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Rating Update:

MOODY'S AFFIRMS A1 RATING ON PERRIS ELEMENTARY SCHOOL DISTRICT GO BONDS; RATING OUTLOOK IS NEGATIVE

24 Sep 2010

Approximately $8 million of Debt Affected

Primary & Secondary Education
CA

Opinion

NEW YORK, Sep 24, 2010 -- Moody's has affirmed the A1 rating on Perris Elementary School District's outstanding Election of 2006, Series A General Obligation (GO) bonds. Concurrently, Moody's has assigned a negative outlook on the district's bonds.

RATING RATIONALE

The A1 rating continues to rely upon the district's above-average financial position, relatively average tax base size, and well below-average socioeconomic profile. The negative outlook reflects the district's weak tax base growth prospects and near-term pressure on the district's financial operations from risks associated with its exceptionally high exposure to variable-rate debt.

RESIDENTIAL TAX BASE EXPERIENCES SIZABLE CONTRACTION IN 2010; WEAKNESS EXPECTED TO CONTINUE

The Perris Elementary School District provides educational services to the city of Perris and unincorporated areas of Riverside County (GO rated Aa2, stable outlook). The district's tax base experienced a year-over-year assessed value (AV) decline of 5.7% in 2011, albeit a substantial improvement from the exceptionally sizable decline of 17.6% year-over-year experienced in 2010. The contractions are due to ongoing downward reassessments of residential properties. Exacerbating housing market stress is the excess supply of homes for sale in the district due to lack of buyers and substantial increases in foreclosures. The County Assessor's office was particularly aggressive with Proposition 8 reductions in 2010 and 2011, and assessed values on residential properties have been substantially reduced to reflect current market conditions. Despite the contractions in fiscal 2010 and 2011, the district's tax base remains near the median of $2.7 billion for similarly rated school districts in California and well above the median of $858 million for A1-rated school districts nation-wide. This is an important consideration for the rating affirmation.

Recent data shows stabilization in the area's housing market; the median resale price of single-family homes in Perris, for example, increased to $160,000 in July 2010 from $143,000 year-over-year. The fiscal 2010 average AV of single-family homes located within the district is approximately $145,724. Given the continued low disparity between average assessed value and current market values, it is likely the district's tax base will remain stressed in the near-term. Although subsequent AV declines are expected to be of a lesser magnitude than what was experienced in 2010 and 2011, near-term growth prospects for the district's tax base remain weak.

Socioeconomic indicators are well below state and national averages. In 2000, median family and per capita income were reported at 65% and 50% of the state respectively. The district continues to experience tremendous stress in its economic base as unemployment rates are well above the state unemployment rate. Riverside County's unemployment rate is 15.3% in August, which is well above the state unemployment rate of 12.4% in this same month.

ABOVE-AVERAGE RESERVES PROVIDE NEAR-TERM CUSHION AGAINST DECLINING STATE EDUCATION FUNDING

The district's financial operations are well-positioned to manage the impact of lower state education funding on its educational programs. The district's balance sheet was strong leading up to the downturn in state education funding; the fiscal 2009 ending general fund balance was $6.1 million (or 13.1% of 2009 revenues). Including a special reserve fund which holds approximately $4.2 million in unrestricted funds, the district's available fund balance was a strong $7.1 million (or 15.4% of 2009 revenues). Despite a sizable cut in state education funding in fiscal 2010, the district was able to generate an operating surplus of $2 million through the receipt of $4 million in federal stimulus funds and expenditure cuts of $3.8 million, which included the approved use of 4 furlough days and reductions in staff. For fiscal 2011, the district intends to drawdown reserves by $2.7 million in order to protect the quality of its educational programs. Despite the drawdown, the district's available fund balance is projected to remain at an above-average level of $8.3 million or 20.5% of projected 2011 revenues. Moody's notes that the state budget is susceptible to additional reductions in education funding and the district will need to monitor and adjust its budget accordingly. Given the above-average reserve levels maintained to date and proactive management action to initiate expenditure cuts, Moody's expects that the district's reserve levels over the long-term will remain comparatively strong.

HIGH VARIABLE-RATE DEBT EXPOSURE GENERATES ADDITIONAL WEAKNESS

The district's high exposure to variable-rate debt generates significant interest rate risk and is a credit weakness. The district's outstanding $8.9 million in variable-rate Certificates of Participation (COPs) (approximately 51% of total debt outstanding) are currently "bank bonds" since the district failed to secure a replacement liquidity facility prior to Dexia's letter of credit expiration in April 2010. The rate on the certificates will gradually increase the longer they remain outstanding as bank bonds. The current interest rate on the variable-rate COPs has significantly increased to 6.25% from 3.25% at the end of April. While the spike in the interest rate on the COPs generate credit weakness, Moody's notes the par amount outstanding on the COPs is minimal at 0.4% of the district's AV. The variable-rate debt financing is structured as a lease so it is not at any time subject to acceleration. Nevertheless, the higher debt service costs associated with the outstanding COPs generates near-term pressure on the district's general fund, particularly given operating challenges resulting from the sizable decline in state education funding. The district is evaluating several options with respect to mitigating this near-term risk which include prepaying the COPs with proceeds from a Bond Anticipation Note (BANs) issuance, refinancing the variable-rate COPs into fixed-rate, or by instituting a new letter of credit on the variable-rate COPs from another liquidity provider.

The district's direct debt burden is modest at 0.9% of 2011 AV while overall debt remains above-average at an estimated 3.9% of AV. The district has $17 million in remaining Election of 2006 GO bond authorization and will likely issue $5 million in GO bonds at the end of 2010. Proceeds from this issuance are anticipated to be used for capital projects. The tax rate on the authorization is projected to reach $30 per $100,000 in AV post-issuance and the district will not be permitted to issue additional GO bonds under its remaining authorization until the tax rate declines below this level.

KEY STATISTICS

Assessed Value, FY 2011: $2.0 billion

Average annual growth, assessed value, 2006-2011: 5.1%

General Fund balance, FY 2009: $6.1 million (13.1% of General Fund revenues)

Available Fund balance, FY 2010: $7.2 million (15.4% of General Fund revenues)

2000 Per Capita Income: $11,382 (50.1% of state)

2000 Median Family Income: $34,258 (64.6% of State)

Average daily attendance, FY 2010: 5,739 students

Direct debt burden: 0.9% of fiscal 2011 AV

Overall debt burden: 3.9% of fiscal 2011 AV

Payout of principal (10 years): 26%

PRINCIPAL METHODOLOGY AND LAST RATING ACTION

The principal methodology used in rating Perris Elementary School District was General Obligation Bonds Issued by U.S. Local Governments rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

The last rating action was on July 23, 2007 when an A3 rating was assigned to the district's 2007 GOs. The rating was subsequently recalibrated to a global scale rating of A1 on April 16, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the issuer satisfactory for the purposes of assigning a credit rating.

Outlook

The negative outlook reflects the district's weak tax base growth prospects and near-term pressure on the district's financial operations from risks associated with its exceptionally high exposure to variable-rate debt.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Sujay Umashankar
Analyst
Public Finance Group
Moody's Investors Service

Dari Barzel
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS A1 RATING ON PERRIS ELEMENTARY SCHOOL DISTRICT GO BONDS; RATING OUTLOOK IS NEGATIVE
No Related Data.
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