Fitch Rates 'AA' Moreland Sch Dist, CA GO Rfdg Bds, Series B and C.

SAN FRANCISCO -- Fitch Ratings assigns an 'AA' rating to Moreland School District (the district), Santa Clara County, California's $11.8 million general obligation (GO) refunding bonds, series B and series C. In addition, Fitch affirms the 'AA' rating to the district's approximately $73.2 million outstanding GO bonds. The bonds are expected to sell via negotiation with Piper Jaffray & Co. on Dec. 14. The Rating Outlook is Stable.

The rating reflects the district's adequate cash position, solid historical assessed valuation increases, low to moderate debt levels, and wealthy economic base. These factors are offset somewhat by the slowdown of the regional economy, which could potentially affect future assessed value gains, declining enrollment, and slow debt amortization rates. A land- and facilities-rich district, Moreland generates additional income by leasing surplus property and facilities. Lease revenues provide the district flexibility to fund special programs, which could be cut upon lease expirations. However, the majority of the leases are long-term arrangements, mitigating lease renewal concerns. The district also has generated cash from land sales, with reserves from those sales providing additional financial flexibility.

The district is located in Santa Clara County, comprising portions of San Jose, Campbell, and Saratoga. Assessed value growth has been strong, despite a slump in the area's economy, increasing 6.5% in fiscal 2005, 7.8% in 2004, 5% in 2003, 11.7% in 2002, and 7.3% in 2001. County unemployment rates are recovering from their dramatic increases following the economic slump in the region, with the September 2004 rate down to 5.5% from its level one year ago of 7.9%. Wealth levels are quite high and are consistently above state and national levels.

The district's financial position is bolstered by large cash reserves in the building fund that supplement minimal general fund reserves. The building fund balance at the end of fiscal 2003 was $16.6 million, with an estimated balance of $16.7 million in fiscal 2004. The majority of building fund reserves resulted from the sale of school properties. Interest income from the building fund is used to subsidize general fund operations in the form of annual transfers. Building fund reserves could be used for general fund operations upon State Allocation Board (SAB) approval. District officials believe approval would be granted in the unlikely event it was needed.

The fiscal 2003 ending general fund balance totaled $1 million or 3.2% of spending, down from 4% the prior year due to a $400,000 fund balance drawdown. Year-end data estimate a slight drawdown in fiscal 2004, thereby keeping the fund balance at 3.2% of spending. Although flexibility in the general fund alone is narrow, unrestricted special revenue funds also are available for general fund operations, if necessary. Including the unrestricted special fund reserves, estimated reserves for fiscal 2004 are $1.9 million, or 6.7% as a percentage of general fund spending. Although Fitch expects the general fund balance to be maintained at current levels, further drawdowns of the general fund could result in rating pressure.

The district's low to moderate debt levels stem from enrollment declines and excess school capacity, resulting in limited growth-related capital needs. Direct debt after the current issuance is a low 1.9%, with overall debt a more moderate 3.7%. Of concern, however, is the slow debt amortization rate, only 19.1% over the next 10 years. Bond proceeds will refund certain of the district's outstanding general obligation bonds, 1995 Election, series D and series H.