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MOODY'S ASSIGNS Aa2 RATING TO THE MILLBRAE SCHOOL DISTRICT, CA, GENERAL OBLIGATION BONDS, 2008 ELECTION, SERIES 2011B

21 Mar 2011

RATING AFFECTS $30.0 MILLION OF DEBT, INCLUDING CURRENT ISSUE

Primary & Secondary Education
CA

Moody's Rating

ISSUE

RATING

2011 General Obligation Bonds Election of 2008

Aa2

  Sale Amount

$18,000,000

  Expected Sale Date

04/21/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Mar 21, 2011 -- Moody's Investors Service has assigned an Aa2 rating to Millbrae Elementary School District's Election of 2008, Series 2011 General Obligation (GO) bonds for $18 million.

RATINGS RATIONALE

The bonds are secured by an unlimited property tax pledge of the district. Proceeds from the sale will fund modernization projects at existing school sites within the district's service area. Key considerations for the Aa2 rating include stable growth in the district's moderately-sized, primarily residential tax base; the residents' above average socioeconomic profile and relatively strong employment base, maintenance of adequate reserves and an overall sound financial position, and minimal debt burdens.

MODERATELY-SIZED, STABLE TAX BASE; ABOVE-AVERAGE SOCIOECONOMIC PROFILE

The Millbrae Elementary School District is located in San Mateo County (Issuer Rating: Aaa) and provides K-8 educational services to the residents of the Cities of Millbrae and San Bruno. The district's tax base of $5.6 billion in Assessed Valuation (AV) is small relative to Aa2-rated California school districts, which had a median AV of $11.8 billion in 2011. Average AV growth from 2007 to 2011 has been stable at 2.3%, which is just slightly below average relative to California school districts. However, the district is sizable relative to its elementary school district peers and a more telling indicator of housing wealth is AV per capita, which is an exceptionally high $240,284 in 2011 and significantly above the Aa2-median of $141,481. The tax base is diversified with top ten taxpayers composing only 4.8% of overall AV and primarily residential by land use. The tax base has moderate exposure to unsecured AV, which represents 33% of total AV in 2011, and is a minor credit weakness. This exposure is due to assessment of unsecured property at the San Francisco International Airport, which is located within the district. Moody's notes the tax base did experience a 6.0% decline in AV for 2011 which was mainly due to sizable downward reassessments of aircraft, and the decline in aircraft lease values.

Socioeconomic indicators are relatively strong compared to the state and national averages, and slightly higher than the median Aa2-rating level for California school districts. In 2000, median family and per capita income was reported at 147% and 139% of the state respectively. The overwhelming majority of residents are in management, professional, and related occupations in the technology and professional services industries. In the near and medium term, Moody's expects income levels to remain steady or grow slightly as the competitive battle for tech talent is an up-side risk for income growth. Moody's notes San Mateo County's unemployment rate had risen to 8.3% in December 2010, but is well below the state unemployment rate of 12.3% reflecting underlying economic strength of the county's high-tech industries and a significant credit strength.

ADEQUATE RESERVE LEVELS, ADDITIONAL REVENUE SOURCES PROVIDE SOME CUSHION AGAINST DECLINING STATE FUNDING; MANAGEABLE OPEB LIABILITY

The district has exhibited stable financial operations, although reserves have fallen to low levels in fiscal 2010 and 2011, which will create pressure amidst continued state education budget cuts for fiscal 2012. The district, like many others in the state, decided to draw down reserves in fiscal 2010 to maintain adequate funding levels for its educational programs, accommodate increased special education costs and class size reduction. The district has projected an operating deficit of $300,000 for fiscal 2011. Despite this deficit, the district has maintained adequate reserves and has begun to propose approximately $1.5 million in expenditure cuts for fiscal 2012 and 2013 to generate structural budgetary balance, which may include staff reductions and a significant curtailment in non-essential expenditures. Without these reductions, the district anticipates ending fiscal 2012 and 2013 with negative fund balances of $161,000 and $1.8 million respectively. Given the adequate 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 sound and in line with the median for Aa2-rated California school districts of 10.5% of revenues.

The district leases one surplus school site to various organizations and provides day care services, providing roughly $300,000 annually to the general fund. The district had set aside approximately $416,000 in a Special Reserve fund which was transferred to the General Fund in fiscal 2010 to offset budget cuts, and is no longer available. The district does maintain a Reserve fund for Capital Projects, which is anticipated to have $13.1 million at the end of fiscal 2011, and should provide an additional $75,000 in relief to the general fund in each year for the next three years by paying the annual lease debt obligation of the district. These are funds from the sale of a school site in 2007. The district's liquidity is a credit positive. Available cash and investments has remains strong at $3.5 million, or 11.5% of revenues at the end of fiscal 2010. The district believes this level of liquidity is sufficient to allow it to meet its liquidity needs despite anticipated state revenue deferrals in 2011, and does not expect to access short-term borrowing or issue Tax Revenue Anticipation Notes (TRANs).

The district has also transferred $3.1 million into a Special Reserve Fund for one-time use on non-operating expenditures. Given the average reserve levels maintained to date, Moody's expects that the district's reserve levels over the long-term will remain adequate. However, Moody's notes that this could be challenging for the district, which to date has prioritized program quality over structural balance. The district's rating could experience downward pressure to the extent that it does not attain structural balance and falls below its target minimum reserve levels.

The district paid $244,394 for other post-employment benefits (OPEB) on a pay-as-you-go basis in fiscal 2010. The district reports an accrued liability of $4.7 million based on its actuarial study conducted in 2003, which is relatively small and quite manageable based on the district's overall financial resources. The estimated annual required contribution under this study is $392,782. The district expects to fund its liability on a pay-as-you-go basis due to the uncertain outlook of increased education funding beyond fiscal 2011. Based on the size of the annual required contribution, limited length of the post-employment benefit offered from age 55 through 65, and the institution of a $6,800 benefit cap, Moody's does not anticipate the funding of its OPEB obligations will present near-term operating challenges.

CAPITAL PLAN PRIMARILY MODERNIZATION CONSTRUCTION; LOW DEBT BURDENS

The current $18 million offering is the final issuance of a 2008 voter-approved GO bond authorization. Funds will be used for modernization projects at all school sites throughout the district. The district does not anticipate the need to expand school facilities at this time due to the district's flat enrollment trend. The district is projecting AV growth of 2% for debt structuring purposes, which appears reasonable given the district's historical stable AV growth rate and near-term housing market environment. The direct debt burden of the district post-issuance is quite low at 0.6% and overall debt burden is higher at 2.3%. The district has no variable-rate or lease-backed debt outstanding, which is favorable for the rating assignment.

What could move the rating - UP

- Significant increase in the district's assessed valuation

-Restoration and growth of reserves; improved liquidity

What could move the rating - DOWN

-Protracted decline in the district's assessed valuation

-Depletion of reserves, with no viable plan to replenish

KEY STATISTICS

Assessed Value, FY 2011: $5.6 billion

Average annual growth, assessed value, 2006-2011: 2.3%

Median family income, 2000 census: $77,962 (147% of state)

Per capita income, 2000 census: $31,548 (139% of state)

General Fund balance, FY 2010: $1.6 million (9.7% of General Fund revenues)

Unreserved Fund balance, FY 2010: $1.5 million (9.1% of General Fund revenues)

Average daily attendance, FY 2010: 2,098 students

Direct debt burden: 0.6%

Overall debt burden: 2.3%

Payout of principal (10 years): 20.6%

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Analytics information.

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

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

Andrea Unsworth
Analyst
Public Finance Group
Moody's Investors Service

Julian Metcalf
Backup Analyst
Public Finance Group
Moody's Investors Service

Eric Hoffmann
Senior Credit Officer
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 ASSIGNS Aa2 RATING TO THE MILLBRAE SCHOOL DISTRICT, CA, GENERAL OBLIGATION BONDS, 2008 ELECTION, SERIES 2011B
No Related Data.
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