OREANDA-NEWS. Fitch Ratings has affirmed its 'AA-' rating on the following Moreno Valley Unified School District (the district), CA's general obligation (GO) bonds:

--$1.5 million GO bonds, election 2004, series A;
--$32.1 million GO refunding GO bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge on all taxable property within the district.

KEY RATING DRIVERS

BALANCED BUDGET, SOUND RESERVES: Positive financial performance continues to add to sound reserve levels. Structurally balanced operations are expected, largely attributable to rising revenues.

RISING DEBT PROFILE: Overall debt ratios are above average and will likely keep rising due to continued issuance from a recent debt authorization. Growing carrying costs for long-term liabilities should remain manageable and amortization is average.

WEAK, IMPROVING ECONOMY: The local economy remains relatively weak with limited job growth and below-average income levels. The unemployment rate, while still above average, has come down significantly and taxable assessed value (AV) has almost fully recovered to pre-recession levels.

RATING SENSITIVITIES
SATISFACTORY RESERVES: The Stable Outlook reflects Fitch's expectation that the district's budget will continue to be structurally balanced and that drawdown of reserves for non-recurring uses will remain within projected levels. Negative rating action would likely occur if those expectations are not met.

CREDIT PROFILE

The district provides public education for grades kindergarten through 12 to approximately 34,000 students in Riverside County. The district's boundaries cover approximately 43 miles and include portions of Moreno Valley and Riverside City.

POSITIVE FINANCIAL PERFORMANCE
The district is expected to record a $9.5 million (3% of spending) operating surplus in fiscal 2015 (draft audit) following two years of positive results, benefitting from significantly increased state funding as well as prior expenditure reduction measures.

Financial performance for fiscals 2016 through 2018 is expected to remain solid as the district continues to benefit from generally improved state funding and the implementation of the Local Control Funding Formula (LCFF), as a result of its high targeted student population (85%). Despite a declining average daily attendance (ADA) trend due to competition from charter schools, the district is currently projecting a 17% increase in LCFF receipts for fiscal 2016.

While increased expenditures are likely to offset some of the district's revenue gains, Fitch expects financial operations to remain balanced in the near term. Fitch expects expenditure pressures to continue due to increased labor and Local Control and Accountability Plan (LCAP) costs.

SOLID FUND BALANCES
Unrestricted general fund reserve level has remained relatively stable historically at around 15% of spending despite volatility in revenues. Management plans to fund capital projects by using a portion of the currently solid unrestricted fund balance (fiscal 2015 draft audit at $56.4 million or 17% of spending). Fitch expects reserves to stay at or above the district's 10% informal reserve policy due to conservative budgeting and financial management.

WEAK, IMPROVING ECONOMY
The local economy remains relatively weak with below-average income levels. In November 2015, the unemployment rates in the city of Moreno Valley and Riverside County improved significantly from prior years but were still higher than state average (5.7%) at 6.6% and 6.2%, respectively. Income levels in Moreno Valley are below average with per capita income at 60% of the California average. The district's poverty rate at 20% is worse than the state average of 16%.

AV growth accelerated to 7.9% and 6.4% in fiscal 2015 and 2016, respectively, and AV is now only 2% below its pre-recession peak.

ANTICIPATED INCREASE IN DEBT
The district's debt profile has weakened significantly, due mostly to recent debt issuance. Overall debt ratios after the recent $103 million in new debt are above average at 5.4% of market value or $3,360 per capita.

The district received voter authorization (with 64% support rate) in June 2014 for $398 million in GO debt to finance a new high school, retrofit existing school sites, and address other district-wide capital needs. The first issuance of $103 million was completed in April 2015. Three additional issuances are currently planned between 2018 and 2024. If issued in full, the proposed additional debt would more than double the district's current direct debt load. The expected increase is factored into the rating.

OPEB AND PENSION PRESSURES
The district's fiscal 2014 contributions for other post-employment benefits and pensions were manageable at 6% of general fund spending. Future increases in contribution rates, however, appear likely based on the relatively weak funding levels of the OPEB and statewide pension plans. Carrying costs for debt service, pension and OPEB are manageable at 12% of governmental fund spending as of fiscal 2014 but likely to take up an increasing amount of the budget going forward, as all three components are expected to rise.