Fitch Rates Los Angeles USD, California's $152MM COPs 'A-'.

SAN FRANCISCO -- Fitch Ratings assigns an 'A-' rating to the following Los Angeles Unified School District, Calif.'s new certificates of participation (COPs):

--$86,525,000 refunding COPs 2005 series A (Administration Building Project);

--$20,885,000 COPs 2005

--$44,230,000 refunding COPs 2005 series C (Various Properties Project).

Also, Fitch affirms the 'A+' rating on $4.48 billion in outstanding parity debt and the 'A-' rating on various COPs. The Rating Outlook for all ratings is Stable.

All series will be issued as variable-rate demand obligations with liquidity provided by a standby purchase agreement with Dexia Credit Local. The series A and B certificates will be insured by AMBAC and the series C by FSA. Fitch will assign ratings reflecting the credit enhancements closer to the closing.

All series will be sold through negotiation by Lehman Brothers, Citigroup, and E.J. De La Rosa & Co., Inc. The series C certificates will be priced on or about May 5 and the series A and B on or about May 23. Gardner, Underwood & Bacon LLC serves as the financial advisor.

The ratings reflect the district's continued financial pressures as well as initial elements of progress in restoring ongoing operating balance. Audited results for fiscal 2004 confirm a sizable operating deficit, although smaller than anticipated toward the end of that year. Nonetheless, the district's year-end reserves have been substantially reduced. The mid-year fiscal 2005 report shows a much smaller operating loss, the result of salary increases from recently approved contracts with employees. The district's economic base remains broad and diverse with declining unemployment levels and healthy assessed value gains. The district operates the nation's second largest school system and serves a broad range of educational and community needs including adult education, jobs skills training, and day care/preschool education. Fitch is concerned over the district's recent designation as a Program Improvement District by the State Department of Education and the impact it may have on enrollment and hence state and federal funding and overall financial operations.

While cutting nearly $500 million in expenditures for fiscal 2004, the district budgeted to retain some programs at levels beyond that supported by state and local resources. Rather, existing general fund reserves were used, resulting in a $255 million fund balance reduction, a significant 4.1% of expenditures and transfers out. The ending balance declined to a satisfactory $324 million, or 5.3% of the year's $6.14 billion in spending. However, this balance is well below prior year's levels, which were as high as 14.9% of spending in fiscal 1999 and 9.5% as recent as fiscal 2003. Fitch notes that the results are better than projected just prior to the fiscal year-end ($232 million, or 3.5%) and well above the budgeted $78 million.

The fiscal 2005 budget brought revenue and spending in balance, retaining the existing reserve levels in keeping with the 5% set by policy. However, a recent agreement with the districts' employee groups resulted in about a 2% salary increase, which, along with other adjustments, is projected to decrease ending reserves by $53.6 million. This figure is about 1% of total general fund spending, but nonetheless reduces an already lowered fund balance. Also, Fitch notes that budgetary savings were achieved in both recurring and one-time items. The non-recurring items include debt restructuring and the substituting of surety bonds for three debt service reserve funds.

The district expects savings from the two upcoming refundings to total $12.4 million, a high 9% of refunded bond par, with savings represented by conversion of the outstanding Beaudry debt to tax-exempt from taxable, as well as the refunding of fixed-rate certificates with variable-rate under the series C refunding. The new issues result in the district having 36% of its certificates and 12% of its total outstanding debt in variable rate, levels Fitch believes are within appropriate levels for this issuer. The district is taking the savings all within the next few years to achieve budget relief, indicative of its continued financial pressures.

The current debt burden is low at $2,294 per capita and 3.2% of taxable value. These figures will rise as the district funds its massive $15.5 billion capital plan, although the district expects to offset some of the new issuance with debt redemptions from developer fees. Substantial building is needed to alleviate overcrowding and better match facilities with student needs by area.

Fitch acknowledges certain positive developments by the district, and expects to see continuation despite several senior management changes. The improvement is marked by adoption of prudent debt and fiscal policies, which should help maintain healthier financial trends in the future. Fitch also notes generally rising attendance levels and continued movement in test scores toward reaching statewide averages. The decreasing differential is notable given the district's higher share of students qualifying as English language learners and eligible for federal lunch program funding. However, as noted above, Fitch views the district's recent designation as a Program Improvement District as potentially affecting its ability to attract and retain students (and thereby state and federal funding) and prevent student loss to competing private and parochial schools.