OREANDA-NEWS.  Fitch Ratings has affirmed the 'AA+' rating on the following Novato Unified School District, CA (the district) general obligation (GO) bonds:

--\\$1.6 million Election of 2001, series 2006.

The Rating Outlook is Stable.

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

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial profile reflects sound general fund balances, generally stable financial performance despite recent deficit spending, good general fund liquidity, and conservative budgeting practices. The district is benefitting from improved state education funding.

REVENUE DIVERSITY AND EXPENDITURE FLEXIBILITY: The district also benefits from an above average level of local funding, including a parcel tax, and a moderate degree of expenditure flexibility. The district anticipates surplus general fund operations going forward.

MODERATE DEBT; GROWING PENSION DEMANDS: The district's overall debt burden is moderate. Carrying costs are currently low but will increase due to rising pension contributions.

RESILIENT ECONOMY: The regional economy benefits from its participation in the broad and diverse San Francisco Bay Area economy and features above average wealth levels and a below average unemployment rate.

STRONG TAX BASE: The district's diverse tax base is expected to continue growing in value.

RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices, particularly with regard to its general fund balances. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in northern Marin County, approximately 30 miles north of San Francisco. The district serves approximately 70 square miles, including the city of Novato (84.6% of the district) and some unincorporated areas (15.4%). The district operates 15 schools with a fiscal 2016 student enrollment of 7,679.

RESILIENT ECONOMY; STRONG TAX BASE

The local economy benefits from its participation in the broad and diverse economy of the San Francisco Bay Area. The district's population is wealthy and highly educated, with per capita income levels and median household income at nearly 162% and 152%, respectively, of the national averages. In May 2015, the unemployment rates in Marin County and the city of Novato were 3.3%, noticeably below the national rate of 5.3%.

The district's tax base is primarily residential (84% of taxable assessed valuation [TAV]) and features a diverse level of ownership with the top 10 taxpayers comprising only 6% of TAV. The district has more than recovered from a 5.9% TAV decline during the recent recession with a subsequent 15.9% rebound during fiscals 2014-2016. Further TAV growth is expected as more properties lose their temporary Proposition 8 valuation reductions.

STRONG FINANCIAL PROFILE

The district ended fiscal 2014 with a strong unrestricted general fund balance of \\$13.2 million or 19.9% of spending. This was the result of a net operating surplus after transfers of \\$2.1 million (compared to deficit or near breakeven operations the prior two fiscal years). The operating surplus was primarily caused by the expenditure of only \\$600,000 of the \\$1.6 million received that year for common core implementation, plus under-expenditures of school site and district department budgets.

The district expects to end fiscal 2015 with a net operating deficit after transfers of approximately \\$2 million as a result of spending the remaining \\$1 million in common core implementation funding, combined with the transfer of \\$1.5 million to the Capital Outlay Fund.

Thereafter, the district expects to resume balanced general fund operations due to increased state education funding revenues under the local control funding formula (LCFF). The adopted fiscal 2016 budget incorporates a 6% base salary increase for certificated employees, plus a one-time 2% off salary schedule increase. The final negotiated increased for classified employees will require a budget amendment, but the district is not expecting this to significantly alter its anticipated positive general fund results for fiscal 2016.

REVENUE DIVERSITY AND EXPENDITURE FLEXIBILITY

The district's good financial position reflects both revenue and expenditure factors. The district's revenue base benefits from an above average amount of local funding for a California school district. The district receives approximately \\$4.3 million annually from a parcel tax which an overwhelming 81% of voters extended for a further eight years from July 1, 2015. In fiscal 2015, the district also received \\$2.7 million in donations, and approximately \\$1 million in Marin Community Foundation grants to promote education reform. Comparable levels of donation and grant funding are anticipated in fiscal 2016 and beyond.

In response to current modest elementary school student enrollment declines, the district has reduced its teacher headcount. The district retains a moderate amount of expenditure flexibility related to class sizes and instructional coaches (seven teachers who are not in the classroom). It is unlikely to need to increase class sizes or reduce its instructional coach headcount in the near term given improved state education funding.

MODERATE DEBT; GROWING PENSION DEMANDS

Overall debt ratios are moderate on both a per capita basis (\\$3,764) and as a percentage of TAV (2.1%). Outstanding principal amortizes at an above average rate with approximately 75% retired within 10 years. The district will consider whether or not to issue new debt in the next couple of years for future capital needs.

The defined benefit healthcare plan administered by the district caps the district's contributions for eligible retirees at \\$200 per month until age 65. The retirees contribute the balance of the healthcare plan costs. Due to past strong funding for the district's annual other post-employment benefit (OPEB) costs, the unfunded actuarial accrued liability is very manageable at \\$784,250.

The district's annual debt repayment, required pension contributions, and OPEB pay-as-you-go costs represented a low 12.6% of total governmental spending in fiscal 2014. The district's pension funding demands will grow as a result of increasing mandatory contributions to the poorly funded California State Teachers' Retirement System (CalSTRS). The state legislature has mandated a series of contribution increases after prolonged underfunding on an actuarial basis.