Fitch Rates San Rafael City ESD, California GO Bonds 'AA'; Outlook Negative.

AUSTIN, Texas -- San Rafael City Elementary School District, CA's $9.3 million election of 2002 general obligation (GO) bonds, series C are rated 'AA' by Fitch Ratings. The bonds will sell the week of July 25 through negotiation by Stone and Youngberg LLC. In addition, Fitch affirms the district's 'AA' rating on approximately $64.5 million GO bonds outstanding. The Rating Outlook is Negative.

The 'AA' rating to San Rafael City Elementary School District (the district) is based on the district's strong economy, growing tax base, and moderate debt position. The Negative Outlook was assigned to the district's GO bonds in July 2003, reflecting substantial projected general fund drawdowns as well as the uncertainty surrounding the state's education funding. Although conservative fiscal practices have yielded better than projected results over the past two years and the state's funding picture is clearer than in the past, financial pressures for the district remain and another sizable operating deficit is anticipated for fiscal 2005. However, district efforts to eliminate its structural imbalance appear to be proving successful, with the fiscal 2006 budget calling for a modest operating surplus. Near-term financial stabilization coupled with voter support for renewal of the district's parcel tax would be viewed favorably by Fitch and warrant a reconsideration of the Outlook.

Located in affluent Marin County, north of San Francisco, the district's estimated population of 57,000 encompasses most of the city of San Rafael, small portions of Larkspur and the town of Ross, and adjacent unincorporated areas of the county. Wealth indices are high, while county unemployment rates remain well below state and national averages. The district's tax base continues to grow at a steady clip, recording annual gains averaging nearly 7% over the past five years.

Audited fiscal 2004 results, as in the case with the prior year results, were much better than previous projections, with the district posting a modest operating surplus. The district's second interim budget had projected a $1.6 million operating deficit. Decreases in state support were more than offset by expenditure controls, resulting in a much improved financial position. For fiscal 2004, the general fund balance stood at about 11% of expenditures and transfers out; the undesignated reserve was over 6%.

In order to close a structural imbalance, the district has tightened expenditures. Salary increases have been modest and essentially flat enrollment has enabled the district to eliminate nine full-time equivalent teaching positions in 2005. In addition, officials have focused more efforts in reducing encroachment of special education and transportation expenditures on the general fund, two areas where the district has experienced some problems in the past. While the district's second interim budget for fiscal 2005 estimates a $1.3 million drawdown, officials anticipate a more moderate, although still sizable, drawdown for the close of fiscal 2005. The budget for fiscal 2006, however, is balanced.

Operational funding is supplemented by a parcel tax approved by the voters in 1989 and 1998. These approvals, in addition to the positive vote for the GO bond referendum, indicate strong support for education programs by taxpayers in this residential district. The parcel tax, which expires following the 2006 fiscal year, provides additional funds to augment the district's operating budget and to retain instructional programs and ensure low class size. Parcel tax revenues represent about 6% of fiscal 2006 general fund budget. The district is seeking an eight year renewal of the tax through a special all-mail election to be held on Aug. 30, 2005. The early election, which requires two-thirds approval, provides the district with adequate time to re-offer the renewal in the event of non-passage prior to its expiration.

The district's debt profile is favorable; both direct and overlapping debt levels are moderate. Payout is slow, reflecting efforts to minimize the tax rate impact of the bonds. No additional GO bond borrowing is planned. A $4.5 million certificate of participation (COP) sale is tentatively scheduled for this fall in order to complete construction of an elementary school. Developer fees are expected to provide sufficient debt service support on the COPs.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.