[July 21, 2014]

Fitch Affirms Mountain View School District, CA GOs at 'AA-'; Outlook Negative

Fitch Ratings has affirmed the following Mountain View School District, California (the district) ratings:

--$0.3 million general obligation (GO) election of 1977 bonds, series 2001-3 at 'AA-';

--$5.9 million Mountain View School Facilities Improvement District No. 1, CA (News - Alert) (SFID) GO (election of 2001) bonds, series 2001A at 'AA-';

--$ 1.6 million SFID GO (election of 2001) bonds, series 2001B at 'AA-'.

The Rating Outlook is Negative.

SECURITY

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

The SFID's GO bonds are secured by an unlimited ad valorem property tax on all taxable property within the SFID.

KEY RATING DRIVERS

CONTINUED NEGATIVE OUTLOOK: The Negative Outlook reflects concerns regarding draws on financial reserves despite an improving state funding environment. Failure to stabilize unrestricted fund balance levels by fiscal 2015 with projected improvement for future years would indicate financial pressure inconsistent with the current rating.

IMPROVING ECONOMY, CONCENTRATED TAXPAYERS: The local economy is mostly industrial, anchored by the Los Angeles/Ontario International Airport (the airport), with mixed wealth metrics and elevated unemployment. The housing recovery and new residential development at the New Model Colony has spurred recent tax base growth.

MANAGEABLE BUT GROWING LONG-TERM LIABILITIES: The current debt burden is moderate with average amortization, but debt levels are expected to increase for the construction of new school facilities. Debt and retiree benefits are affordable, though Fitch expects carrying costs to increase due to poor funding of state pension plans in which the district participates.

RATING SENSITIVITIES

FUND BALANCE IMPROVEMENT: A downgrade would likely result if unrestricted fund balance levels fail to stabilize and prospects for ultimate improvement are lacking.

CREDIT PROFILE

The school district covers 13 square miles composed of SFID (89% of district assessed value [AV]) and two community facilities districts in southwestern San Bernardino County, approximately 40 miles east of Los Angeles. The district serves a total 2013 population of 20,180, which has grown modestly over the last decade despite declining enrollment.

PROJECTED DEFICITS DESPITE INCREASED FUNDING

Due to a trend of declining enrollment and state fiscal distress, the district experienced general fund net operating deficits after transfers during fiscal years 2010 through 2012. To correct these imbalances the district achieved significant savings through workforce reduction, furlough days, early retirement incentives and increased class sizes. These efforts reduced expenditures in each of the last five fiscal years but have limited the district's expenditure flexibility going forward.

The district reported breakeven results in fiscal 2013, reversing a projected deficit of approximately 1.2% of budgeted spending at last review. The district's unrestricted fund balance was reduced, despite favorable results. Although recent reductions in unrestricted reserves are relatively small, they have thinned the district's fiscal cushion, which Fitch views as somewhat low for the rating. The fiscal 2013 unrestricted general fund balance decreased to $1.5 million, or 8.1% of general fund spending, down from 11.4% in fiscal 2009.

With an improved state revenue picture going forward, reflecting implementation of the local control funding formula (LCFF), the district opted to increase spending, including spending for the restoration of furlough days and pay increases across all emloyee groups. The district projects to draw down unrestricted reserves to $1.4 million, or 7.6% of general fund spending in fiscal 2014, while increases to fund balance are projected for future years. These projections include both the increased revenue from LCFF as well as the projected cost of recently settled labor contracts. The district's forecast appears reasonable, and achievement of such expectations will be critical to maintenance of the existing rating along with moving the Rating Outlook back to Stable.

INDUSTRIAL BASE WITH CONCENTRATION

The area is mostly industrial with logistics companies benefiting from the proximity to the airport. The city of Ontario's (the city) unemployment rate has improved significantly to 8.5% in May 2014, down from 10.5% one year prior. Unemployment remains above the state (7.1%) and nation (6.1%), which is consistent with the historical trend. Wealth metrics are mixed relative to state and national averages and have declined in recent years, though the local poverty rate is low.

AV of both the district and SFID have been relatively stable with only two years of modest declines throughout the recession. District and SFID AV now exceed their peak values in fiscal 2010 and continued positive momentum appears likely as Zillow indicates a strong recovery in home prices in the area since 2012.

Taxpayer concentration has moderated with overall tax base growth and shifts in taxpayer mix. The district's principal property taxpayers constitute 13% of the district's AV, and 15% of SFID AV, down from the prior year at 19% and 22%, respectively. The largest taxpayer, UPS Worldwide Forwarding, represents 3% of the total tax base for both districts, followed by apartment buildings and other industrial establishments.

The New Model Colony, a major residential and commercial development in the city that had been delayed for years, is completing the first phase of construction with over 400 homes scheduled for occupancy in December 2014. When all phases are completed, the development is expected to bring as many as 19,000 new households and 8,100 additional students to the district. The district is currently in discussion with the developer regarding the creation of a second SFID to secure funding for the construction for additional schools.

MODERATE LONG-TERM LIABILITIES BURDEN

The district's overall debt burden is moderate at $4,537 per capita (2.3% of AV). Amortization of direct debt is average, with 48% of principal scheduled to be repaid within 10 years. Management indicated that new debt will likely be issued in early 2016 for the construction of a new school to serve the first phase of New Model Colony residents.

District employees are covered under the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS). Funding levels for the plans are 63.5% for CalSTRS and 78.8% for CalPERS, based on Fitch's estimated 7% rate of return. The district's annual required contribution (ARC) was $990,000 in fiscal 2013.

Additionally, the district manages a separate other post-employment benefits (OPEB) plan to which it contributed a modest $110,000 or 0.5% of governmental fund spending in fiscal 2013.

Total carrying costs, including debt service and pension ARC, and OPEB contribution equaled a low 11.4% of governmental fund spending in fiscal 2013. However, carrying costs are expected to increase as pension contribution rates rise to address substantial unfunded liabilities in the pension systems.

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.

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=840761

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