LOS ANGELES — Fitch Ratings downgraded California's Oroville Elementary School District to A-plus from AA-minus based on a structural imbalance that has steadily eroded the district's previously solid fund balances.

The rating outlook is stable.

The downgraded affected $5.4 million of general obligation bonds, series 2003 that are payable from an unlimited ad valorem tax on all taxable property within the district.

The district serves about 2,500 students in Oroville, which is roughly 70 miles north of Sacramento.

Cost-cutting efforts weren't enough to alleviate reduced state funding and modestly declining enrollment, said Fitch analysts; and as a result, the district has experienced operating deficits during four of the past five fiscal years. Most recently, Fitch said the district recorded an operating deficit of $790,000 equal to 5% of spending in fiscal 2014.

The fiscal 2014 unrestricted reserve balance amounted to 6.3% of spending compared to 17.7% at the end of fiscal 2011, according to the report.

The district, however, does have improving revenues as a result of improved state funding and the adoption of the local control funding formula, which analysts said may offset enrollment declines and restore balance to financial operations. The district's overall debt burden also is relatively low, it has no additional issuance plans and outstanding debt amortizes at a rapid rate.

Limited expenditure flexibility and ongoing labor negotiations could be an issue for fiscal 2015 financial performance. Other challenges cited by Fitch analysts are a below-average income levels, an elevated unemployment rate and a taxable assessed value that dropped 8.3% below its previous high in fiscal 2008, according to the report.

Rising pension costs are built into management's financial projections and appear manageable. However, the additional expenditures will further constrain the district's ability to reduce costs, potentially adding another source of budgetary pressure if revenues do not materialize as expected.

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