Fitch Rates Cypress-Fairbanks ISD (TX) TANs 'F1'; Taxable 2010A ULT Bonds 'AAA' PSF/'AA' Underlying

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'F1' rating to Cypress-Fairbanks Independent School District, Texas' (the district) $20 million tax anticipation notes (TANs), series 2010. Fitch also assigns an 'AAA' rating to the district's $30 million unlimited tax (ULT) qualified school construction bonds, taxable series 2010A. The rating on the 2010A bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose Insurer Financial Strength is rated 'AAA' by Fitch. Fitch also assigns an underlying 'AA' rating to the 2010A bonds.

At this time, Fitch also affirms the rating on the district's outstanding debt as follows:

--Approximately $1.8 billion in outstanding ULT bonds affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'F1' rating considers the lack of a formal replenishment requirement, well ahead of the maturity date, although note funds are held separately according to resolution, and in practice, the district replenishes the year's TAN funds as state aid and property tax revenues are received.

--Pledged revenues for note repayment are diverse and generally stable; borrowing is less than last year.

--Cash flow assumptions associated with short-term borrowing are based on conservative revenue and expenditure projections.

--Coverage from the district's net cash balance in the general fund is good at 1.9 times the note principal when it matures and enhanced somewhat with a very modest cushion from limited borrowables.

--The district's long-term rating of 'AA' reflects its sound management practices, healthy financial position, a modest decline in taxable values that reverses a trend of strong tax base gains, as well as high debt levels and slow principal amortization.

KEY RATING DRIVERS:

--Legal requirements related to the TAN resolution that would require mandatory set-asides for eventual full repayment would strengthen the short-term credit quality.

--The district's ability to maintain solid reserve levels and fiscal balance is key to maintaining long-term credit quality, particularly in light of financial pressure from its below average state revenue target.

SECURITY:

Revenues pledged for note repayment consist primarily of ad valorem taxes levied by the district in fiscal 2011 for operating purposes and state appropriations, excluding any revenues collected or received by the district for debt service. The bonds are secured by an unlimited ad valorem tax pledge of the district. In addition, the bonds are secured by the Texas PSF guaranty.

CREDIT SUMMARY:

Note proceeds will be used to finance a short deficit period that is projected to occur mid-December 2010 in the district's operating fund cash flow during the fiscal year ending June 30, 2011, due to the uneven nature of cash receipts from state appropriations and property taxes. While cash flow projections indicate expenditures will significantly outstrip revenues, assumptions are conservative compared to the balanced budget and actual cash flow performance has historically outperformed projections.

Based on past practices by the district that included replenishment of last year's $36 million TAN borrowing five months ahead of the maturity date, Fitch has confidence in the district's continued financial performance that repayment will again be made in a timely manner and in full. In addition, Fitch notes favorably the district's net cash balance in the general fund that is projected at a solid 1.9 times the note principal when it matures on June 28, 2011. Additional borrowables are limited, but it is projected that they could provide approximately 40% of the note principal in the event of a short-term financial stress. Fitch also notes that cash flow projections indicate a much lower cash position by the close of fiscal 2011 than in the prior year; however, and in light of the district's ongoing financial pressures, Fitch believes legal requirements in the resolution that would require mandatory set-asides for eventual full repayment would strengthen the short-term credit quality of the TAN.

While operations have experienced some financial pressure from the district's below average state revenue target, particularly in light of slower enrollment growth trends, management has made necessary budget cuts (about $56 million during fiscal years 2007-2010) in order to sustain fiscal balance. The district maintains one of the lowest costs per pupil among its peer districts, reflective of management's prudent fiscal stewardship and tight budgetary measures. The large $24 million deficit in fiscal 2008, which dropped the unreserved general fund balance to $50 million or 8% of spending, was due in large part to significant operating pressures from lower than expected enrollment. Audited results for fiscal 2009 were stronger than originally projected, however, bringing the unreserved general fund balance up to $68 million or 11% of spending and closer to pre-fiscal 2008 levels. These results were assisted with the district's receipt of approximately $14 million in additional one-time state revenues, generated primarily from successful property tax appeals by the district.

Year-end projections for fiscal 2010 are again positive and management conservatively anticipates adding a minimum of $12 million to general fund reserves, which would bring reserves up to almost 13% of spending; results were assisted by additional state revenues from successful property tax appeals and reconfiguring program delivery. The district's 2011 general fund expenditure budget of $703 million was adopted as balanced after additional expenditure cuts were made and break-even results are projected.

Located in the northwestern portion of Harris County, the district is one of the largest in the state in terms of student population, which currently totals about 104,000 students. Taxable assessed valuation (TAV) growth slowed sharply in fiscal 2010 to nearly 3% from previously strong levels that have generally exceeded 10% per year. Valuations are projected to decline modestly by about 5% in fiscal 2011, due in large part to the housing market downturn as well as declines in existing residential values. Nonetheless, the district's tax base remains substantial at almost $43 billion in market value as of fiscal 2010 and long-term prospects for additional development in the district remain promising, given the district's location in the broad, diverse Houston MSA.. Reflective of these trends in the tax base, annual enrollment increases have moderated from previously rapid rates and are now closer to 3%-4%.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' includes:

--'Tax-Supported Rating Criteria,' Dec. 21, 2009;

--'U.S. Local Government Tax-Supported Rating Criteria,' Dec. 21, 2009.

--'Rating Municipal Short-Term Debt', Oct. 18, 2007;

--'Revenue-Supported Rating Criteria', Dec. 29, 2009;

--'State Revolving Fund and Municipal Loan Pool Rating Guidelines', April 28, 2008;

Considerations for Taxable/Build America Bonds Investors

This sector credit profile is provided as background for investors new to the municipal market.

Local Government General Obligation Bonds:

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing and, therefore, is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA', with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities, including debt and post-employment benefits, and/or unusually limited financial flexibility. For additional information on these ratings, see 'U.S. Local Government General Obligation Rating Guidelines,' dated Dec. 21, 2009 and available on Fitch's Web site at 'www.fitchratings.com'.

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

Related Research:

Rating Municipal Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=347784

State Revolving Fund and Municipal Loan Pool Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492466

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

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.