Fitch Rates San Rafael City Elementary School District, California's GOs 'AA'.

SAN FRANCISCO -- San Rafael City Elementary School District, CA's (the district) $30 million election of 2002 general obligation (GO) bonds, series B are rated 'AA' by Fitch Ratings. The bonds will sell on July 13 through negotiation by Stone and Youngberg LLC. In addition, Fitch affirms the district's 'AA' rating on approximately $34.5 million GO bonds outstanding. The Rating Outlook is Negative.

The 'AA' rating 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 a substantial projected drawdown for fiscal 2003 and a more modest operating deficit budgeted for 2004 as well as the uncertainty surrounding the state's education funding.

Audited fiscal 2003 results were much better than previous projections, with a more modest than expected operating deficit actually recorded. While Fitch recognizes that the district's 2003 financial position is stronger than previously anticipated and that the state's education funding picture is somewhat clearer than in the past, the district is still projecting a substantial drawdown for the close of fiscal 2004 and included another operating deficit, albeit more modest, in the 2005 budget. As a result, the Negative Outlook remains in place. Stabilization of financial performance and reversal of the trend of declining reserve levels would warrant reconsideration of the outlook.

Projections provided to Fitch last year pointed to a large $2 million operating deficit. Actual 2003 financial results, however, were much stronger with only a $250,000 drawdown recorded. The general fund balance stood at about $3.2 million, representing 11.5% of expenditures and transfers out.

Current estimates for fiscal 2004 anticipate a $1.6 million drawdown, with an ending general fund balance of $1.3 million, or 4.5% of expenditures and transfers out. The trend of declining fund balances may continue, as the 2005 budget includes a $200,000 operating deficit and ending reserves equaling 4.2% of expenditures. Offering some comfort is the fact that historically, actual operating results have outperformed the budget and previous year-end estimates, reflecting the district's generally conservative financial management practices.

Operational funding is supplemented by a parcel tax approved by the voters in 1998. This approval, in addition to the positive vote for the GO bond referendum, indicates strong support for education programs by taxpayers in this residential district. Debt levels are expected to remain low after all bonds from the November 2002 authorization are issued. The district has experienced good assessed valuation growth, with an average annual increase of about 7% since 1999, with the trend expected to continue at a similar pace.

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 well above average, while county unemployment rates remain well below state and national averages.

District facilities include eight elementary schools and one middle school, which feed into the San Rafael City High School District (GOs rated 'AA' by Fitch). The elementary school district and San Rafael City High School District are managed by a single board and share a common administrative staff but are operated separately.

The 2005 budget is based on the governor's May revised budget, which recommends a 2.4% increase in revenue limit funds to districts. However, enrollment drives funding sources such as revenue limit funds and despite the increase in state support, the net projected impact for the district is the loss of about $150,000 due to the modest decline in enrollment. A 1.9% decline in enrollment was experienced in 2004, with a more modest 0.3% decrease budgeted for 2005. Overall, enrollment has shown modest growth, rising 3.8% since 1998.

An area of concern identified last year has since been resolved. Labor contracts have been settled, with modest increases included in the budget for health benefits, although excess funds generated by greater than expected revenues could be directed to salary increases. Overall, a total of seven full-time teacher equivalents have been cut from the 2005 budget as a result of enrollment declines.

The current offering represents the second phase of borrowing of the November 2002 bond program authorized by over 55% of district voters. The program, which is reportedly ahead of schedule and on budget, will address various building improvements and facility renovations and modernizations. The remaining $9.3 million in authorization is expected to be issued within the next twelve to eighteen months. No additional borrowing is planned for at least eight years.

The district's debt position is a positive credit factor. Both direct and overlapping debt levels are low, even after including the remaining portion of the 2002 authorization. Payout is slow, reflecting district efforts to minimize the tax rate impact of the bonds.