Fitch Rts San Rafael City ESD General Obligation Bonds 'AA'.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--July 9, 2003

San Rafael City Elementary School District (the district), CA's $10.0 million election of 1999 general obligation bonds, series C and San Rafael City Elementary School District CA's $10.0 million election of 2002 general obligation bonds, series A are rated 'AA' by Fitch. Fitch also affirms the 'AA' rating to approximately $15.9 million general obligation bonds outstanding. The Rating Outlook for all of these bonds is Negative. The bonds will sell on July 10 through negotiation by Stone and Youngberg LLC.

The rating is based on San Rafael City Elementary School District's strong economic base, adequate financial operations, and minimal debt. These factors are offset somewhat by recent operating deficits, constant pressure to fund modernization of existing facilities, and the state's budget crisis. Because of its wealth levels, the district supplies most of its per-student funding from property tax revenues, with a very small portion from the state. Operational funding is supplemented by a parcel tax approved by the required two-thirds of voters in 1998. This approval, in addition to the positive vote for the general obligation 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 5.6% over the last six years.

Located in affluent Marin County, north of San Francisco, the district's estimated population of 56,700 encompasses most of the city of San Rafael, small portions of Larkspur and the town of Ross, and adjacent unincorporated areas of the county. Facilities include eight elementary schools and one middle school, which feed into the San Rafael City High School District (general obligation bonds rated 'AA' by Fitch Ratings). 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.

Financial operations are adequate but stressed. The general fund balance experienced significant growth in fiscal years 2000 and 2001, due, in part, to deferred categorical spending. Solid fund balances resulted, ending fiscal 2002 with a healthy $3.2 million ending general fund balance, or 12.4% of spending. After a slight operating deficit in 2002, projections for fiscal 2003 indicate a substantial drawdown of the solid fund balance. A portion of last year's projected fund balance decline is attributed to one-time carryover expenditures for categorical programs. The district has corrected the categorical funding imbalance in the fiscal 2004 budget by reducing categorical fund expenses to match recurring revenues. In addition, the district has prudently identified programs that could potentially be cut to offset possible state education cuts. However, concern over the declining fund balance trend, the unresolved labor negotiations for both fiscal 2002 and fiscal 2003, and uncertainty over the state budget remains.

Almost all the district's revenue limit funding per unit of average daily attendance (ADA), as set by the state, is generated by local tax revenues. About 75% of the district's total funding is generated by local funds. Enrollment grew in 2002 after two consecutive years of slight declines and is projected to remain fairly steady. In addition to gains in younger residents moving into the area, enrollment growth is partially a result of the admission of transfer students from outside the district. Since the district does not receive revenue limit funding from the state, no additional revenues are generated to fund the cost of educating these students.

Both direct and overlapping debt levels are low and are expected to remain so after the remaining $40 million authorized but unissued bonds from a November 2002 election are sold.