OREANDA-NEWS. Fitch Ratings has affirmed the following rating for Cypress Elementary School District, CA (the district):

--\$46.6 million general obligation (GO) bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: The district benefits from strong unrestricted reserves, consistently positive financial operations, sound liquidity levels, and prudent budgeting practices.

MANAGEABLE BUDGETARY CONSTRAINTS: The district's budget is likely to be constrained to some degree over the medium term due to declining attendance, rising pension costs, and requirements mandated through the state's adoption of the Local Control Funding Formula (LCFF). However, Fitch views the district's financial flexibility as sufficient to absorb the additional commitments and maintain financial balance.

SLOWLY AMORTIZING DEBT: The district's overall debt burden is moderate and the district does not plan on issuing any additional debt over the near term. However, direct debt amortizes at a very slow rate and the current tax rate for debt service modestly exceeds the level committed to voters, potentially limiting future capital flexibility.

MODESTLY GROWING TAX BASE: Taxable assessed value (AV) for the district increased by 4.7% in fiscal 2015, marking the fourth consecutive year of modest gains for the district's relatively stable tax base.

SOUND ECONOMIC INDICATORS: The city of Cypress (the city) benefits from its close proximity to Los Angeles and Orange County labor markets. The city's unemployment rate is just below the state average and income levels are above state levels.

RATING SENSITIVITIES:

The rating is sensitive to shifts in fundamental credit characteristics including the district's healthy financial profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

HEALTHY FINANCIAL PROFILE

The district's financial profile is healthy and stable as indicated by consistently positive operating margins, strong unrestricted reserves, and sound liquidity levels. At the end of fiscal 2014, the district's unrestricted reserve stood at \$8 million or 26.5% of spending.

Operating performance is consistently balanced. In fiscal 2014, the district recorded its fourth consecutive fiscal year with an operating surplus, which amounted to \$1.3 million or 4.4% of spending. The district's good financial performance reflects effective expenditure control that has helped offset recent volatility in state funding.

Prudent budgetary practices are expected to help preserve balance over the medium term as the district faces spending pressures from rising pension contributions (CalSTRs and CalPERs) and higher personnel expenses related to the LCFF required reduction in class sizes for grades K-3. District revenues are expected to continue increasing due to improved state funding; however, revenue gains will be somewhat constrained by the district's on-going trend of declining attendance.

SLOWLY AMORTIZING DEBT

The district's overall debt burden remains moderate at \$2,661 per capita and 2.23% of AV. However, with the exception of approximately \$7.4 million in outstanding certificates of participation (COPs), the district's direct debt largely consists of GO capital appreciation bonds, whose values steadily accrete through 2050. The direct debt burden will rise over time absent robust population and tax base growth even without further issuance.

Fitch views the district's future capital flexibility as somewhat constrained. The tax rate on outstanding GO debt modestly exceeds the tax rate promised to voters. This constraint led to the district's issuance of \$7.4 million in COPs rather than utilizing the remaining GO authorization.

PENSION CONTRIBUTIONS

Future budgetary pressure is expected to come from increasing pension contribution amounts that will be phased in over the next several years. The district participates in CalSTRS and CalPERS to provide defined pension benefits for teachers and classified employees, respectively.

The district is expected to pay increasing contribution amounts to both systems, particularly CalSTRS, where contribution amounts are projected to increase by a cumulative \$1.4 million (4.6% of fiscal 2014 spending) through fiscal 2018 relative to fiscal 2014.

SOUND ECONOMY; MODESTLY GROWING TAX BASE

The district benefits from its proximity to the large and diverse regional Los Angeles and Orange County employment markets. The district's per capita income is 14% higher than the national average and poverty rates are well below state and national levels. The city of Cypress's 5.3% (September 2014) unemployment rate is below both the state (6.9%) and nation (5.7%) averages.

The district's AV increased by 4.7% in fiscal 2015, marking the fourth consecutive year of modest gains. Stability over the near term is expected as the real estate market continues to improve and limited development in the largely built-out area takes place.