Fitch Ratings said it downgraded Eastside Union School District, Calif.'s $6.8 million series 2002 and 2003 general obligation bonds to A-minus from A.

The rating outlook is revised to stable.

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

The rating downgrade reflects the significant erosion of the district's unrestricted general fund balance in fiscal years 2011-2013, within the context of a weak local economy, limited tax base, dependence on volatile state funding, and policymakers' reluctance to fully align expenditures with revenues.

The district's reliance on state funding, its poor liquidity, and its limited local economic resources indicate the need for higher general fund balances than the 3.3% unrestricted general fund balance projected for fiscal 2013 year-end. Improved unrestricted general fund balances in fiscal years 2014 and 2015 are possible given the passage of Proposition 30 (absent further state funding volatility) but will still require the district to exhibit significant expenditure control.

While policymakers have demonstrated little willingness to make difficult expenditure cuts to date, their reluctance to do so has left them with a variety of available options for permanent expenditure reductions.

The district's dependence on volatile state funding is somewhat offset by a sparing use of debt, manageable pension and OPEB liabilities, and slowly growing student enrolment.

The local economy is characterized by high unemployment, low wealth levels, and a limited tax base which is finally stabilizing after three years of significant taxable assessed valuation (TAV) declines.

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