OREANDA-NEWS. Fitch Ratings has rated Campbell Union High School District, California's (the district) general obligation bonds (GOs) as noted below:

--\$23 million 2015 GO refunding bonds at 'AA+'.

The bonds will sell via negotiated sale on or about the week of April 6.
In addition, Fitch affirms the following ratings:
--\$152 million outstanding GO bonds.

The Rating Outlook is Stable.

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

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The 'AA+' rating reflects the district's strong financial position, with a solid financial cushion, prudent management practices, and several years of mostly structurally balanced operations. Management anticipates a degree of fund balance spend-down in future years on one-time purposes, though Fitch expects the district's financial cushion to remain satisfactory for the rating category.

RELATIVELY DIVERSE REVENUE BASE: The district benefits from property tax revenues in excess of the state-guaranteed minimum, revenues from a recently renewed parcel tax, and lease revenues, all of which have remained stable throughout the economic downturn.

ROBUST LOCAL ECONOMY: The local economy benefits from solid long-term fundamentals, such as high income and educational attainment levels, its central position within the large and diverse San Francisco Bay Area employment market, and a diverse and mature tax base that was resilient through most of the recession.

ADEQUATE DEBT PROFILE: The district's debt profile is weighed down by slow principal amortization, rising carrying costs, consideration of a sizable GO authorization in calendar 2016, and participation in the poorly funded CalSTRS pension system. These weaknesses are somewhat mitigated by a moderate debt burden.

GOOD MANAGEMENT PRACTISES: Labor contracts include automatic wage reduction triggers, management has successfully obtained surplus revenue streams from site leasing and a recent parcel tax extension, and the district is subject to strong financial reporting and distress procedures.

RATING SENSITIVITIES

CONTINUED SOLID FINANCIAL OPERATIONS: An inability to maintain a solid financial profile, including maintenance of a sound financial cushion, could lead to negative rating action. The Stable Outlook reflects Fitch's view that the district's intent to draw down a portion of its reserves for one time purposes is unlikely to result in material financial deterioration.

CREDIT PROFILE
The district serves a population of 223,000 in western Santa Clara County, including portions of the cities of Campbell, Santa Clara, Saratoga, Monte Sereno, Los Gatos, and San Jose. Campbell is a somewhat affluent bedroom community to San Jose and the San Francisco Peninsula, and San Jose represents a large employment and residential market with outsized concentration in the economically cyclical high-tech industry.

STRONG, STABLE LOCAL ECONOMY
The district's local economy exhibits strength, maturity, and resilience. Income levels are well above average, poverty rates are low, and the population has been relatively stable, reflecting the degree to which the district area is built out.

The well-diversified tax base proved resilient during the housing-led recession, falling just 2.4% peak to trough from fiscal years 2010-2012. The tax base subsequently has grown to a new peak, with fiscal 2015 AV up a robust 21% from the trough in fiscal 2012. Year-over-year home price gains and some in-fill development bode well for further growth over the short term.

STRONG FINANCIAL POSITION
The district's financial position is strong, as exhibited by solid fund balances, a diverse stream of revenue sources not typically available to most school districts, and good expenditure flexibility. The district is in the midst of a planned and measured spend-down of fund balance after reserve levels peaked in times of greater revenue uncertainty.

Audited fiscal 2014 general fund operations produced a \$2 million deficit, lowering the total and unrestricted fund balances to still strong levels of \$18.2 million (22.3% of expenditures and transfers out) and \$14.6 million (17.9%), respectively. Projected financial operations for fiscal 2015 show a manageable \$1.6 million operating deficit, lowering the total and unrestricted balances to still sound levels.

The district's financial cushion is bolstered by an \$8 million (9.8% of fiscal 2014 expenditures and transfers out) capital reserve located outside of the general fund. This capital reserve is board-designated to be allocated to the re-opening of Blackford High School and has been set aside for some time. It is possible that the reserve could be spent down if the district re-opened Blackford, though other financing options exist.

Changing enrollment trends are increasing the risk that Blackford will need to be reopened, which could result in a drawdown of the Blackford re-opening fund. For some time the district's enrollment was stable to declining due to the aging demographics of the community. More recently, the district has reported an emerging enrollment bubble in feeder districts' K-3 sizes that would increase the high school district's enrollment by about 33% in seven years if trends continue. If the Blackford re-opening fund were to be spent down in conjunction with the general fund to a level materially inconsistent with an 'AA+' rating, Fitch would contemplate taking negative rating action.

Expenditure flexibility for the district is good overall given relatively low class sizes, capacity to implement a limited number of furlough days based on current paid teacher days, and wage reduction trigger language contained within labor contracts.

DIVERSE, GROWING REVENUE BASE
The district benefits from three revenue streams not available to most California school districts. The district's largest supplemental revenue source is its voter-approved parcel tax. The district has benefitted from a parcel tax since at least 2004, and the current one was renewed in November 2013 for an eight-year period. The tax is fixed per parcel with no inflation adjustment and generates \$4.8 million (5.8% of fiscal 2015 forecasted revenues) annually. The district has a solid history of voter support for the tax, with the November ballot measure supported by an impressive 77% of voters.
Second, the district's wealthy and diverse tax base generates more local property taxes for the district than what the state would guarantee, causing it to be a 'community supported district'. These surplus revenues are retained by the district and add \$4 million (4.8%) annually.

The district's smallest supplemental revenue source consists of lease revenues for an unused high school site. This source generates roughly \$2.2 million (2.7%) annually and must be used for capital purposes. If Blackford were to be re-opened, the district likely would lose this revenue source, which has been paying for a capitalized lease that matures in fiscal 2022.

ADEQUATE DEBT PROFILE
The debt burden is moderate, with net debt equal to \$4,821 per capita, or 3% of AV. However, principal amortization is slow, with less than 40% of debt retired over 10 years. The district is completing its capital needs assessment, which could ultimately result in a sizeable GO authorization, though no plans have been cemented to date.

Carrying costs (debt, OPEB, and pension costs as a percentage of total governmental spending) are moderate at 16%, but are likely to rise significantly due to CalSTRS pension contribution rate hikes in future years. Potential future debt issuances would further escalate carrying costs.

The district participates in the poorly funded CalSTRS pension system, as do all districts in the state. As part of its fiscal 2015 budget, the state initiated a seven-year program of pension contribution rate hikes that is structured to fully fund the system's unfunded liability over a 32-year period. The rate hike, if enacted as currently scheduled, would substantially increase the district's contribution rates to 19.1% of wages from 8.25%. The district's audited CalSTRS expenditures in fiscal 2014 equaled 4.7% of general fund expenditures and transfers out. If the district had hypothetically paid at the full phase-in contribution rate of 19.1%, the cost would have increased to 10.8%.