OREANDA-NEWS. April 07, 2016. Fitch Ratings has assigned an 'AAA' rating to the following bonds to be issued by the Berkeley Unified School District, California:

--Approximately \\$17.7 million 2016 general obligation (GO) refunding bonds.

The bonds will be sold competitively on April 12. Proceeds will refund outstanding debt for interest savings.

Fitch also has assigned an Issuer Default Rating (IDR) of 'AA' to the district. The distinction between the 'AAA' rating on the bonds and the 'AA' issuer rating 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

SPECIAL REVENUE ANALYSIS: 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 economic basis, stable revenues, moderate liabilities, and strong gap closing ability.

ECONOMIC RESOURCE BASE
The district is part of the regional San Francisco Bay Area economy and has experienced strong enrollment and tax base growth in recent years. The regional employer base is broad and diverse, with good prospects for continued employment growth.

REVENUE FRAMEWORK: 'a' FACTOR ASSESSMENT
District revenues have grown steadily in recent years due to both state economic improvement and steady enrollment gains, but the district's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.

EXPENDITURE FRAMEWORK: 'aa' FACTOR ASSESSMENT
The district, with a moderate fixed cost burden, has demonstrated a solid ability to manage spending at times of economic and revenue decline. On average, growth in spending is likely to be in line with revenue growth over time.

LONG-TERM LIABILITY BURDEN: 'aa' FACTOR ASSESSMENT
The district participates in a two adequately funded state-run pension plans and funds the bulk of its capital needs from voter-approved property tax levies, resulting in a long-term liability total that is a moderate burden on resources.

OPERATING PERFORMANCE: 'aa' FACTOR ASSESSMENT
The combination of the district's expenditure cutting flexibility and solid reserve funding levels leaves it well positioned to address cyclical downturns. The district has strong budget management and a demonstrated commitment to bolstering its financial cushion as needed at times of economic recovery.

RATING SENSITIVITIES
SOLID TAX BASE AND ECONOMY: The 'AAA' general obligation 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 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 well above the minimum levels required by the state of California.

CREDIT PROFILE

Berkeley Unified School District operates within the city of Berkeley, about 10 miles northeast of the city of San Francisco. The district serves approximately 9,400 students in 11 elementary schools, three intermediate schools, a high school, and a continuation school, and also operates independent study and adult school programs.

TAX REVENUE TO REPAY BONDS VIEWED AS PLEDGED SPECIAL REVENUES

Fitch believes that taxes levied for bond repayment would be considered pledged special revenues under the U.S. bankruptcy code and therefore the lien on pledged revenues would survive and would not be subject to the automatic stay (i.e., payment interruption) in the event the district were to file for bankruptcy.

Fitch has reviewed and analyzed legal opinions provided by district counsel and believes they provide a reasonable basis to conclude that these revenues would be treated as pledged special revenues due to certain provisions of the state constitution (primarily propositions 13 and 39), which limit and direct the use of pledged property tax revenues for bond repayment.

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 financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. 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.

REVENUE FRAMEWORK

State aid and local property taxes provide the majority of district revenues and are supplemented by local parcel taxes, which provide 20% of general fund support. Property tax revenues have increased steadily in recent years, reflecting the district's strong underlying tax base. State aid has also expanded with the recent improvement in the state's economy, as well as rising enrollment for the district. Parcel tax revenues are subject to periodic voter approval and have experienced strong support from district residents.

Historical revenue growth has exceeded inflation and overall U.S. economic performance, in part due to rising enrollment levels. An annual inflation adjustment on parcel tax revenues has also supported ongoing revenue gains. Future revenue growth may be somewhat constrained by a projected flattening of enrollment.

State law requires voter approval of tax increases, limiting the ability of the district to control revenues. Property tax growth is constrained by an annual limit on assessed value increases on taxable property absent a change in ownership.

EXPENDITURE FRAMEWORK

Personnel costs for teachers and staff comprise the vast majority of district expenditures and are likely to be in line with to moderately above expected revenue growth based on the district's current spending profile. Fixed costs for debt service and retiree benefits are sizable, with the majority related to outstanding bonds, and could be pressured by anticipated increases in contribution rates for pensions and other post-employment benefits (OPEBs).

LONG-TERM LIABILITY BURDEN

The district's debt issuance is funded from an unlimited property tax levy restricted to this purpose. The district expects to issue approximately \\$85 million in new GO debt through 2020 which should not materially impact moderate overall debt ratios. Amortization is average with 49% of outstanding principal repaid within 10 years.

State pensions in which the district participates are adequately funded and reforms adopted in 2012 should slow the growth in the liability over time. Actuarial assumptions for the district's pensions are standard.

OPERATING PERFORMANCE

The district's financial resilience is founded upon a stable revenue base, expenditure cutting flexibility, and healthy reserves. In an unaddressed moderate economic decline scenario reserves would continue to be sufficient to support a superior assessment of financial resilience. In addition, Fitch expects that district management would actively manage expenditures to address potential budget gaps.