, with expected elimination in 2016. Based on current projections, management does not anticipate the need to issue TRANs in fiscal 2016.

WEAKER SOCIOECONOMIC INDICATORS PARTIALLY OFFSET BY STABLE LOCAL ECONOMY

The district benefits from its proximity and access to the greater Los Angeles employment market. The city of Whittier's April 2015 unemployment rate of 5.6% remains lower than the state level and approximates that of the U.S.

Wealth indicators are mixed. Median household income was 101% and 116% of state and national averages, however per capita money income levels are well below-average at 58% and 60% of the state and nation, respectively. A large proportion of the district's students are considered economically disadvantaged.

The district's tax base is somewhat concentrated, but stable. District assessed value (AV) suffered muted declines in the housing downturn, and fully recouped the losses in fiscal 2013. Fiscal 2015 AV now exceeds the previous peak achieved in fiscal 2009 by over 9%.

MANAGEABLE LONG-TERM LIABILITIES

Overall debt levels are low equaling $1,733 per capita and 2.06% of AV. Amortization is above-average, with about 74% of principal retired in 10 years. Currently, the district has no future debt plans.

The district participates in the California Public Employees' Retirement System (CalPERS) as well as the California State Teachers' Retirement System (CalSTRS) pension system. Estimated funding levels for the plans are a low 71.3% for CalPERS and 72.5% for CalSTRS, based on Fitch's 7% rate of return. Both plans are currently increasing contribution rates. Total carrying costs of debt service, pension, and other post-employment benefit costs equaled a reasonable 11% of governmental funds spending in fiscal 2014. Fitch expects total carrying costs to increase because of growth in pension costs, but to remain in the low to moderate range.