New York, December 07, 2012 -- Moody's Investors Service has affirmed the Aa3 General Obligation bond rating for Gilroy Unified School District (CA). Concurrently, Moody's has affirmed at Aa3 the district's 2011 General Obligation Bond Anticipation Notes (BANs) and downgraded to A2 from A1 the district's Series 2008 Certificates of Participation (COPs).

The rating action primarily reflects the district's consistent financial position, large and stabilizing property tax base located in proximity to the Silicon Valley region, and the near-term planned refinancing of $39 million of Bond Anticipation Notes (BANs) through a General Obligation bond issuance. The district's elevated debt burden and limited financial position -- reflected in relatively low levels of General Fund cash and reserves -- are noted as weaknesses.

The downgrade of the COPs to A2 from A1 reflects a one-notch adjustment to align with Moody's standard two-notch differential for essential purpose, fixed asset leases relative to a California issuer's General Obligation (GO) bond rating or Issuer (GO equivalent) Rating. When Moody's downgraded the district's General Obligation bond rating to Aa3 from Aa2 on June 8, 2011, the COPs were not downgraded as they should have been at that time.

Strengths

- Large property tax base stabilized in 2013

- Near-term refinancing of BANs into GO debt

Challenges

- Elevated direct and overall debt burdens

- Low levels of General Fund cash and reserves

WHAT COULD CHANGE THE RATING UP

- Ability to achieve and sustain structurally balanced operations

- Improved General Fund financial profile, reflected in increased cash and reserves

- Reduced debt burden

WHAT COULD CHANGE THE RATING DOWN

- Deterioration of financial position

- Material weakening of demographic and tax base indicators

- Increased debt burden

RATING METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009 and The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Moses Kopmar Associate Analyst Public Finance Group Moody'sInvestors Service, Inc.One Front Street Suite 1900 San Francisco, CA 94111 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Kevork Khrimian Vice President - Senior Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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