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Fitch Rates San Ysidro SD, California $34MM GOs 'A'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'A' rating to $34 million San Ysidro School District (the district), California general obligation bonds, election of 1997, series E. The bonds are expected to sell via negotiation with Stone & Youngberg LLC during the week of November 12. In addition, Fitch affirms the rating on approximately $56 million of outstanding general obligation bonds at 'A'. The Rating Outlook is Stable.

The 'A' rating reflects the district's continued sound financial operations, good general fund balances, and strong, but moderating, assessed valuation (AV) growth. These factors are somewhat offset by high debt levels, the potential for further capital pressures from planned residential development, ongoing labor issues, and recent enrollment fluctuation. Although located in San Diego County, the district facilities did not sustain any damage as a result of the recent fires, although schools were closed for a week. Furthermore, due to the state's declaration of emergency, districts in fire-affected areas will receive full state attendance-based funding and will not have to extend the school year to compensate for the closure.

Student enrollment has fluctuated significantly and dropped nearly 6% this school year to its lowest level in six years. If enrollment does not return to projected growth rates in the 2009 school year, per pupil revenues would be negatively impacted, challenging the district's positive operations. In order to prepare for this possibility, district management is planning to build general fund reserves in fiscal 2008 to allow more time for planning and adjusting to new funding levels. The district expects enrollment growth to return to recent healthy levels as management forecasts continued long-term residential growth including a planned development in the Otay Mesa area. However, Fitch believes that the overall downturn in the national housing market may lead to some scaling back or delays in this development project.

Financial operations of the district are sound, marked by good general fund balances. Audited data for the past three fiscal years showed an increase in fund balances as growth in revenues outpaced expenditures. The fiscal 2006 fund balance was a very high $8.5 million, or 21.3% of total spending with the unreserved portion of the fund balance at a more moderate $1.8 million, or 4.6% of total spending. Unaudited year-end data for fiscal 2007 showed an increase in unreserved fund balance to about 5.3% of total spending. The fiscal 2008 budget projects a $3.5 million surplus, but labor contracts for the current fiscal year are still being negotiated. Both the teachers and the classified employees are currently working without contracts, although management expects to reach agreements this calendar year with moderate salary increases.

The bonds represent the fifth installment from a $250 million authorization approved by more than 86% of voters in 1997. The bond authorization limits the tax levy to repay the bonds to no more than $0.10 per $100 of AV, thereby keeping debt issuance affordable. Bond proceeds will be used to fund land acquisition and the construction of a new elementary school in the Ocean View Hills area. State matching funds, district funds and proceeds of a recent Qualified Zone Academy Bonds (QZABs) sale and an upcoming issuance of certificates of participation (COPs) are expected to supplement project costs. Bond proceeds may also fund modernization projects for various school facilities.

Along with the growing residential community, the district area has a large industrial and commercial presence due to its proximity to the Mexican border. AV has risen at a fast pace since fiscal 2003, averaging 16.4% annual growth, although AV growth in fiscal 2008 was a more moderate 9.6%, reflecting the slowing of the overall housing market. The tax base has no significant concentration with the top 10 taxpayers accounting for 9.6% of fiscal 2008 AV. Located 12 miles south of downtown San Diego and bordering Mexico, the district covers 29 square mile and has an estimated population of 30,305. Income levels are below average, increasing concerns about the high debt levels.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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
Date:Nov 5, 2007
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