OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following bonds to be issued by the Sylvan Union School District, California (the district):

--Approximately $17.2 million 2016 general obligation (GO) refunding bonds.

The bonds will be sold competitively during the week of August 15. Proceeds will refund outstanding debt for interest savings.

Fitch also has assigned a Long-Term Issuer Default Rating (IDR) of 'AA' to the district. The distinction between the 'AAA' rating on the bonds and the 'AA' IDR reflects Fitch's assessment that bondholders are legally insulated from any operating risk of the district.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by unlimited ad valorem property taxes levied on all taxable property in the district.

KEY RATING DRIVERS

The 'AAA' bond rating 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 revenues levied to repay the bonds would be considered "pledged special revenues" in the event of a district bankruptcy.

The 'AA' IDR reflects the district's solid operating performance and low long-term liabilities, somewhat offset by a history of limited revenue growth.

Economic Resource Base

The district covers an area of approximately 23 square miles within the city of Modesto in Stanislaus County, about 90 miles east of San Francisco. The regional economy is based in agriculture and food processing, but local governments, hospitals, and school districts account for most of the district's largest employers. The district serves 8,200 students in 10 elementary schools and three middle schools and has a population of approximately 74,000.

Revenue Framework: 'a' factor assessment

District revenues have grown more quickly than inflation over the past 10 years but slower than U. S. GDP. The district's legal ability to raise revenues is also constrained by Proposition 13, which requires voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

Expenditures are likely to be in line with revenue growth based on the district's current spending profile. Management demonstrated a solid ability to adjust spending to match revenues during the last recession and would be expected to perform similarly in the event of a renewed revenue shortfall.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities are low relative to the district's resource base and appear likely to remain so due to limited borrowing plans and increased funding of pension expenses.

Operating Performance: 'aa' factor assessment

The district retains gap closing ability that Fitch expects would prove sufficient in a moderate recession scenario. Budgets are conservative and both reserves and cash levels have strengthened in the wake of the recession.

RATING SENSITIVITIES

SOLID TAX BASE AND ECONOMY: The 'AAA' general obligation bond rating could come under downward pressure in the event of a significant and long-lasting decline in the district's tax base and economy, which Fitch believes is unlikely.

IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA' IDR could come under downward pressure if the district fails to maintain satisfactory financial flexibility, including reserves sufficient to withstand a moderate economic recession.

CREDIT PROFILE

The local tax base is primarily residential and diverse, with no evidence of taxpayer concentration. Taxable assessed values have been somewhat volatile historically but strong overall, with a 6% compound annual growth rate over the past 17 years. Recent growth in the district has been attributed to long-distance commuters to San Francisco Bay Area jobs, attracted by the region's relatively affordable housing market.

Revenue Framework

State aid and local property taxes provide the vast majority of district revenues and are ultimately determined by a formula based on enrollment and overall state revenues.

Historical revenue growth has exceeded inflation but has been below U. S. economic performance, in part due to flat enrollment. Future revenue growth will largely depend on statewide economic performance, which impacts state per pupil funding levels. Fitch expects that district enrollment and revenues will continue to expand modestly over time.

The district has no independent ability to raise revenues as a result of California's Proposition 13, which requires voter approval for tax increases.

Expenditure Framework

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

Fitch expects expenditure growth to be in line with to moderately above expected revenue growth based on the district's current spending profile.

The district's mandate to provide educational services limits its ability to make expenditure reductions in the event of a revenue shortfall. In practice, however, management was able to reduce costs through negotiated concessions during the last recession, and would likely return to such strategies if needed to address new revenue declines.

Fixed costs for debt service and retiree benefits are a relatively low burden on revenues. Pension contribution rates are scheduled to rise over the next several years but appear likely to remain affordable.

Long-Term Liability Burden

District employees participate in two state-sponsored pension plans with adequate funding levels. Overlapping debt levels and pension liabilities are low at approximately 7% of personal income.

Ongoing increases in pension contribution rates appear likely to slow growth in related liabilities. The district retains approximately $6 million in GO authorization but has no near-term plans for debt issuance. Amortization of direct debt is slow due to the issuance of 40-year debt in 2010 including capital appreciation bonds, and limited borrowing in prior years.

Operating Performance

District fund balances are healthy and appear sufficient to withstand a moderate economic recession. Fitch expects that the district would respond to temporary revenue shortfalls with a combination of draws on fund balance and expenditure reductions, and to maintain balanced operations over the longer term.

District reserves have increased in the years following the last recession and there has been no material deferral of required spending. Budgets are conservative and the district typically outperforms its financial estimates.