OREANDA-NEWS. Fitch Ratings has affirmed Banning Unified School District, California's (the district) general obligation bond (GO) rating at 'A+' as follows:

--$47 million GOs (election of 2002) series A & B and (election of 2006) series A & B.

The Rating Outlook is Stable.

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

KEY RATING DRIVERS
CONTINUED FINANCIAL IMPROVEMENT: The district's financial profile has continued to improve, leading to stronger reserve levels. Continued local control funding formula (LCFF) revenue gains are expected in the coming years but remain dependent on the state's own financial performance, which has historically been volatile.

PRESSURED DEBT PROFILE: The district's participation in the weakly funded state teachers' retirement system (CalSTRS) remains a credit concern; debt amortizes quite slowly, and the district has insufficient tax rate capacity to take advantage of its remaining GO authorization. Mitigating these concerns are low carrying costs and a moderate debt burden.

WEAKER ECONOMIC PROFILE: The district's economy is weak as demonstrated by low income levels, high unemployment, and a concentrated tax base that contracted rapidly during the housing-led recession. However, recent economic indicators suggest the economy is stabilizing, including continued moderate tax base expansion and declining unemployment.

RATING SENSITIVITIES
The rating is sensitive to the district's ability to maintain at least the state-required 3% minimum unrestricted general fund balance; failure to do so would likely lead to a rating downgrade. The rating is also sensitive to continued financial improvement and managerial stability.

CREDIT PROFILE
Located in western Riverside County (the county), 80 miles east of downtown Los Angeles, the district encompasses 300 square miles, including the city of Banning and portions of unincorporated Riverside County, including the Morongo Indian Reservation; the population is estimated at 34,000 residents. The district operates several schools with total average daily attendance of approximately 4,100, which has grown modestly in recent years.

CONTINUED FINANCIAL IMPROVEMENT
The district ended fiscal 2014 with an unrestricted general fund balanced of $2.5 million, or 6.3% of spending, increasing modestly by 0.2% from the prior year.

The district's financial position has improved markedly in recent years as a result of past years' expenditure reductions and improved state funding. As a result, general fund operations produced surpluses in each of the last three fiscal years. Improved operations have been restoring reserves after significant recessionary deficits requiring the enactment of a fiscal recovery plan overseen by the county board of education.

The general fund produced an unaudited surplus of $2.4 million in fiscal 2015, substantially out-performing budgeted projections of a $452,000 surplus. The out-performance was due largely to conservative revenue budgeting, as revenues exceeded the adopted budget by a solid $3.2 million. The surplus drove unrestricted reserves to a solid 12% of fiscal 2015 spending, though some of this is due to the receipt of supplemental concentration monies that will be expended in the coming years.

The district is budgeting for a $2.4 million operating surplus in fiscal 2016 based on continued conservative state revenue projections. The district's state funding growth is significantly higher than most districts in the state because of its high population of targeted students (about 86%) who receive additional state funding resources.

WEAKER ECONOMIC PROFILE
Banning was hard hit by the housing-led recession but has since stabilized with tax base and employment growth. The September 2015 unemployment rate dropped to 5.5% from 7.1% one year prior, falling in line with state and national averages, while measures of resident income remain comparatively low.

The district's tax base was severely hit by declining home values during the recession, contracting by 20% from fiscal years 2010 to 2013. Fiscal 2015 assessed valuation (AV) increased by a strong 7.3%, but remains below the pre-recession peak. The district's tax base remains concentrated among top taxpayers, which constitute 20% of fiscal 2014 AV. However, risks associated with concentration are somewhat offset by participation in the county's Teeter plan, by which the district receives 100% of levied taxes, regardless of actual collection rates.

A PRESSURED LONG-TERM LIABILITY PROFILE
The district's debt amortizes quite slowly, with just 27% of principal repaid over 10 years due to historically depending on capital appreciation bonds to fund capital needs. Deferred capital needs are significant and the district has some remaining capacity from its GO bond authorization; however, there is insufficient current tax rate capacity to issue additional GO bonds. Sufficiently high AV growth could provide needed tax rate flexibility to issue GO bonds in the future.

The district's obligations to retirees, though manageable, are likely to pose an increasing burden due to participation in the California State Teachers' Retirement System (CalSTRS). The district also participates in the California Public Employees' Retirement System (CalPERS). Whereas contribution rates for CalPERS are actuarially based, those for CalSTRS are set by statute and were below the level required to amortize the system's unfunded liability for some time. CalSTRS reported a funded ratio of 68.5% for fiscal 2015. Fitch estimates that funded ratio to be 65% based on a more conservative 7% rate of return assumption. School districts' CalSTRS contribution rates will rise significantly over the coming years to the actuarially required level.

These weaknesses in the district's debt profile are somewhat mitigated by the district's moderate debt burden of $2,987 per capita, or 4.1% of AV. Carrying costs (OPEB, pension, and debt service over total governmental expenditures) are low at 11%. However, Fitch expects carrying costs to rise if and when pension contribution rates are adjusted upwards.