OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' ratings for the following San Rafael City Elementary School District, CA (the district) bonds:

--\$0.7 million general obligation (GO) bonds, (election of 1999) series A;
--\$19.1 million GO bonds, (election of 2002) series B;
--\$7 million GO bonds, (election of 2002) series C.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax levy.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Prudent financial management drives solid financial performance, characterized by sound reserve levels, ample expenditure flexibility, local control funding formula (LCFF) supplemental and concentration funding, increasing student enrollment, and a parcel tax.

STRONG LOCAL ECONOMY: The district benefits from its close proximity to the San Francisco Bay Area employment market. Socioeconomic characteristics are above average, and the housing market has been resilient.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are moderately low. Carrying costs are affordable but expected to rise given below-average state pension funding levels. Amortization is moderate despite the significant portion of debt attributable to capital appreciation bonds.

RATING SENSITIVITIES

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

CREDIT PROFILE

The district serves approximately 4,500 students in the city of San Rafael (implied GO rating of 'AA' by Fitch), which is the seat of Marin County (implied GO rating of 'AAA'), and surrounding communities. Located about 20 miles north of San Francisco, it is one of two feeder districts to San Rafael High School District (GO bonds rated 'AA+').

FINANCIAL PROFILE EXPECTED TO REMAIN SOUND

The district has consistently maintained surplus general fund operations (with the exception of a minor general fund balance draw down in fiscal 2010) and sound general fund balances despite state fiscal pressure during the recession. The district ended fiscal 2014 with a \$989,000 operating surplus after transfers (2.5% of total general fund spending) resulting in a solid unrestricted general fund balance of \$8.1 million, or 20.4% of total general fund spending.

The district's fiscal 2015 second interim report projects a \$2.7 million deficit after transfers (5.6% of total spending). However, the district expects a much smaller deficit due to lower than budgeted spending against departmental budgets and prior year categorical carryforwards, and position vacancies. Fitch considers this plausible given the district's conservative budgeting practices and historical trend of outperforming its second interim report. Nevertheless, the district does expect some deficit spending due to state-mandated spending on common core curriculum implementation by June 30, 2015. The district is projecting a return to surplus general fund operations in fiscal years 2016 and 2017.

A voter-approved parcel tax provides the district with over \$2 million in additional annual revenue (approximately 4.5% of projected fiscal 2015 total general fund revenues) and benefits from an automatic 5% cost of living adjustment. The parcel tax has been consistently renewed by voters since its initial implementation in 1989. Most recently, in May 2013, 78% of voters supported renewal of the parcel tax through fiscal 2022.

FUNDING GROWTH SUPPORTED BY ENROLLMENT INCREASES

The district has a reasonably high unduplicated count of 67% of its students who are English language learners, eligible for free or reduced-price lunches, or in foster care. Consequently, the district has benefited from LCFF, which targets supplemental and concentration funding towards such students. The funding available through LCFF is subject to state funding volatility but is currently benefiting from strong state revenues, including those revenues generated by temporary voter-approved income tax increases.

Strengthened district funding has also been supported by ongoing student enrollment increases, which the district attributes to the relative affordability of the area compared to San Francisco and the consequent housing turnover from the older Marin County population to younger families.

The combination of funding increases due to higher student average daily attendance plus LCFF supplemental and concentration funding has more than offset the district's rising labor costs.

STRONG LOCAL ECONOMY

The district benefits from its proximity to the diverse San Francisco Bay Area employment market. The city of San Rafael serves as a local commercial, retail, and employment hub within Marin County. The district's income levels are above average, with median household income in 2012 equal to 122% and 140% of state and national averages, respectively. The city's unemployment rate was only 3.8% in February 2015, well below both the state and national levels.

The district has benefited from strong AV growth over decades and lack of property taxpayer concentration. There were only small AV dips in fiscal years 2011 and 2013 as a consequence of the recent recession. Subsequently, these declines have been more than offset by strong AV growth in fiscal years 2014 (3.8%) and 2015 (5.3%), driving AV to a peak of \$9.6 billion. Strong AV growth is projected going forward, particularly given rising housing prices.

LONG-TERM LIABILITIES WILL REMAIN MANAGEABLE

Overall debt levels are moderately low at \$2,521 per capita and 1.5% of AV. Although capital appreciation bonds represent a significant portion of outstanding principal, amortization remains moderate at 57% in 10 years (when accreted interest is taken into account). The district has nearly completed a master facilities planning process to review needs arising from some aging facilities plus student enrollment growth. The district might consider placing a bond measure on the November 2015 ballot to help with funding identified capital needs. The par amount of such a bond measure would be determined once the master facilities planning process is complete.

Carrying costs for debt service repayment, annually required pension contributions, and other post-employment benefit (OPEB) pay-as-you-go costs are currently affordable at 14.3% of total governmental spending. Carrying costs are expected to rise, particularly given the poorly funded status of the California State Teachers' Retirement System (CalSTRS), which the state is seeking to rectify through increased contributions from plan participants. The above carrying costs incorporate the initial phasing in of the state's move towards actuarially required, rather than statutorily determined, CalSTRS annual contributions.

The district is seeking to address its \$6.2 million unfunded actuarially accrued OEPB liability by recently establishing a special OPEB reserve fund which has \$0.7 million set aside, with plans to increase annual contributions over coming years.