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Fitch Rates Cypress-Fairbanks ISD, Texas' $259MM GOs 'AAA' PSF/'AA-' Underlying

AUSTIN, Texas-(Business Wire)-July 2, 2008 - Fitch Ratings assigns an 'AAA' rating to the Cypress Fairbanks Independent School District, Texas' (the district) approximately $259 million unlimited tax schoolhouse and refunding bonds, series 2008. The 'AAA' rating is based on the guarantee provided by the Texas Permanent School Fund (PSF), whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch assigns an underlying 'AA-' rating to the series 2008 bonds, which are expected to sell the week of July 14, 2008 via negotiation. Also, Fitch affirms the 'AA-' underlying rating on the district's approximately $1.4 billion in outstanding unlimited tax bonds. The Rating Outlook is Stable.

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district. The series 2008 bonds are further secured by the Texas Permanent School Fund guarantee. Bond proceeds will be used for construction of new school buildings, renovations to existing facilities, land acquisition, to refund certain outstanding obligations for interest cost savings, and to pay issuance costs.

The underlying 'AA-' rating reflects the district's solid and growing tax base, sound management practices, historically healthy financial position, and operating and capital pressures associated with rapid enrollment growth. Ongoing residential development is expected to continue, although at a slower pace. The district's debt burden is high and is expected to remain high due to the district's substantial capital needs and slow principal amortization. For the current fiscal year, the district expects to generate a large deficit for general operations; however, general fund balance reserves remain adequate. District officials made significant budgetary cuts to balance the budget for fiscal 2009. Fitch will continue to monitor the district's financial performance. Further significant declines in the district's fund balance reserves could put downward pressure on the rating.

The district is the third largest in the state in terms of student population. It is located in west and northwest Harris County and covers 186 square miles, including the unincorporated communities of Cypress and Fairbanks, as well as the City of Jersey Village. Enrollment has grown at a rapid clip, averaging 6.3% over the last five fiscal years. The slowdown of single-family home construction in the last year resulted in a lower enrollment growth rate of 4% for fiscal 2008; this change still represents a large increase of nearly 4,000 students. District officials have revised estimates for the next three years to reflect the slower growth expected in the near term. Although the district's tax base is primarily residential, the commercial component represents almost one-fourth of the value. Tax base growth has averaged 10% per year for the past five years, including a $2.8 billion increase in fiscal 2008 to $27.9 billion.

Considering the district's rapid growth, its financial position has remained stable over time. However, the district has faced significant operating pressures despite implementation of cost containment measures. For fiscal years 2005 and 2006, the district experienced operating deficits that resulted in general fund balance reserve draws of about $13 million over those two years. Conversely, for fiscal 2007 the district added $3.2 million to fund balance resulting from larger than projected revenues combined with tight budgetary and cost containment measures.

District officials expect to end fiscal 2008 with a large $15 million deficit, reducing fund balance reserves to about 10% of spending. These results are attributable to lower than expected enrollment growth and lower property tax collection rates that culminated in a lower than budgeted revenue stream. In order to balance the fiscal 2009 budget, after adjusting for lower enrollment growth and local funding, the district made significant adjustments to the operating expenditure budget. These adjustments include no pay increases and elimination of about 400 positions by increasing class sizes and cutting support positions. The district maintains among the lowest cost per pupil in the state, reflective of management's prudent fiscal stewardship and tight budgetary measures. Having adopted less than the entire four discretionary pennies in its O&M tax levy for fiscals 2007 and 2008, the district is one of few school districts that maintained some operating tax margin. Although the district does not adopt the tax rate until September and October, the district's adopted budget assumes an O&M levy of $1.04 per $100 of TAV in fiscal 2009.

A small portion of the current issue (approximately $8 million) will refund outstanding debt for interest cost savings. After this issuance, the district will have approximately $113 million authorization remaining from the 2004 bond program and $657 million from the recently authorized 2007 bond program. In November 2007, district voters approved an $807 million bond package for construction of 14 new school facilities, renovations to existing schools, land site acquisition, buses, and technology. Direct and overall debt ratios are high. Given the district's ongoing growth pressures and slow amortization rate, the debt levels are expected to remain elevated.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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