OREANDA-NEWS. Fitch Ratings has affirmed Oroville Union High School District, California's (the district) general obligation (GO) bonds as follows:

--\$17.9 million outstanding GO bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax on all taxable properties within the district.

KEY RATING DRIVERS:

LIMITED ECONOMY: The district is geographically isolated and the area's economy is limited. Most economic indicators are below state and national averages.

SOUND FINANCIAL POSITION: The district has maintained healthy reserves despite recent enrollment declines and planned drawdowns of general fund balance.

IMPROVED REVENUE PROSPECTS: The district relies heavily on the state for financial support, similar to most California K-12 school districts, and recent improvements in state finances have helped to stabilize district revenues. State funding volatility remains an ongoing risk but revenue prospects for the next several years appear positive.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are low and carrying costs for long-term obligations are affordable. Capital needs and debt plans are limited.

RATING SENSITIVITIES

ADEQUATE RESERVES: Material reductions in unrestricted general fund balances could increase downward rating pressure.

CREDIT PROFILE

The district encompasses approximately 723 square miles of the northern Sacramento Valley and includes the city of Oroville and portions of unincorporated Butte County. Total student enrollment is approximately 2,300 across two comprehensive high schools and two smaller institutions.

LIMITED ECONOMY
The district is isolated from major population centers and its service-based economy relies on the city of Oroville's role as the county seat. Additional economic contributors include agriculture, light manufacturing, and tourism.

Income levels for the district are well below state and national averages, consistent with the district's rural economy. The county's unemployment rates have traditionally exceeded state and national averages, but steady employment growth over the past three years has helped reduce this differential, as total employment has begun to approach pre-recession peaks. Unemployment for Butte County was 7.4% as of September 2014, as compared to state and national rates of 6.9% and 5.7%, respectively.

The district's tax base has proven fairly resilient. Taxable assessed values (TAV) declined by 9.4% between fiscals 2009 and 2014 following a 50% increase over the prior four years. TAV returned to growth in 2015 with a 2.6% increase. Tax base concentration is minimal as the top 10 taxpayers account for a low 4% of TAV.

SOUND FINANCIAL POSITION
The district has a history of balanced operations but began to reduce fund balance levels in fiscal 2013 following several years of additions to reserves. Management has prudently limited the use of such reserves to one-time purposes. At the end of fiscal 2014 unrestricted general fund balance remained healthy, despite recent drawdowns, at approximately \$4 million, equivalent to 17.4% of spending.

Fund balances could be pressured over the next several years following recent turnover in the district's board and ongoing discussions to revise the district's fund balance target downward. The district currently maintains reserves for economic uncertainty at 17% of expenditures, as compared to a minimum state requirement of 3%. Fitch has viewed this policy as a credit positive for the district, particularly in light of state funding volatility, recent enrollment declines, and limited revenue raising ability.

IMPROVED REVENUE PROSPECTS
The district relies heavily on state funding for operations and has benefited from recent improvements in the state's economy and revenue collections. Total general fund revenues for the district rose by 3.8% in fiscal 2014 following declines in three of the four years prior. Management projects additional revenue growth in fiscals 2015 through 2017, but has conservatively maintained forecasts below estimates provided by the state department of finance.

Most district revenues are apportioned on a per-pupil basis and demographically-driven enrollment declines of approximately 19% since 2009 have contributed to ongoing operating pressure. Recent growth in state revenues has helped to offset such pressure, and management now projects that enrollment levels will stabilize over the next several years, based on current enrollment levels in local elementary schools.

LOW DEBT LEVELS AND MANAGEABLE CARRYING COSTS
Overall debt levels for the district are low at 1.8% of TAV and \$1,055 per capita. Carrying costs for debt service and retirement benefits are affordable at approximately 13% of governmental expenditures in fiscal 2014, but may be pressured by rising pension expenses. Capital needs are minimal.

The district is a participant in two state-sponsored defined benefit pension plans and faces increases in contribution rates over the next several years to address current low funding levels. Other post-employment benefit (OPEB) costs are funded on a pay-as-you-go-basis, resulting in a growing liability for these commitments.