Fitch Ratings assigns an 'A-' rating to $7.6 million El Rancho Unified School District, Los Angeles County, California's (the district) general obligation bonds, election of 2003, series 2004. The bonds will sell via negotiation led by George K. Baum and Associates on or about Dec. 7. In addition, Fitch affirms the district's 'A-' rating on outstanding $26 million general obligation bonds. The Rating Outlook is Negative.

The rating reflects the district's growing assessed valuation, stable underlying economy, and relatively low debt levels. Also incorporated in the rating and Negative Outlook is the district's strained financial position. Although sizable expenditure cuts implemented by the district had been projected to result in positive year-end performance for fiscal 2003, audited finances show a negative general fund balance position due to sizable prior period adjustments. Preliminary fiscal 2004 projections and the fiscal 2005 budget point to marked improvement. However, failure to achieve budget balance and to rebuild reserves to more appropriate levels in the near term would likely result in further credit deterioration and a downgrade.

Coterminous with the City of Pico Rivera, the district's population is just over 65,000. District enrollment has remained stable with approximately 12,000 students for the 2003 and 2004 school years. The district projects flat to slightly declining enrollment for the next few years, resulting in minimal growth driven needs in the future. Economic indicators within the area are mixed, with median household buying income declining slightly in 2003 from 2002 levels, while unemployment numbers have improved in 2004 over 2003's. Assessed value has steadily increased, averaging nearly 6% over the past five years.

Despite the stable and growing tax base, the district's financial operations have been under considerable pressure as reflected by operating deficits and slim cash balances. Since fiscal 2000, the district has maintained unrestricted reserve levels well below the 3.0% of spending required by the state, recording unrestricted reserve deficits in each year since 2001. As a result, the state has assigned a qualified certification to the district's interim reports over the past two fiscal years.

Management has made efforts to address negative operating margins by cutting $6.3 million from the 2003 and 2004 fiscal year budgets, as well as transferring previously reserved money to the economic uncertainty designation. However, due to prior year adjustments and a receivable deemed unrecognizable as revenue for fiscal 2003, the expenditure cuts were not sufficient to bring the district in line with previous projections. For fiscal 2003, the general fund balance stood at negative $238,000, with the undesignated fund balance at about negative $1.4 million. Earlier district projections for fiscal 2003 had anticipated an ending general fund balance of about $2.4 million.

Unaudited information for fiscal 2004 indicates a modest operating surplus resulting in a positive fund balance and unrestricted reserves of 0.9% of expenditures and transfers out. While reserves are budgeted to increase in fiscal 2005, the 3% unrestricted reserve required by the state may not be met. Restoring fiscal integrity and rebuilding reserve levels remains key to maintaining the current rating.

This sale is the second from a $49.5 million Proposition 39 authorization approved by 69% of voters in November 2003. The authorization will fund handicapped accessibility projects, schoolyard playgrounds, and a gymnasium, among other projects. Bonds are secured by an unlimited ad valorem pledge on all taxable district property and are expected to be paid within a $60 per $100,000 taxable assessed valuation levy. The capital plan will be funded with bond proceeds, state-matching funds, and developer fees. Typical of many California school districts, principal amortization rate is below average.