Fitch Affirms Cypress Elementary School District, CA's GOs at 'AA'; Outlook Stable

NEW YORK--()--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.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Huang, +1-212-908-0315
Analyst
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Matthew Reilly, +1-415-732-7572
Associate Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gary Huang, +1-212-908-0315
Analyst
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Matthew Reilly, +1-415-732-7572
Associate Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com