Fitch Affirms Madera USD, CA's GOs at 'AA-'; Outlook Stable

--$23.7 million (election of 2002) GO bonds series 2005;
--$3.2 million (election of 2002) GO bonds series 2006;
--$15.6 million (election of 2006) GO bonds series 2007;
--$12.1 million GO refunding bonds series 2012.

The Rating Outlook is Stable.

SECURITY
The bonds are supported by an unlimited pledge of ad valorem tax on all property within the district.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: The district's finances are balanced, budgets are conservatives, and reserve levels remain healthy.

RISING REVENUES: Enrollment growth has contributed to ongoing increases in per-pupil revenues. In addition, the district receives enhanced funding under the state's Local Control Funding Formula (LCFF) due to its high proportion of English-language learners and low-income students.

AGRICULTURAL ECONOMY: The district's economy is concentrated in agriculture and related industry, with low wealth and income levels and high poverty rates. Employment levels and home values declined sharply during the last recession but have shown notable improvement over the past several years.

MANAGEABLE LONG-TERM OBLIGATIONS: Carrying costs for debt service and employee retirement benefits are affordable, but pension costs will continue to rise over the next several years to address substantial unfunded liabilities.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The rating is sensitive to the district's ability to maintain financial flexibility while addressing growth pressures. Continued strong financial performance would raise upward pressure on the rating, while a material decline in operating balance or reserves could cause downward pressure.

CREDIT PROFILE

The Madera Unified School District is located in California's Central Valley, 24 miles northwest of the city of Fresno, and encompasses the city of Madera and adjacent unincorporated portions of Madera County. While agriculture has long been a mainstay of the Central Valley region, the economy has experienced increasing diversification along with steady population growth. The district has an enrollment of approximately 20,000 students in 27 schools, with a total population of 89,000.

SOUND FINANCIAL POSITION

The district maintained a sound financial position throughout the last recession, steadily raising reserves despite reduced state funding and deferrals of revenues. Unrestricted fund balance peaked at $40.5 million in fiscal 2014, equivalent to 25.4% of general fund spending. The district recorded another strong operating performance in fiscal 2015, transferring $12.9 million in reserves to funds dedicated to new school construction and deferred maintenance, while maintaining $40 million in unrestricted general fund balance.

Multi-year projections provided by the district reflect continued balanced operations over the next several years under conservative revenue assumptions.

RISING REVENUES

State funding provides the majority of district revenues and the district has benefited from the recent improvement in state finances. In addition, steady enrollment growth has contributed to rising per-pupil revenues over the last several years. This trend appears likely to continue based on ongoing housing and population growth in the district.

Revenues have also been boosted by the state's Local Control Funding Formula, which targets enhanced funding to districts based on the proportion of their school population identified as English-language learners or low-income. Nearly 90% of the district's students qualify under these categories, contributing to a projected 50% increase in revenues over the five-year period between fiscal years 2013 and 2018.

AGRICULTURAL ECONOMY

The district's economy is concentrated in agriculture and related industry, and wealth and income levels are correspondingly low. Median household incomes are 62% of the state average, and poverty rates are elevated.

Local employment and housing markets were hit hard during the last recession but have seen notable improvements over the past several years. Employment growth for the city of Madera outpaced state employment between 2011 and 2014, reducing the local unemployment rate to 9.5% in 2014. Local unemployment was still well above the state rate of 7.5% in 2014 but reflects a substantial decline from the city's peak unemployment rate of 18.8% in 2009.

Taxable assessed values (TAV) exceeded their pre-recession peak in fiscal 2016 after five years of steady growth. Median home values reported by Zillow increased by 4.4% year-over-year through December 2015 but remain approximately 42% below their pre-recession peak. Non-residential properties, including industrial and agriculture parcels, account for nearly half of the district's tax base, helping to insulate TAV from home price volatility.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt levels for the district are moderate at 3.1% of TAV and $1,848 per capita. Amortization is below average, with 45% of principal and accreted interest on capital appreciation bonds repaid in 10 years. The district is currently engaged in several school construction projects but has no near-term plans for issuance of additional debt.

The district participates in two state-sponsored employee pension plans with substantial unfunded liabilities. Carrying costs for debt service and retiree benefits are currently affordable at 16.3% of governmental expenditures in fiscal 2015, but are likely to rise over the next several years due to scheduled increases in pension contribution rates. In addition, the district had an unfunded OPEB liability of $27.5 million (0.5% of TAV) at the end of fiscal 2015.