[March 18, 2013]

Fitch Affirms Lake Tahoe Unified School Dist, CA's GOs at 'AA-'; Outlook Stable

Fitch Ratings affirms the 'AA-' rating on the following Lake Tahoe Unified School District, California (the district) general obligation (GO) bonds:

--$14.6 million election of 1999 series A and B;

--$2.1 million refunding bonds series 2002;

--$6.2 million refunding bonds series 2005.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOUND FINANCIAL CUSHION: A satisfactory level of general fund reserve remains despite recent operating deficits and state funding volatilities.

ADEQUATE FINANCIAL MANAGEMENT: The district has a history of proactive financial management and retains substantial expenditure flexibility. Fitch expects the district to make necessary cuts if funding does not increase as proposed in the governor's budget.

LIMITED ECONOMY: The tourism-centered local economy endured three consecutive years of assessed value (AV) declines. Wealth level indicators are below state and national averages.

MODERATE DEBT: The overall debt burden is moderate, although bonds are long dated with slow amortization. The district does not incur costs related to other post-employment benefits (OPEB). Pension contribution requirements are currently affordable, but will likely rise.

RATING SENSITIVITIES

FAILURE TO MAINTAIN RESERVES: A failure to resolve the district's remaining structural budget imbalance, resulting in a significant decline in reserves from the current level, would put downward pressure on the rating.

CREDIT PROFILE

The 250 square miles district serves 30,000 residents of the city of South Lake Tahoe and portions of the unincorporated areas of El Dorado County and Lake Tahoe Basin. The district operates four elementary schools, one middle school, two high schools and a continuation school, with around 3,800 students.

SOUND FINANCIAL PROFILE

Fiscal 2012 ended with a $428 thousand (1.3% of spending) net operating deficit after transfers, offsetting the $302 thousand surplus produced in fiscal 2011. Fiscal 2013 is projected to incur another operating deficit; however, management expects the unreserved general fund balance to remain at a satisfactory level of 9% of spending.

Faced with enrollment declines and the challenging state funding environment, the district relied on one-time federal funding, attrition, class size increases, transportation savings, and draws on reserves to balance budgets in recent years. A reduction of three teacher days was planned for fiscal 2013 but later restored with the receipt of additional one-time funding. Liquidity position is satisfactory, given the general fund's access to other internal funds.

The district has substantial flexibility to increase class sizes, reduce the number of paid teacher days, or cut programs, if cost saving is needed. The Nvember 2012 approval of Proposition 30 by California voters (increasing income and sales taxes temporarily) removes the threat of mid-year funding cuts for the district.

Improved state revenues appear likely to boost school funding in fiscal 2014 and help restore state revenues that were deferred during the recession. Fitch expects the district's financial conservatism, commitment to maintaining satisfactory reserve levels, and remaining expenditure flexibility to result in continued sound financial position.

WEAK ECONOMY AND TAX BASE

Ski-related tourism dominates the local economy, with taxpayer concentration in hotels and resorts. Good snow levels have helped revive local businesses. Student enrolment appears to have stabilized after a persistent decline.

Unemployment rates exhibit seasonal volatility, but overall trends are positive. The county's seasonally adjusted annual unemployment rate has shown a steady decline from its peak of 12.5% in 2010, down to a still elevated 10.3% in 2012. Per capita income for the district is 10% below national average.

Fiscal 2013 assessed value (AV) is 10% below the peak value after 3 years of decline, although Fitch believes recent home price stabilization may indicate AV stabilization in the near term.

MODERATE DEBT, SLOW AMORTIZATION

Debt burden remains moderate, with total debt at $4,196 per capita, or 2.1% of market value. The district has no GO authorization capacity left and has no plans to issue additional debt.

Debt amortization is slow, and series 2010 and 2012 GOs have a long final maturity date of 2045. A portion of the outstanding GO bonds are capital appreciation bonds (CABs) structured in such a way that annual debt service increases consistently and gradually.

The district does not provide other post-employment benefits (OPEB). Total fiscal 2013 debt service and pension carrying costs are equivalent to a moderate 15% of governmental funds spending, less capital projects. Though currently affordable, pension costs are expected to rise.

The district participates in the poorly funded CalSTRS pension system for teachers, as do all schools in the state. CalSTRS contribution rates are set by statute and they have not been increased to reflect the weak investment return environment over the past several years. The system's Fitch-adjusted funded ratio (assumes 7% investment return) has fallen to a low 65.7%. Future contribution rates likely will need to rise substantially from current levels and Fitch believes districts would likely bear at least part of the burden.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=685314

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