[January 14, 2014]

Fitch Affirms Baldwin Park USD, CA's GO Bonds at 'A+'; Outlook Stable

Fitch Ratings affirms the following outstanding Baldwin Park Unified School District (the district), CA's (News - Alert) general obligation (GO) bonds at 'A+':

--$205,000 series 2003 GO bonds;

--$8.9 million series 2004 GO bonds;

--$11.2 million series 2005 GO refunding bonds;

--$6.3 million series 2005 GO bonds;

--$24 million series 2006 GO bonds;

--$22.6 million series 2007 GO bonds;

--$15.7 million series 2008 GO bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

RELATIVELY LIMITED RESERVES: The rating reflects the district's structural imbalance which is projected to continue over the next few years, keeping reserve balances close to the state required 3%.

INCREASED REVENUES AND EXPENDITURES: District revenues are projected to increase significantly despite enrollment declines as the Local Control Funding Formula (LCFF) is phased in. However, Fitch views expenditure pressures, particularly from labor groups, as reducing the district's financial flexibility and preventing a meaningful increase in the district's reserves over the medium term.

ABOVE-AVERAGE DEBT BURDEN: Overall debt ratios remain above average and direct debt amortizes at a slow rate. Carrying costs are moderate but expected to increase due to ascending debt service and expected increases in pension contributions.

WEAK LOCAL ECONOMY: The local economy exhibits high unemployment rates and below-average income levels. However, the area benefits from its proximity and access to the diverse Los Angeles labor market.

MODEST TAX BASE GROWTH: Taxable assessed value (AV) increased for the third consecutive year in fiscal 2014 and additional modest increases are expected as the real estate market recovers and limited additional development takes place in the city.

RATING SENSITIVITIES

REDUCED FINANCIAL CUSHION: Maintenance of adequate reserve levels is fundamental to the rating given the weak economy and above-average debt burden.

CREDIT PROFILE

The district covers nine square miles encompassing the city of Baldwin Park, and parts of Irwindale, Industry, and West Covina. District enrollment has trended down over the past several years with fiscal 2013 average daily attendance of 14,256, approximately 7.1% lower than in fiscal 2010.

WEAKENED FINANCIAL POSITION

The district's financial profile weakened somewhat since fiscal 2011 as two consecutive years of operating deficits modestly reduced reserve balances. At the end of fiscal 2013 (draft audit), the district's unrestricted reserve balance was $6.3 million or 4.8% of spending compared to $7.7 million or 5.2% of spending at the end of fiscal 2011.

The district made significant expenditure cuts in both fiscal 2012 and 2013 but they were insufficient to fully offset revenue declines that largely stemmed from volatile state funding and declining enrollment. The district recorded operating deficits of $1 million (0.7% of spending) and $948,000 (0.7%) in fiscals 2012 and 2013 (unaudited), respectively.

Reserve levelsare expected to remain low and may decrease modestly over the next couple of years due to projected budgetary imbalances. Management expects to record an operating deficit in fiscal 2014 as expenditure increases due to the restoration of seven furlough days and other expenditure increases exceed the additional revenue that the district expects to receive from improved state funding and the implementation of the LCFF.

District management expects to receive approximately $5 million-$6 million annually in additional revenue during the eight year implementation of LCFF. While Fitch views the significant revenue growth as a credit positive, expenditure pressures, particularly salary demands from labor groups whose contracts are currently under negotiation, are expected to largely keep pace with revenue gains over the near term.

ABOVE-AVERAGE DEBT BURDEN

The district's overall debt burden remains above average at $3,340 per capita and 6.3% of AV. The district recently issued approximately $24 million in GO debt (not rated by Fitch) to take out a corresponding amount of bond anticipation notes that were set to mature later in 2014. While the district does not plan on issuing any additional debt, direct debt levels are unlikely to decrease over the near term because of the slow amortization rate for outstanding principal.

RETIREMENT BENEFITS

The district participates in CalPERS and CalSTRS to provide defined-benefit pensions for employees. The district regularly makes its full annual contribution. However, Fitch views contribution rates as likely to rise, particularly for CalSTRS, given the pension plans' relatively weak funding levels. The additional costs may put further pressure on the district's financial performance.

WEAK LOCAL ECONOMY; MODEST TAX BASE GROWTH

The local economy benefits from its proximity to viable transportation options and diverse employment opportunities in the greater Los Angeles metropolitan area. However, the unemployment rate in the city of Baldwin Park remains high at 12.7% (June 2013) compared to the regional average of 9.2%. Income levels in the city are also relatively weak with per capita income at 52.6% of the state's average.

The district recorded AV growth in fiscal 2014 of 3.2%, marking the third consecutive year of increases. An improved real estate market and limited redevelopment in the largely built-out area are expected to support relatively stable AV performance over the near term. The tax base is not concentrated, with the top 10 taxpayers comprising 6.6% of total AV.

Additional information is available at 'www.fitchratings.com'.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814532

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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