Fitch Rates Cypress-Fairbanks ISD, Texas' $243.7MM Rfdg GOs 'AAA' PSF/'AA-' Underlying.

AUSTIN, Texas -- Fitch Ratings has assigned an 'AAA' rating to the Cypress Fairbanks Independent School District, Texas' (the district) $243.7 million unlimited tax refunding bonds, series 2007. The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF; insurer financial strength rated 'AAA' by Fitch). In addition, Fitch assigns an underlying 'AA-' rating to the series 2007 bonds, which are expected to sell on Jan. 18 via a syndicate led by Merrill Lynch & Co. Also, Fitch affirms the 'AA-' underlying rating on the district's approximately $1.16 billion in outstanding general obligation (GO) bonds. The Rating Outlook is Stable.

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2007 bonds are further secured by the Texas Permanent School Fund guarantee. Bond proceeds will be used to refund certain outstanding obligations for debt service savings.

The underlying 'AA-' rating reflects the district's strong tax base growth, sound management practices, and historically healthy financial position. Also considered in the rating are operating and capital pressures associated with rapid enrollment growth, as well as the district's high overall debt load. The tax base growth is providing additional property tax receipts to meet service and infrastructure demands of growing enrollment. Future challenges for the district include continued rapid enrollment growth coupled with the implementation of a new funding formula, both of which will continue to pressure the district's healthy, but declining fund balance. Moreover, capital needs are being financed with additional debt, thereby increasing the already high direct debt ratios.

The district is the third largest in the state in terms of student population. It is located in west and northwest Harris County and covers 186 square miles, including the unincorporated communities of Cypress and Fairbanks, as well as the City of Jersey Village. A small portion of the City of Houston lies within the district along its eastern boundary. The service area represents approximately 10% of the county and is approximately 60% developed. Beginning the 2006-07 school year with nearly 92,000 students, enrollment has increased by 9% just in the last year. District officials project reaching enrollment in excess of 100,000 by 2008.

Although the district's tax base is primarily residential, the commercial component represents almost one-fourth of the value. The district's commercial sector is diversified and includes utility, manufacturing, and retail businesses. Tax base growth has exceeded $1 billion annually, averaging gains of 9.5% per year for the past five years. Growth in taxable assessed value has enabled the district to maintain a fairly stable tax rate and provided the financial resources to meet demands associated with rapid enrollment growth; however, the district is experiencing operating pressures resulting in general fund balance reserve draws despite implementation of significant cost containment measures.

Tax base growth generally in excess of enrollment growth has resulted in a shift of the district's revenue composition; state aid decreased to 29% in fiscal 2006, compared with 41% state aid received in fiscal 2000. In fiscal 2006 the district recorded an operating deficit of $3 million; however, this was much lower than the originally budgeted operating deficit of $18.6 million. Despite the recent operating deficits, the district closed the fiscal year with a $71.6 million unreserved and undesignated general fund balance, equivalent to 14.7% of operating expenditures and just under its goal of maintaining a two month operating expenditure reserve. In fiscal 2006 the district issued tax anticipation notes for the first time in 10 years to meet cash flow needs. For fiscal 2007, although the projected cash flow needs of the district were only $17 million, the district issued $35 million in June 2006 (rated 'F1+' by Fitch).

Fiscal 2007 will be the first year that Texas school districts operate under a new funding formula that was approved by the state legislature as a taxpayer relief effort. Implementation of this new formula enables school districts to reduce their operations and maintenance tax rate because the state will increase its funding ratio. This formula is expected to result in a revenue-neutral position for the district. The local funding portion for the district in fiscal 2007 will be reduced to approximately 47% and the state will provide about 51% of operating funds. The fiscal 2007 budget is balanced with an adopted operations and maintenance tax rate of $1.354 per $100 of taxable assessed valuation (TAV) and additional expenditure cuts totaling $13.7 million.

The current issue will refund certain outstanding obligations to achieve debt service savings. In December 2004, district voters approved two bond propositions totaling $713.2 million. The district currently maintains authority to issue an additional $462.8 million from the 2004 approved bond package. To keep pace with the growing enrollment base, the district expects returning to the market in the summer of 2007 with another $200-$250 million issue and selling the remainder sometime in fiscal 2008. Direct debt ratios are high and growing, with debt per capita and debt to TAV at $1,363 and 3.8%, respectively. Overall ratios have jumped well above average levels, even after discounting state support on one-fifth of the district's outstanding bonds. Overall debt per capita is $3,471, while debt to TAV is a high 10.5% in part due to the debt of the numerous municipal utility districts in the region

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