OREANDA-NEWS. Fitch Ratings has affirmed the following Taft City School District, California's (the district) general obligation bonds (GOs) at 'A+':

--\$1.4 million (election of 2001) GOs series 2001A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable by an unlimited property tax levied on all taxable property within the district.

KEY RATING DRIVERS

SOUND FINANCIAL OPERATIONS: The 'A+' rating reflects Fitch's view that the district's strong financial cushion, solid expenditure flexibility and likely increase in state funding adequately position the district to manage wage and retirement cost pressures over the intermediate term.

WEAK ECONOMY: The local economy and tax base is highly concentrated in the oil and gas sector, and is characterized by weak income and poverty levels and high regional unemployment. Recent and substantial oil price declines, if prolonged, could lead to negative secondary effects on the district's assessed value (AV), GO tax rates, unemployment and enrollment.

ADEQUATE DEBT PROFILE: The district's debt profile is weighed by slow amortization, high other-post employment benefit (OPEB) costs and, like all California schools, participation in the poorly funded CalSTRS pension plan. However, the debt burden is moderate, and capital needs are manageable.

EFFECTIVE RESPONSE TO REVENUE DECLINES: Management prudently implemented significant expenditure reductions during the funding downturn to maintain a sound financial cushion, and the board's fund balance target level exceeds the state minimum. Like all California school districts, the district is subject to strong financial reporting, forecasting, and oversight provisions.

RATING SENSITIVITIES

Material deterioration of the district's financial operations could negatively pressure the rating; Fitch does not anticipate such an occurrence over the review cycle. Upward movement in the rating is unlikely given the weak and concentrated local economy.

CREDIT PROFILE

The district is located 40 miles southwest of Bakersfield in Kern County and serves a population of about 19,700 in and around the City of Taft (the city). The local economy is dominated by agriculture and oil and gas enterprises, the latter of which makes up over three quarters of the district's highly concentrated tax base.

WEAK LOCAL ECONOMY

Economic indicators are weak overall, as is typical for heavily agricultural areas. The city's per capita income levels equal just 59% and 62% of state and national averages. Unemployment levels are not available for the city, though county rates are highly elevated compared to the state and nation.

SCHOOL FUNDING FORMULA MITIGATES POTENTIAL AV LOSS

The district's AV levels have fared well to date despite the weak local economy due to commodity price gains in recent years. However, quite recent and substantial declines in the price of oil may lead to a major AV loss in fiscal 2016. Kern County recently reported a preliminary AV loss of over 40% for oil enterprises county-wide. If a 40% loss were applied to the district's largest six oil enterprises, its tax base would contract by a substantial 32% in fiscal 2016, assuming no valuation change for non-oil properties. After Kern County's AV announcement, Fitch affirmed the county's implied GOs at 'A+' with a Stable Outlook (for more information, see 'Fitch Affirms Kern County, CA's \$173MM POBs at 'A', Outlook Stable' dated Feb. 9, 2015).

Due to the state's school district funding mechanism, lost local property tax revenues will be entirely back-filled by state funding. However, over the long-run, the district's greater reliance on state funding would leave it more exposed to state funding deferrals, should they be implemented again as they have in the past during times of state fiscal stress.

The district's ability to issue additional GO bonds to meet its remaining capital needs is already constrained by tax rate caps. A significant reduction in AV, if prolonged, could eventually force the district to consider alternative means of capital financings that could impact its financial operations or further slow amortization.

Fitch is also concerned that a prolonged slump in the oil industry could negatively affect the district's enrollment levels, though management reports that enrollment has been driven more by agricultural employment than the oil industry.

Fitch expects management will respond effectively to the pressures noted above, should oil prices remain depressed for some time. Fitch's expectations are based on management's constructive responses to liquidity and funding pressures imposed on the district by the state during the housing-led recession and currently solid expenditure flexibility. An inability to deal with these pressures, should they transpire, could lead to a negative rating action.

SOUND FINANCIAL OPERATIONS

The district's financial operations remained solid through the prior funding downturn due to significant expenditure reductions, resulting in the maintenance of a strong financial cushion. General fund operations in fiscal 2014 produced a \$442,000 surplus, further raising the district's unrestricted general fund balance to a high \$7.1 million (37.3% of expenditures and transfers out).

The district's first interim financial report projects a \$768,000 operating deficit (after transfers) in fiscal 2015. However, the district has a solid history of out-performing such projections and management expects a significantly smaller deficit. Out-year projections point to continued deficits, but do not include significant revenue enhancements proposed under the governor's budget. Once included, out-year deficits would turn to surplus before consideration of any further wage or service level enhancements, which seem likely.

The district benefits from blanket increases in K-12 state funding levels over recent years (as determined by Proposition 98) and the Local Control Funding Formula (LCFF). LCFF allocates higher proportions of Proposition 98 funding to districts with greater concentrations of students who are economically disadvantaged, English-learners, and foster care youths (cumulatively referred to as unduplicated count). The district's unduplicated count is a very high 84%, which results in the district being allocated a larger proportion of Proposition 98 funding. The district's share of overall Proposition 98 funding will continue to grow until LCFF has been fully implemented. The LCFF implementation schedule will depend on future Proposition 98 funding growth.

FINANCIAL VULNERABILITIES REMAIN DESPITE IMPROVED FUNDING

The district is exposed to various expenditure pressures that will at least partially offset the positive funding environment described above. The state's fiscal 2015 budget included a CalSTRS contribution rate hike of over 100% by fiscal 2021, to be phased in incrementally each year. The state projects funding gains will offset increased costs; however, elevated rates are projected to last for 32 years. Long-term vulnerability to structural imbalance is a concern as fixed costs rise and state funding, tied to state-wide economic activity, inevitably fluctuates through cycles over such a long period.

Fitch believes the district is also likely to experience expenditure increases related to pent-up wage and service level pressures. Prior to fiscal 2014, certificated employees (predominantly teachers) had not received any wage increases for six years. As funding levels have begun recovering so too have wages with increases of 5% and 6.2% in fiscal years 2014 and 2015, respectively. The district has also begun adding back services that were cut during the recession.

Maintenance of a solid financial position will require the board to judiciously approve further wage and service level enhancements, such that future revenue gains, to the extent they are realized, are not overwhelmed by expenditure hikes.

LONG TERM LIABILITY BURDEN INCREASING

The district's debt profile is weighed down by slow amortization resulting from the district's significant use of capital appreciation bonds, as well as participation in poorly-funded CalSTRS and a large other post-employment benefit (OPEB) liability. These weaknesses are somewhat mitigated by an affordable debt burden (total debt equals \$3,031 per capita, or 2.3% of AV), and relatively limited capital needs due to recent years' capital improvements.

Carrying costs, while currently low to moderate, are likely to rise moving forward based on scheduled CalSTRS rate hikes and the district's practice of paying OPEB on a pay-as-you-go basis.

EFFECTIVE EXPENDITURE RESPONSES

The financial management team is tenured and has exhibited a willingness and ability to reduce spending as necessary to maintain an adequate financial cushion. Like all California schools, the district is required to publish a large amount of forward-looking financial data multiple times per year. The board has a policy of maintaining at least a 5% fund balance, although management indicated they would not be comfortable drawing down below an amount equal to one month's payroll (about \$1.5 million, or 7% of expenditures and transfers out). The existence of an OPEB reserve (currently sized to \$3.5 million) provides a significant financial cushion on top of the board minimum.