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Fitch Rates Cypress ESD, CA's GOs 'AA'; Outlook Stable.

SAN FRANCISCO -- Fitch Ratings rates Cypress Elementary School District (ESD), California's (the district) general obligation bonds (GOs) as follows:

--$22.3 million 2008 Election GOs, series B-1 (Tax-Exempt) 'AA';

--$4.5 million 2008 Election GOs, series B-2 (QSCBs) 'AA'.

The bonds are expected to sell via negotiation the week of April 18. Proceeds will be used to retire outstanding bond anticipation notes and finance renovations to existing facilities.

In addition, Fitch affirms following ratings:

--$18 million outstanding GOs at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'AA' rating reflects the district's currently sound financial operations, including a good general fund balance, a significant supplemental revenue stream, which is unusual for school districts, a history of prudent management practices, and the potential for leasing or selling recently shuttered schools to provide additional revenues over the next few years.

--Nonetheless, financial operations are vulnerable to declining enrollment, a challenged state funding environment, and the expected cessation of one-time federal stimulus revenues.

--The local economy is good overall, exhibited by a relatively mature and resilient housing market and solid income levels; however, unemployment is somewhat high.

--Additionally, the local economy benefits from its proximity to the large employment markets of Los Angeles and Santa Ana.

--The tax base is somewhat concentrated, but has held up well in spite of recessionary pressures.

--The district's debt profile is somewhat weak. The politically pledged tax rate ceiling has been reached, assessed value (AV) growth assumptions are very aggressive, and amortization is very slow, so future financing flexibility will be limited. However, debt levels remain low, and remaining capital needs are limited after this issuance.

KEY RATING DRIVERS:

Fitch expects reserves to remain at adequate levels given prudent management actions to date and remaining expenditure flexibility, in spite of a challenging state funding environment and declining enrollment.

The local economy has remained relatively resilient throughout the recession, and Fitch expects that it will remain so over the near term.

SECURITY:

The bonds are secured by an unlimited ad valorem tax pledge on all taxable property within the district's boundaries.

CREDIT SUMMARY:

The district serves approximately 45,000 residents in a six square mile area of northern Orange County, including the city of Cypress, and portions of La Palma, Buena Park and Los Alamitos. Academic performance is very strong, making the district competitive with private and charter schools. As with most of the region, the district is grappling with a long-term trend of declining enrollment. The local economy is good overall, with the area benefitting from its proximity to the large and diverse Orange County and Los Angeles employment markets. Further, the district's mature tax base has held up well in spite of recessionary forces, income levels are high, and non-agency foreclosure levels have remained subdued. December unemployment fell to a still high 9.4% from 10% a year prior.

Financial operations are solid overall. Fiscal 2011 general fund operations are projected to produce a $669,000 surplus, raising the total and unreserved fund balances to good levels of $4.72 million (15.9% of expenses and transfers out) and $4.7 million (15.8%), respectively. Additionally, the district has $6 million in a capital fund, and believes a significant, but as yet undetermined, portion of it could be transferred to the general fund at the board's discretion. Current year financial projections are set to well out-perform a budgeted draw-down of $800,000 due largely to the deferral of expenditures. Over the next two years, these accumulated savings will largely be spent down, lowering the projected fund balance to lower but still adequate levels of about 3.8% by fiscal 2013. However, management has tended to budget conservatively. Also, projected draw-downs assume state-wide taxes are not extended, resulting in a $349 per average daily attendance revenue decline. It is further assumed that the district would take limited offsetting actions.

The district faces both a challenging state funding environment and declining enrollment. Management prudently has responded by implementing substantial expenditure reductions and school closures, retaining certain one-time revenues, and by conservatively budgeting enrollment levels. Management is contemplating leasing or selling its shuttered schools, which may generate up to $2 million-$3 million annually within the next few years. The district additionally benefits from the Cypress Education Foundation, which donates $500,000-$600,000 annually to the district.

The district's debt profile is somewhat weak. Net debt levels are a low $2,237 per capita (2% of AV), but amortization is extremely slow with just 16.3% of debt amortized in 10 years. Currently the district's politically pledged tax rate ceiling of $24.63 has been reached, and staying below it will require that very aggressive AV growth assumptions materialize over the next 15 years. Fitch notes, however, that AV rates required to keep under the legal $30 rate cap at the time of issuance are materially lower, and that the tax rate is unlimited after issuance. Nonetheless, the combination of very slow principal amortization and a lack of additional tax rate capacity will restrict future financing flexibility.

As with all California school districts, pension costs likely will rise over the intermediate term due to investment losses in recent years. The district's other post employment benefit (OPEB) liability seems manageable, and management has prudently acted to lower its liability.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and LoanPerformance, Inc.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated 16 Aug 2010.

'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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Publication:Business Wire
Geographic Code:1U9CA
Date:Mar 18, 2011
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