TEXT - Fitch affirms California's Cypress Elementary SD GOs

Fri Feb 15, 2013 2:18pm EST

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Feb 15 - Fitch Ratings has affirmed the following ratings for Cypress
Elementary School District (the district):

--$40.7 million general obligation (GO) bonds at 'AA'. 

The Rating Outlook is Stable.

SECURITY 

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

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: Prudent financial management drives consistently 
positive operating margins, ample liquidity, and solid reserve levels.

REDUCED RISKS FROM STATE DISTRESS: The November 2012 approval of Proposition 30 
by California voters removed the threat of mid-year funding cuts for the 
district in fiscal 2013. The proposed fiscal 2014 state budget presents a more 
favorable fiscal future for K-12 school districts.

WEAK DEBT PROFILE: With heavy reliance on capital appreciation bonds (CABs), 
debt service ascends steadily until 2050. The use of CABs, along with a current 
tax rate for debt service above the level committed to voters, limits debt 
flexibility for the foreseeable future. 

ABOVE AVERAGE SOCIOECONOMICS: The district benefits from its proximity to major 
employment markets in Orange and Los Angeles Counties. Wealth levels exceed 
state and national levels, while the unemployment rate is on par with the 
national unemployment rate.

RATING SENSITIVITIES

Negative rating action could result if the district's finances deteriorate. 
Given the weak debt profile, positive rating action is difficult to envision.

CREDIT PROFILE

Located in Orange County, the district is 30 miles south of Los Angeles and 
serves about 4,000 students.

HEALTHY FINANCIAL PROFILE 

The district has had strong financial performance over each of the last few 
years, with prudent financial management mitigating declines in enrollment and a
recessionary environment. Aggressive expenditure cuts have allowed the district 
to consistently maintain structural balance. The district ended fiscal 2012 with
a $903K net operating surplus, which represents 3.1% of total general fund 
spending. Reserve levels are healthy, with fiscal 2012 unrestricted fund balance
(sum of the unassigned, assigned and committed funds) at 23.8% of total general 
fund spending. 

With the passage of state Proposition 30, which temporarily increases state 
income and sales taxes, districts were spared mid-year funding cuts in fiscal 
2013. As a result, the district avoided a budgeted $1.7 million cut from the 
state. In its first interim report, the district projects a small operating 
deficit in fiscal 2013. 

Compared to other California school districts, the district has been relatively 
unaffected by significant deferrals of state funding as much of its revenue 
limit funding comes from property taxes. Liquidity levels remain satisfactory 
and the district has not issued tax revenue anticipation notes in recent years 
to meet cash-flow needs. 

LONG TERM LIABILITIES ARE GROWING BUT REMAIN MANAGEABLE

Overall debt levels are currently moderate at $2,039 per capita and 1.8% of 
assessed value. However, most of the district's debt is capital appreciation 
bonds, whose values steadily accrete through 2050.  Therefore, the debt burden 
would rise over time absent robust population and tax base growth even without 
further issuance. The declining enrollment trend further highlights the 
potential increased role debt service might play in future years' budgets. 
Fiscal 2013 debt service is a moderate 5% of the 2013 general and debt service 
fund budget, but maximum annual debt service, which does not occur until 2050, 
would make up 42%.

The district expects to issue a modest $7 million in certificates of 
participation (COPs) later this month. The district has authorization to issue 
additional general obligation bonds but outstanding debt already requires a 
slightly higher property tax rate than was promised to voters. 

The district participates in two state pension plans, the California Public 
Employees' Retirement System (CalPERS) and the California State Teachers' 
Retirement System (CalSTRS). While the district contributes 100% of the required
contribution for each system, CalSTRS is funded on a statutory basis which in 
recent years has been substantially less than the actuarially required 
contribution.  The district's total required contribution was equal to a 
manageable 5.7% of total general fund spending in fiscal 2012; however, given 
the poor funded ratios for both plans, Fitch expects increasing costs for 
participants in the future.

Other post-employment benefit (OPEB) costs are very manageable at 1.1% of total 
general fund spending. Total carrying costs, calculated by dividing fiscal 2012 
debt service, pension, and OPEB costs by governmental spending, equals a low 
11.7%.

ABOVE AVERAGE SOCIOECONOMICS 

The district benefits from its proximity to the Los Angeles County and Orange 
County employment markets. Median household income in 2011 equals 136% and 159% 
of state and national averages, respectively. The city of Cypress had an 
unemployment rate of 7.6% in October 2012, which is lower than the state 
unemployment rate of 9.8% and on par with the national unemployment rate of 
7.5%. District population growth lags the national average. Assessed value has 
remained stable.
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