[January 17, 2013]

Fitch Rates Menifee Union School District, CA Rfdg GOs 'AA-'; Outlook Negative

Fitch Ratings assigns a 'AA-' rating to the following Menifee Union School District (the district), CA (News - Alert) general obligation (GO) bonds:

--$7.4 million 2013 GO refunding bonds.

In addition, Fitch affirms the 'AA-' rating on the following outstanding district GO bonds:

--$9.2 million 2002A GO bonds;

--$5 million 2002B GO bonds.

The Rating Outlook is Negative.

Purpose of Current Debt Issue: The bonds are being issued to advance refund certain maturities of the 2002A GO bonds and to pay the costs of issuance.

SECURITY

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

KEY RATING DRIVERS

STRUCTURAL IMBALANCE: The Negative Outlook reflects a weakening in the district's fiscal position and ongoing challenges that the district faces in balancing a structural deficit.

STILL SOUND BUT REDUCED RESERVE LEVELS: The district recorded an operating deficit (after transfers) in fiscal 2012 leaving the unrestricted fund balance at a reduced but still sound level. Additional reductions in reserve levels are projected over the next few years unless addition spending reductions are made.

TAX BASE STABILIZATION: Assessed value (AV) appears to be stabilizing after experiencing significant annual declines since fiscal year 2009. While still below prerecession levels, the resumption of residential home construction and increased home sales may provide support for future AV gains.

CHALLENGED ECONOMY: The local economy continues to experience stubbornly high unemployment rates and below average employment growth. Wealth indicators for the area are somewhat below the state average.

ABOVE AVERAGE OVERALL DEBT LEVELS: District debt levels are above average largely due to overlapping issuance. The district does not anticipate issuing any additional over the next few years and capital needs are considered manageable. District debt amortizes at a very slow rate.

WHAT COULD TRIGGER A RATING ACTION

DIMINISHED UNRESTRICTED FUND BALANCE: An inability to stabilize financial operations leading to continued deterioration in the unrestricted fund balance below the level currently projected for fiscal 2013 likely would result in a rating downgrade.

CREDIT PROFILE

The district serves approximately 9,000 students in western Riverside County, largely covering the city of Menifee and some of the surrounding areas. District facilities include nine elementary schools, three middle schools, and one preschool.

FINANCIAL PERFORMANCE WEAKENS IN FISCAL 2012

The district's financial operations were positive in fiscal 2011, but weakened in fiscal 2012. Due to the receipt of federal funds and better than budgeted state funding, fiscal 2011 operations produced a $2.8 million (4.7% of spending) operating surplus, increasing the total fund balance to $13.8 million. The fiscal 2011 unrestricted fund balance (the sum of committed, assigned, and unassigned fund balances under GASB 54) was $12.9 million or a solid 219% of spending.

Financial performance weakened in fiscal 2012 with an operating deficit of $1.6 million (2.6%). The unrestricted fund balance declined by $2.2 million with an ending balance of $10.7 million or a still sound 17.6%.

ONGOING STRUCTURAL IMBALANCE

The district's structural imbalance is projected to continue in fiscal 2013 with an estimated deficit of $3.3 million. Fitch notes that the district historically outperforms its financial estimates due to its conservative budgeting practices. However, under current projections, the unrestricted fund balance would be reduced to $7.4 million or a still adequate 11.8% of spending.

SOME FINANCIAL FLEXIBILITY REMAINS

The district will be challenged to resolve the projected operating deficits in fiscal 2014 and future years, although the district retains some options to reduce spending. One of the more significant options would be raising class sizes to permitted maximums that would allow 43 teacher layoffs for approximately $3.2 million in savings. However, the school board did not pursue the option of teacher layoffs in fiscal 2013 and has implemented few layoffs in recent years.

INTERNAL RESOURCES MEET CASH FLOW NEEDS

The district does not have a recent history of debt issuance for cash flow needs. It instead relies on internal cash flow borrowing from the capital facilities fund. The district borrowed $12 million in June 2012, with repayment due in June 2013. Currently available resources are estimated at about $27 million.

CHALLENGED ECONOMY, STABILIZING TAX BASE

The local economy remains challenged with a stubbornly high unemployment rate of 12.9% (October 2012) and below average employment growth over the past year. Wealth levels in the area are somewhat below the state average with per capita and median household income at 85% and 89%, respectively. The district benefits from increasing enrollment, and preliminary figures reflect growth of 1.4% in fiscal 2013.

The district's assessed value (AV) appears to be stabilizing with two consecutive years of modest growth. In fiscal 2012 and 2013, respectively, AV increased by 2.3% and 0.5%. While the gains are relatively limited, Fitch views the recent developments positively following the significant cumulative AV contraction of 26% from fiscal 2008 through fiscal 2011. The district reports increasing commercial and residential property development, but at a slower pace than in prior years.

ABOVE AVERAGE OVERALL DEBT LEVELS

The district's overall debt burden is above average at $4,546 per capita and 5.8% of AV. The district's direct debt comprises a relatively small portion of the overall debt burden at $655 per capita and 0.8% of AV. The district's capital needs are manageable and no additional debt issuance is expected. However, amortization is very slow, with just 25% of debt retired in 10 years.

Pension costs were a manageable 5.8% of spending in fiscal 2012. The district's other post-employment benefits liability is minimal with an estimated unfunded actuarial accrued liability of $661,123.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 (News - Alert) 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

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