Fitch Rates San Ysidro School District (California) $7.2MM 2007 COPs 'A-'; Outlo

The 'A-' rating on the district's 2007 COPs is based on the sound legal structure and the essentiality of the leased asset (Ocean View Hills School), as well as the district's overall credit characteristics including continued sound financial operations, good general fund balances, and strong but moderating AV growth. These factors are somewhat offset by moderately high debt levels, the potential for further capital pressures from planned residential development, ongoing labor issues, and recent enrollment fluctuation.

The COPs are secured by lease payments by the district under a standard lease-leaseback structure. The leased asset is an existing elementary school valued at $30,828,360. The COPs and recent GO bond proceeds will be used to build a new elementary school and fund modernization at existing schools. The lease structure is sound, characterized by standard security features, including the district's covenant to budget and appropriate annually for the lease payment, strong collateralization, sufficient insurance policies, and a reserve fund (cash or surety) that meets the lesser of 125% of average annual aggregate lease payments, maximum aggregate annual lease payments, or 10% of the net proceeds of the 2007 COPs. Most of the district's insurance, including rental interruption insurance, is provided through a joint powers authority managed by the San Diego County Board of Education.

While the lease payments are secured by the district's general fund, certain special tax revenues are pledged to repay the COPs. Three existing community facilities districts located in the district have pledged their respective special tax revenues to the COPs. The special taxes are levied at fixed amounts on the basis of land use, and escalate at 2% per year. Current revenues from such special taxes are sufficient to pay debt service on the 2007 COPs and outstanding parity COPs. The 2% escalation in revenues matches the escalating debt service. While tax delinquencies are above average (over 6% on a current basis in fiscal 2006), the district covenants to budget and appropriate for lease payments regardless of receipt of the special tax revenues, mitigating this risk.

Located 12 miles south of downtown San Diego and bordering Mexico, the district covers 29 square miles and has an estimated population of 35,000. Income levels are below average, increasing concerns about the debt levels. Student enrollment dropped nearly 6% this school year to its lowest level in six years to 4,930 students. If enrollment does not return to projected growth rates in the 2008-2009 school year, per pupil revenues would be negatively affected, challenging the district's positive operations. To prepare for this possibility, district management is planning to build general fund reserves in fiscal 2008. The district expects enrollment growth to return to recent healthy levels as management forecasts continued long-term residential growth, including a planned development in the Otay Mesa area. However, Fitch Ratings believes that the overall downturn in the national housing market may lead to some scaling back or delays in this development project.

Financial operations are sound, marked by growth in revenues outpacing expenditures and increases in fund balances over the last three audited years. The fiscal 2006 fund balance was a high $8.5 million, or 21.3% of total spending, with the unreserved portion a more moderate $1.8 million, or 4.6%. Unaudited fiscal 2007 data indicated the unreserved fund balance increased to $2.5 million, or 5.3% of total spending. The fiscal 2008 budget projects a $3.5 million surplus, but labor contracts for the current fiscal year are still being negotiated. Both the teachers and the classified employees are currently working without contracts, although management expects to reach agreements this calendar year with moderate salary increases.

The district's direct and overlapping debt levels are moderately high for a school district. Upon sale and delivery of these COPs, direct debt is $3,641 per capita, or 3.1% of market value; overall debt totals $6,280 per capita, or 5.3% of market value. Amortization of debt is slow, with approximately 23% of principal retired in 10 years.

Along with the growing residential community, the district has a large industrial and commercial presence due to its proximity to the Mexican border. AV has increased at a fast pace since fiscal 2003, averaging 16.4% annual growth. Growth in fiscal 2008 was a more moderate 9.6%, reflecting the slowing of the overall housing market.

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