Fitch Affirms Moreno Valley Unified School District, CA's GOs at 'AA-'; Outlook Revised to Stable

Fitch Ratings has affirmed its 'AA-' rating on the following Moreno Valley Unified School District (the district), CA's general obligation (GO) bonds:

--$3.8 million GO bonds, election 2004, series A;

--$35.7 million GO refunding GO bonds, series 2007.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge on all taxable property within the district.

KEY RATING DRIVERS

BALANCED BUDGET: The Outlook revision to Stable reflects the district's restoration of budgetary balance. Significant expenditure reductions and recovering revenues are projected to keep the district's finances structurally balanced over the next few years.

PLANNED USE OF RESERVES: Reserves are expected to be reduced to still satisfactory levels over the next few years as the district addresses one-time needs through the use of accumulated funds. Rating concerns are offset by management's informal policies to maintain satisfactory reserve levels and preserve conservative budgeting practices.

RISING DEBT PROFILE: Overall debt ratios are low to moderate but will likely rise as the district pursues a new high school project. Carrying costs for long-term liabilities are manageable and amortization is average.

WEAK ECONOMY; STABILIZING AV: The local economy remains relatively weak with high unemployment, limited job growth, and below-average wealth levels. Taxable assessed value (AV), however, appears to be stabilizing with a return to growth in both fiscal 2013 and 2014.

RATING SENSITIVITIES

SATISFACTORY RESERVES: The Stable Outlook reflects Fitch's expectation that the district's budget will continue to be structurally balanced and that the drawdown of reserves will remain within projected levels. Negative rating action would likely occur if those expectations are not met.

CREDIT PROFILE

The district provides public education for grades kindergarten through 12 to approximately 34,000 students in Riverside County. The district's boundaries cover approximately 43 miles and include portions of Moreno Valley and Riverside City.

BUDGETARY BALANCE RESTORED

The district is expected to record a $3.1 million (1.2% of spending) operating surplus in fiscal 2013 (draft audit) after running operating deficits in each of the previous three years. Expenditure reductions, including seven furlough days, and stabilized revenues led to the improvement in operating performance.

Financial performance from fiscal 2014 through 2016 is expected to remain solid as the district benefits from generally improved state funding and the implementation of the Local Control Funding Formula (LCFF), which will provide the district with additional revenue due to its relatively high targeted student population. Expenditures will increase significantly in fiscal 2014 as the district restores all seven furlough days, although management still expects to generate a modest surplus of around $1.5 million.

Fitch expects additional expenditure pressures to emerge in fiscal 2015 and 2016 as labor contracts expire at the end of the current fiscal year. While increased expenditures are likely to offset some of the district's revenue gains, Fitch expects financial operations to remain balanced.

SOLID FUND BALANCES TO DECLINE

Management plans on spending down a portion of the currently solid unrestricted fund balance that ended fiscal 2013 (draft audit) at $39.8 million or 15.3% of spending. The use of reserves is expected to support one-time spending on technology upgrades, employee bonuses, and other non-recurring items. Rating concerns regarding the reduced financial cushion are offset by management's informal financial policies, including establishing a floor fund balance level of approximately $30 million (10.4% of projected spending in fiscal 2014), and very conservative revenue budgeting and forecasting assumptions.

WEAK ECONOMY; STABILIZING TAX BASE

The local economy remains relatively weak with high unemployment rates and below-average wealth levels. In October 2013, the unemployment rates in the city of Moreno Valley and Riverside County were high at 11.8% and 10.1%, respectively. Wealth levels in Moreno Valley are below average with per capita income at 61.7% of the California average.

The district's AV appears to have stabilized with modest growth of 1.8% and 1.9% in fiscals 2014 and 2013, respectively. While AV remains 15.1% below its fiscal 2009 peak, Fitch views the return to stability as a credit positive.

ANTICIPATED INCREASE IN DEBT

The district's debt profile remains positive but likely to rise. Overall debt ratios (including accreted interest) are currently a below-average $1,496 per capita and 2.4% of fiscal 2014 AV.

The district has tentative plans to seek voter authorization in June 2014 for approximately $300 million in additional GO debt to finance a new high school, retrofit existing school sites, and address other district-wide capital needs. If issued in full, the proposed additional debt would triple the district's direct debt load. The potential increase in the district's debt burden to above-average levels is factored into the rating.

OPEB AND PENSION PRESSURES

The district's fiscal 2013 contribution amount for other post-employment benefits and pensions were manageable at 7.1% of general fund spending. Future increases in contribution rates, however, appear likely with the relatively weak funding levels of the OPEB and statewide pension plans. Carrying costs for debt service, pension and OPEB are currently manageable at 13.8% of governmental fund spending but likely to take up an increasing amount of the budget going forward as all three components are expected to rise.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814471

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Fitch Ratings
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Matthew Reilly
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