Fitch Affirms Dixie Elementary SD, CA's GOs at 'AAA' & Lease Revs 'AA+; Outlook Revised to Stable

SAN FRANCISCO--(BUSINESS WIRE)--As part of its routine surveillance process, Fitch Ratings has affirmed the following bonds issued by the Dixie Elementary School District, California (the district):

--$8.2 million general obligation (GO) bonds at 'AAA';
--$2.3 million lease revenue bonds, series 2009 at 'AA+'.

The Rating Outlook is revised to Stable from Negative.

RATING RATIONALE:
--The Outlook revision to Stable from Negative reflects the district's ability to preserve its financial margins in spite of slowing revenue growth.
--Resilient local economy that provides relative stability in property tax revenues, which make up the majority of the district's revenues and a relatively modest reliance on state revenues, in contrast to many school districts in California.
--Revenue diversity provided by a local parcel tax, a foundation that collects charitable contributions on behalf of the district, and lease revenues from surplus properties.
--Strong financial profile and considerable financial flexibility as evidenced by net operating surpluses during a period of slow to no revenue growth that have resulted in modest additions to unreserved fund balance.
--Slightly declining to flat enrollment pattern that relieves capital growth pressure and does not harm the district since its primary revenues are not funded by the state at a per pupil level.
--The district's debt profile is strong, with low debt levels, average amortization, minimal capital needs, and progress towards paying down its manageable OPEB liability.
--The 'AA+' rating on the lease revenue bonds reflects the essentiality of the leased asset and the district's covenant to budget and appropriate funds annually to make the lease payment. However, the lack of a dedicated debt service reserve fund heightens appropriation and abatement risks.

KEY RATING DRIVERS:
--Renewal of the parcel tax that expires in June 2012 and currently provides around $1.4 million in annual revenues to the district to fund specific programs. Management expects to hold an election to renew and potentially increase the parcel tax in the spring of 2011 for another eight years.
--Continued ability to outperform financial forecasts given the softness in district property tax revenues.
--Additional budget flexibility continues to be provided through support from revenue sources not included in the forecast, such as charitable contributions and lease revenues on its surplus properties.

SECURITY:
The GO bonds are secured by an unlimited ad valorem tax on all taxable properties within the district. The lease revenue bonds are secured by rental payments from the district to the Dixie Education Foundation for use of the district administration offices.

CREDIT SUMMARY:
Located in affluent Marin County, the district's population of about 21,000 encompasses the Terra Linda area of the city of San Rafael and the unincorporated communities of Marinwood and Lucas Valley. The resilient local economy benefits from its location within the economically diverse San Francisco Bay Area. County wealth levels are high, with per capital income at 140% and 150% of state and national levels, respectively. District assessed valuation (AV) growth has slowed substantially with a small increase of 0.7% in fiscal 2010 and the first year of decline in fiscal 2011, albeit at a modest level of decline around 1%. The local housing market has shown an impressive degree of resilience so far, with a low but rising number of foreclosures, and low exposure to subprime mortgages.

Facilities include three elementary schools and one middle school. The district serves around 1,800 students. Enrollment is substantially below that of previous decades, but more recent enrollment trends show a relative degree of stabilization. There are no growth pressures for new facilities and the district has recently finished a modernization program. The district also owns three surplus school sites, which are leased to third parties.

The district's financial operations are strong and the district enjoys a level of financial flexibility that is stronger than many school districts in the state. The district has consistently generated moderate net surpluses in its general fund for the past five years. Fiscal 2010 operations resulted in a $259,000 general fund surplus, resulting in total and unreserved general fund balances of levels of $4 million (23% of expenditures and transfers out), and $3.7 million (21%), respectively. The positive financial performance in fiscal 2010 is in contrast to a 2010 mid-year forecast of a net deficit of around $1.5 million. The favorable changes resulted from some level of expenditure reductions as well as revenues provided by charitable contributions, lease revenues, and more flexibility related to the spending of state categorical funds. Multi-year projections suggest the district will produce operational deficits through fiscal 2013, although in practice, the district typically outperforms its projections as occurred in fiscal 2010. In addition, the district maintains a high degree of flexibility through potential expenditure reductions it could achieve through larger class sizes, reduction in teacher days, and additional staff reductions. Increased revenues are possible, although not projected, that may result from an increase to the parcel tax that will go to voters in the spring of 2011.

The district's debt profile is strong. Net debt levels are a low $383 per capita (.3% of AV). Due to the debt of overlapping municipalities, the district's direct and overlapping debt per capita rises to a still modest $2,018 (1.5% of AV). Debt amortization is average. Capital needs are minimal, and management has no intent to issue debt over the short to intermediate term.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in Fitch's 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 Aug. 16, 2010;
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 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

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