OREANDA-NEWS. Fitch Ratings affirms the following Hueneme School District, California's general obligation (GO) bonds
at 'AA-':

--$0.8 million Election of 1997, series B;
--$1.1 million Election of 2000, series B;
--$7.3 million Election of 2004, series A & B.

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

SOUND FINANCIAL PROFILE; FUNDING BOOST: The district continues to maintain structural balance and a sound general fund reserve level. The district has been a beneficiary of increases in state revenues pursuant to the state's local control funding formula (LCFF).

LIMITED LOCAL ECONOMY: The local economy is somewhat limited with its focus on military and agricultural concerns, and exhibits below-average wealth. The housing market is recovering after showing substantial weakness.

AFFORDABLE LONG-TERM LIABILITIES: Overall debt ratios are low to moderate. Despite expected debt issuance in the medium term and participation in poorly funded state pension plans, carrying costs are expected to continue to be affordable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's conservative financial management practices, achieving structural balance and maintaining sound fund balance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in Ventura County in coastal southern California north of Los Angeles County. It covers approximately eight square miles, including a portion of the city of Port Hueneme, a limited portion of Oxnard, and adjacent unincorporated areas. The district provides elementary school education to over 8,000 students.

LIMITED, RECOVERING LOCAL ECONOMY

The local economy centers on agriculture, a deep-water port, and two naval bases.

The district's median household income is around state and national averages, but its per capita income is substantially below average, equivalent to 68% and 71% of state and national levels, respectively, suggesting larger family sizes. The Ventura county unemployment rate (as a proxy) has been trending down due to rising employment since 2009. November 2015 unemployment stood at 5.4%, compared to 5.8% in California, and 5.0% nationwide. The education attainment rates are substantially below the national average.

The district's assessed values (AV) dropped 12% between fiscal 2008 and 2013. However, according to Zillow, Port Hueneme's average home price experienced a significant drop of more than 50% during the recession, a magnitude that was typical for the region. Since 2012, the city's average home price has recovered by more than 50%, resulting in a full AV recovery with growth of 4.8% in fiscal 2014, 7.9% in 2015, and 6.1% in 2016.

SOUND FINANCIAL PROFILE; IMPROVED FUNDING PROSPECTS

The district has a solid track record of producing small operating surpluses despite a volatile funding environment, incurring only three operating deficits (after transfers) over the last 10 years. At the end of fiscal 2015, unrestricted general fund reserve stood at a healthy 12% ($9.2 million) of expenditures. The first interim report to the state department of education projects break-even results for fiscal 2016, and small surpluses again in 2017 and 2018.

California's LCFF has brought substantial revenues to the district, as 72% of its students qualify for supplemental funding. Coupled with certain one-time state revenues and stable enrollment, total general fund revenue increases were 9% in fiscal 2014, 14% in 2015 and 15% (estimated) in 2016.

The district has been successful in controlling costs, as the salary schedule was kept at the 2007 level until fiscal 2013, and various labor concessions were achieved during the recession. The recent revenue improvement enabled the district to give salary and benefit increases, reduce class sizes, restore programs and increase capital spending.

LOW TO MODERATE DEBT; CONCERN OVER CALSTRS

The district's overall debt is low to moderate at $1,956 per capita, or 3.0% of AV. All of the district's direct debt is in the form of GO bonds. The district obtained a $19.6 million GO authorization in 2012, of which it issued a total of $15 million in 2013 and 2015. Additional issuance is likely in the medium term, but should not materially alter the district's debt profile.

The district participates in CalPERS for classified staff and the poorly funded CalSTRS pension system for teachers, as do all school districts in the state. The combined funded ratio for the district is estimated by Fitch to be 74% based on a 7% investment return assumption.

The district's other post-employment benefit (OPEB) liability is low at $27.5 million, or less than 0.1% of district AV. Fiscal 2015 total debt service, pension actuarially determined contribution and OPEB carrying costs are equivalent to an affordable 11.6% of total governmental spending. CalSTRS required contributions from all school districts are set by statute which have been significantly below actuarially determined contributions. Under AB 1469 approved in 2014, school district contributions to CalSTRS are set to increase by 11%, phased in over seven years. Carrying costs for the district are expected to remain affordable despite these increases in pension costs.