Fitch Rates Dixie ESD, CA's $2.3MM LRBs 'AA'; Outlook Negative

SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to Dixie Elementary School District (ESD), California's (the district) lease revenue bonds (LRBs), series 2009, with a Negative Rating Outlook. Fitch also affirms the 'AA+' rating on the district's approximately $8.1 million of outstanding general obligation bonds, and revises the Rating Outlook to Negative from Stable.

The Negative Outlook reflects a modestly softening economic environment and sizable financial pressures, including a state take-back of some basic aid revenues, slowing assessed value (AV) growth that may pressure local revenues, and a large budgeted operating deficit that is mitigated by a history of budgeting conservatism. The 'AA' rating on the lease revenue bonds reflects the essentiality of the leased asset and the district's currently strong but softening financial position, including at least three years of break-even to surplus operations and solid reserve levels. Financial operations additionally benefit from secondary revenue streams from the district's basic aid status, a parcel tax, rental payments from surplus properties, and contributions from local non-profit organizations. The rating also considers the resilient local economy, with high wealth levels and a relatively stable housing market. It also takes into account a strong debt profile with low debt levels, minimal capital needs and progress toward paying down the district's manageable other post employment benefit (OPEB) liability.

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. Facilities include three elementary schools and one middle school, which feed into the San Rafael City High School District (general obligation bonds rated 'AA' by Fitch). The city benefits from its location within the economically diverse San Francisco Bay Area. Wealth levels are high, with per capital income at 140% and 150% of state and national levels, respectively. 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. However, negative amortization mortgage exposure is slightly above average. Fiscal 2010 AV rose by a small 0.7%, which was well below prior year increases.

Financial operations are currently strong, but softening. Estimated actual operations for fiscal 2009 produced a slight $16,600 surplus, raising the total and unreserved general fund balances to $3.8 million (21.6% of expenditures and transfers out) and $3.3 million (18.5%) respectively. However, the revised fiscal 2010 budget points to a $1.5 million deficit that would more than halve the district's unreserved general fund balance. Management has a strong history of outperforming its conservatively prepared budgets, but this fiscal year's budgeted deficit is greater than those of prior fiscal years. Revenue headwinds include a state take-back of excess basic aid revenues, which will reduce revenues by $441,000 and $684,000 in fiscal years 2010 and 2011, respectively. Additionally, state categorical funding is budgeted to decline by over $500,000 in fiscal 2010, and flat or potentially declining AV may pressure local revenues. Offsetting these challenges, the district's financial cushion is augmented by nearly $1 million of funds in its OPEB and property rental funds that could be transferred back to the general fund, if necessary. The district's parcel tax, which yielded $1.4 million in fiscal 2008, expires in 2011, and management intends to seek renewal.

The $2.3 million lease revenue bonds are structured as Clean Renewable Energy Bonds (CREBs), and are secured by rental payments from the school district to the Dixie Education Foundation for use of the district administration offices. Most legal provisions are standard, including rental interruption insurance and a covenant to budget and appropriate. However, the structure does not include a debt service reserve fund. In its place, management intends to set up a balancing account, funded with grant money and renewable energy credits for the first five years, that is intended to be used along with energy savings to make the financing revenue neutral to the district's general fund for the life of the bonds, subject to assumptions about maintenance costs and energy savings.

The district's debt profile is strong. Debt levels are low, with direct debt at 0.28% of AV ($383 per capita) and 1.49% ($2,018). Capital needs are minimal and amortization is average.

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

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