Fitch Ratings has revised the outlook on California's 12th largest school district to negative from stable, saying it may downgrade its ratings if structural balance isn't restored.

The agency assigned the outlook to all of the Sacramento City Unified School District's ratings, including the affirmed A rating on $32.6 million of Series 2001 certificates of participation, and A-plus rating on $213.7 million of general obligation bonds.

Fitch also assigned an A rating to the district's new $40.8 million of lease revenue refunding bonds, expected to price during the week of Jan. 8.

"The negative outlook reflects the districts failure to return to structural budget balance in 2014 as previously predicted due to a failure to control spending," analysts wrote in the credit report on Thursday. "Financial oversight is weak."

The GOs are secured by an unlimited ad valorem property tax, and the LRBs and COPs are secured by annual lease payments for the use and occupancy of essential district school buildings.

The district includes just over half of the state's capitol city and some adjacent suburban areas, totaling approximately 42,623 students.

The city has begun to recover from a deep recession with stabilization in the state's budget position and the district's large, diverse tax base has begun to grow again after a period of relatively manageable assessed value declines.

However, the district's reserves are very weak with unrestricted general fund balance equal to just 3.2% of expenditures at the end of fiscal 2013, Fitch said. The district expects to spend reserves down to just 2% of expenditures in fiscal 2014.

"The district's debt profile is weak, with a moderate but growing debt burden, manageable exposure to variable-rate debt, a poorly funded teachers' pension plan, and a large unfunded liability for other post-employment benefits," the report said.

Fitch said it expects to downgrade the ratings if the district does not convincingly restore structural balance in the near term.

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