OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following general obligation (GO) bonds to be issued by the Jurupa Unified School District, CA (the district):

--$65 million GO bonds, 2014 election, 2017 series B.

In addition, Fitch has downgraded the following ratings to 'A' from 'AA-':

--$42.6 million GO bonds series 2002, 2011 and 2012;

--Issuer Default Rating (IDR) .

The distinction between the 'AAA' rating on the series 2017B bonds and the 'A' IDR reflects Fitch's assessment that the pledged revenues meet the definition of 'special revenues' under the U. S. Bankruptcy code and therefore, bondholders are legally insulated from any operating risk of the district.

The Rating Outlook is Stable.

The series 2017B bonds will be sold via negotiation on or about the week of Jan. 9, 2017. Proceeds will be used to finance specific capital construction, repair and improvement projects approved by district voters.

SECURITY

The bonds are payable from a voter-authorized unlimited ad valorem property tax levied on all taxable property within the district's boundaries.

KEY RATING DRIVERS

SPECIAL REVENUE ANALYSIS: The 'AAA' rating on the 2017 series B bonds is based on a dedicated tax analysis without regard to the district's financial operations. Fitch has been provided with legal opinions by district counsel that provide a reasonable basis for concluding that the tax revenue levied to repay the bonds would be considered 'pledged special revenues' under Section 902(2)(e) of the U. S. Bankruptcy Code in the event of a district bankruptcy.

TAX BASE DRIVES GO RATING: The 'AAA' GO bond rating reflects the strong and diverse economic resource base supporting the 2017 series B bonds. The unlimited nature of the tax pledge offsets any potential concern about tax base volatility.

IDR LIMITED BY FINANCIAL OPERATIONS: The downgrade of the IDR to 'A+' from 'AA-' reflects the implementation of Fitch's revised criteria for U. S. state and local governments, which were released on April 18, 2016. In particular, the revised criteria place increased focus on issuer's ability to raise revenues and reserve levels relative to inherent budget flexibility and historical revenue volatility. In addition, overlapping debt pushes the district's liability burden to moderately elevated levels. However, spending flexibility is solid.

RATING SENSITIVITIES

TAX BASE DRIVES GO RATING: The district's 'AAA' series 2016A GO bond rating could come under downward pressure in a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is very unlikely.

IDR SENSITIVE TO RESERVE DECLINES: The IDR could come under downward pressure if the district fails to maintain adequate gap-closing capacity, including sufficient reserves to withstand moderate historical revenue volatility commensurate with the current rating level. Conversely, the rating could increase given higher reserve levels and/or a reduction in the revenue volatility over time.

CREDIT PROFILE

Debt Service Viewed as Special Revenue

The specific features of the bonds meet Fitch's criteria for rating special revenue obligation debt without consideration of the district's general credit quality. Fitch believes bondholders are effectively insulated from the operating risk of the district as expressed in its IDR.

Fitch sets a high bar for considering local government tax-supported debt to be secured by special revenues, which provide security that survives the filing of a municipal bankruptcy (in preservation of the lien) and benefit from relief from the automatic stay provision of the bankruptcy code. Fitch gives credit to special revenue status only if, in its view, the overall legal framework renders remote a successful challenge to the status of the debt as secured by special revenues under Section 902 (2) (e) of the U. S. Bankruptcy Code.

Fitch has identified a number of elements it considers sufficient to reduce the incentive to challenge the special revenue status given the definitions outlined in the bankruptcy code. These include clear restrictions on the use of pledged revenues for identified projects and clear separation from the entity's operations. Fitch has undertaken an extensive review of the statutory provisions that govern the use of the pledged property tax revenues. Those provisions, along with the legal documents governing the bond issuance, provide sufficient strength for Fitch to rate the district's ULTGO bonds higher than its IDR.

As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy, tax base and debt burden without regard to the IDR. Fitch typically calculates the ratio of available revenues to debt service for dedicated tax bonds, but the unlimited nature of the tax rate pledge on the district's bonds eliminates the need for such calculations.

STRONG TAX BASE SUPPORTS BONDS

The district's diverse tax base and economy provide a strong basis for repayment of the 2017 series B bonds that is unlikely to be reduced by normal or even severe cyclical fluctuations. Concentration is moderate with the top 10 taxpayers representing about 12% of assessed value. Most of the top taxpayers are classified as industrial and located adjacent to the Ontario airport. After experiencing a 10% decline in fiscal years 2009-2011, taxable assessed value (AV) has rebounded by more than 25% through fiscal 2017. The 35-year average annual AV growth for the district is 6.94%. The district notes that there is stored Proposition 13 value which will be released as longer-held properties are resold.

Tax rates are low and unlikely to rise to a level that pressures the rating even under relatively severe economic stress. The general tax rate of 1% of AV is established in the state constitution and cannot be increased. Tax override levies for overlapping jurisdictions are similarly low at a combined 0.123% of taxable AV for fiscal 2017.

IDR EXTENDS ANALYSIS TO OPERATIONS

IDR KEY RATING FACTORS

Economic Resource Base

The district covers approximately 44 square miles in the western portion of Riverside County. It serves about 19,283 students in the city of Jurupa Valley, a portion of Eastvale and a small portion of the city of Riverside. The district operates 16 elementary schools, three middle schools, and three high schools as well as an online high school, continuation high school and a learning center.

In addition, the district's operating revenues benefit from the much broader economic resource base of the state of California (rated 'AA-'/Outlook Stable). California's economy is unmatched among U. S. states in its size and diversity and is generally stable despite a considerable presence in industries prone to cyclicality. Growth in the state economy has been strong since the state recovered from the most recent, very severe recession.

Revenue Framework: 'bbb' factor assessment

Fitch expects revenue growth to slow to below the level of inflation, reflecting flat to slightly declining enrollment and slower per pupil funding growth as the state's revised school funding formula nears full implementation. The district's independent ability to raise revenues is limited by state constitutional provisions requiring voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

Expenditure flexibility is solid. Carrying costs are moderate, and the district has demonstrated ability to cut costs in times of economic distress. The pace of spending is expected to be in line with or moderately above that of revenues without policy actions.

Long-Term Liability Burden: 'a' factor assessment

Long-term liabilities are moderately elevated relative to the district's resource base due primarily to overlapping debt.

Operating Performance: 'a' factor assessment

The district's gap-closing ability is strong despite somewhat volatile revenues. In addition, budget management is sound and supported by strong state oversight.

IDR CREDIT SUMMARY

Revenue Framework

The district is primarily funded with state revenues through the state funding formula known as the Local Control Funding Formula (LCFF).

Historical revenue growth has been strong and driven by the ramp-up of LCFF funding beginning in fiscal 2014. The funding formula increased education spending to support disadvantaged students. The district's unduplicated count of targeted disadvantaged students in fiscal 2017 was a relatively high 80%. As such, it has benefits from some of the components of LCFF that provide additional funds for districts with high concentrations of English language learners and low-income students. Given that the state's fiscal 2017 budget reached about 90% full funding of LCFF, future increases to funding due to the district's high unduplicated count will be minimal.

Future revenue growth will be more dependent on enrollment and state revenue trends. The district has experienced flat to modestly declining in enrollment over the past decade. The district expects modestly increasing enrollment in the near term due to development activity in the district; however, the scale of development expected is not likely to offset long-term demographic trends on an ongoing basis.

As with other California local governments, the district has no independent legal ability to raise revenues due to state constitutional provisions (most notably Propositions 13 and 218) requiring voter approval for tax increases.

Expenditure Framework

Personnel costs for teachers and staff comprise the vast majority of district expenditures.

Based on the district's current spending profile, Fitch expects expenditure growth to be in line with, to moderately above, expected revenue growth, in the absence of policy action with the need for teachers decreasing roughly in-line with decreases in enrollment.

Expenditure flexibility is solid. The relatively fixed carrying costs of debt service and retiree liabilities are moderate at about 13% of total spending. The labor framework is manageable. Policymakers must undertake a structured bargaining process with labor groups, but the elected board may ultimately impose terms in the rare instances where agreement cannot be reached. The district typically negotiates one-year contracts and has an agreement through fiscal 2017 that provides a 3% salary increase. Prior contracts included salary increases of 6% in fiscal 2016, 3% in fiscal 2015 and no increases in 2014 though furlough days were eliminated.

The district has also demonstrated a solid ability to reduce expenses in past downturns. For instance, the district had furlough days in place for three years for employees (four years for management) during the latest period of state funding weakness. The district's budgets also include a degree of built-in flexibility because the district budgets fully for vacancies and typically experiences $3 to $4 million (1.5% of spending) in annual savings from this practice.

Long-Term Liability Burden

The district's long-term liability burden including debt and pensions is moderately elevated at about 26% of the personal income. More than 50% of the burden relates to overlapping debt, primarily that of Riverside County and community facilities districts (CFDs). The district participates in two state-sponsored pension plans, CalPERS and CalSTRs. The ratio of pension assets to liabilities is 73.6% when adjusted by Fitch to a 7% rate of return. Its liability related to other-post employment benefits is $33.2 million, or 1.1% of personal income.

The district's 2014 bond measure authorized $144 million of borrowing to fund modernization projects at various elementary middles and high schools. After this issuance, the district will have about $49 million remaining authorization, though it has no plans to issue additional debt at this time. In addition, the district is building a K-8 school to open in fiscal 2019 in an area with new development using lease revenue bond proceeds and CFD financing.

Operating Performance

The district has adequate gap closing ability. The Fitch Analytical Sensitivity Tool indicates the district could experience a general fund revenue decline of 5.9% in Fitch's standard 1% GDP decline scenario, based on an analysis of historical revenue performance. Fitch assesses the district's inherent budget flexibility as midrange because it has solid control over spending but limited revenue flexibility. Fitch expects the district to weather recessions using a combination of reserve spending and budget cuts and to maintain reserves above the threshold for a 'bbb' financial resilience assessment.

The district has exercised prudent management of its budget through such tools as fully budgeting for vacancies and conservative enrollment estimates. Fitch expects that it will turn to past methods, such as implementing furlough days, during times of economic distress.

In addition, the district benefits across the business cycle from a very strong financial oversight framework for California school districts. Under California Assembly Bill 1200, school districts must file financial reports with county offices of education at least three times a year. The filings must include multiyear budget projections, and both county and state officials are empowered to intervene and restore budget balance if the district cannot show that it can meet state minimum fund balance standards over a three year time horizon. In severe stress, county officials with stay and rescind powers step in to oversee financial decision making. In extreme cases, state overseers can remove management and elected board members if a state loan is required to maintain solvency.