Fitch Ratings downgrades the following outstanding Menifee Union School District , California's general obligation bonds to 'A+' from 'AA-': -- $8.8 million series 2013 GO refunding bonds; -- $866,702 series 2002A GO bonds; -- $4.8 million series 2002B GO bonds. The Rating Outlook is revised to Stable from Negative. Security The bonds are secured by an unlimited ad valorem tax on all taxable property within the district. Key Rating Drivers Projected Decline in Reserves: The downgrade reflects the projected reduction of the district's unrestricted reserve to levels more consistent with an 'A+' rating by the end of fiscal 2014 and Fitch's expectation that reserves will remain in a lower range than they have been historically. Ongoing Structural Imbalance: A recent trend of operating deficits is projected to continue through fiscal 2015. Challenges to closing the fiscal gap include potential expenditure pressures from upcoming labor negotiations and poor funding of the state's pension plans. Enrollment Growth: Better than expected enrollment gains in fiscal 2014 may continue due to significant residential development within the district. The additional revenue generated by increased enrollment may partially offset spending pressures. Tax Base Stabilization: The district's taxable assessed value has stabilized with three consecutive years of modest to moderate growth. Additional development in the area is likely to sustain positive AV trends over the near term. Challenged Economy: The local economy continues to experience stubbornly high unemployment, an average rate of job growth, and a decreasing labor force. Wealth indicators for the area are somewhat below the state average. Above Average Overall Debt Levels: Overall debt levels are above average, largely due to overlapping debt issuances. Capital needs include an additional school that may be built over the next several years, although additional debt issuances, if any, are not expected to materially affect the district's debt profile. Rating Sensitivities Diminished Unrestricted Fund Balance: An inability to balance financial operations leading to continued deterioration in the unrestricted fund balance below the level currently projected for fiscal 2014 may result in negative rating action. Credit Profile The district serves approximately 9,000 students in western Riverside County , largely covering the city of Menifee and some of the surrounding areas. District facilities include nine elementary schools, three middle schools, and one preschool. Projected Decline in Reserves; Operating Deficits Continue The downgrade to 'A+' reflects the actual and projected decline in the district's unrestricted reserves. The unrestricted balance, which ended fiscal 2013 at $8.1 million or 13 percent of spending, is projected to decline in fiscal 2014 to $5.8 million or 8.6 percent. The district's previous rating was supported by balanced financial operations and historically strong unrestricted fund balances that in fiscal 2011 reached as high as $12.9 million or 21.9 percent of spending. However, the district has been challenged to reduce expenditures sufficiently to match decreased revenues, leading to operating deficits that have steadily eroded the district's financial cushion. In fiscal 2012 and 2013, the district recorded operating deficits of $1.5 million (2.6 percent of spending) and $2.2 million (3.5 percent), respectively. The district continues to face challenges in balancing its budget. Operating deficits of $2.7 million and $4.2 million are projected for fiscal 2014 and 2015, respectively. The district has generally outperformed its projections in the past and the revised rating reflects Fitch's expectation that actual deficits are likely to be less than current projections. However, expenditure pressures from labor groups that have not received raises over the past six years may reduce the district's financial flexibility. Current labor contracts expire at the end of fiscal 2014. Unexpectedly strong enrollment growth at 3.6 percent in fiscal 2014 will generate additional revenue for the district and may reduce projected operating deficits. Significant ongoing and planned residential development in the district should support continued enrollment growth over the near term. Challenged Economy, Stabilized Tax Base The local economy remains challenged with the city's unemployment rate at a relatively high 11.9 percent ( July 2013 ). Year-over-year employment growth has been consistent with the nation's average of 1.4 percent, although Menifee's labor force contracted by 1.3 percent, which improved the unemployment rate but was modestly worse than regional trends. Wealth levels in the area are somewhat below the state average with per capita and median household income at 84 percent and 91 percent, respectively. The district's assessed value (AV) increased by 6.8 percent in fiscal 2014 as new development and a recovering housing market bolster the district's tax base. Growth was also recorded in fiscals 2012 and 2013, respectively, as AV increased by 2.3 percent and 0.5 percent. Above Average Overall Debt Levels The district's overall debt burden is above average at $4,489 per capita and 5.8 percent of AV. The district's direct debt comprises a relatively small portion of the overall debt burden at $651 per capita and 0.9 percent of AV. Future capital needs include the likely construction of an additional school sometime over the next several years, depending on enrollment growth. Financing plans for the new school are at very preliminary stages, but are unlikely to materially affect the district's debt profile based on current expectations. Pension costs were a manageable 5.9 percent of spending in fiscal 2012. However, future budgetary pressure is likely due to the weak funding levels of the statewide pension systems, which is likely to result in increased contributions by the district. Additional information is available at 'fitchratings.com '. ((Comments on this story may be sent to firstname.lastname@example.org ))
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