U.S. PUBLIC FINANCE

CREDIT OPINION 24 May 2017

Pierce King Counties S.D. 417 (Fife), WA New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3

New Issue

Summary Rating Rationale

Contacts Sam Feldman415-274-1706 Crough Analyst [email protected] William Oh AVP-Analyst [email protected]

415-274-1739

Steven Goodman415-274-1723 Leibof Associate Analyst [email protected]

Moody's Investors Service has assigned a Aa2 rating to Pierce & King Counties School District 417 (Fife), Washington's $12.7 million Unlimited Tax General Obligation Refunding Bonds, 2017. The bonds will also receive the Aa1 enhancement rating of the Washington State School Bond Guarantee Program. At the same time, Moody's has upgraded the rating on the district's outstanding general obligation debt to Aa2 from Aa3; the outstanding rated debt is expected to be refunded with this issuance. The upgrade to Aa2 on the underlying rating reflects the district's improved reserves, healthy local economy, and the important flexibility of being attractive to out-of-district students. The rating also reflects the district's average socioeconomic profile, modest debt profile, and manageable pension liabilities. The Aa1 enhancement rating is based upon the assumption that the bonds will qualify for, and be backed by, the Washington State School Bond Guarantee Program. Under this program, the state pledges its full faith, credit, and taxing power to guarantee debt service when due on qualified school districts' voter-approved general obligation bonds. The program rating reflects the pledge of the State of Washington (Aa1 stable), strong state oversight of local school districts, and strong program mechanics. For more detailed information on the state guarantee program, please refer to Moody's Global Credit Research Rating Update dated December 2, 2010.

Credit Strengths »

Healthy reserves compared to state peers

»

Low debt profile with manageable pension burden

»

Strong mechanics of school district general obligation pledge in Washington

Credit Challenges »

Socioeconomic profile is somewhat weaker than similarly rated peers

»

Size of operations is somewhat smaller than similarly rated districts

U.S. PUBLIC FINANCE

MOODY'S INVESTORS SERVICE

Rating Outlook Outlooks are usually not assigned to local governments with this amount of debt outstanding.

Factors that Could Lead to an Upgrade »

Significant and sustained growth in the tax base and size of operations

»

Improvement in the socioeconomic profile of the district

Factors that Could Lead to a Downgrade »

Substantial decline in reserves

»

Enrollment declines that lead to structural deficits

Key Indicators Exhibit 1

Pierce & King Counties S.D. 417 (Fife), WA

2012

2013

2014

2015

2016

Economy/Tax Base Total Full Value ($000)

$ 2,839,606 $

Full Value Per Capita

$

Median Family Income (% of US Median)

2,632,388 $

2,792,968 $

122,414 $

129,797 $

132,430 $

142,215

110.2%

109.3%

109.8%

108.9%

108.9%

35,622 $

36,095 $

40,641 $

44,724

139,408 $

2,851,889 $ 3,062,608

Finances Operating Revenue ($000)

$

38,216

$

Fund Balance as a % of Revenues

12.8%

14.3%

14.1%

14.3%

17.2%

Cash Balance as a % of Revenues

12.1%

13.6%

12.8%

15.1%

17.8%

Debt/Pensions Net Direct Debt ($000)

27,066 $

24,708 $

23,828 $

20,933 $

Net Direct Debt / Operating Revenues (x)

$

0.8x

0.7x

0.6x

0.5x

17,731 0.4x

Net Direct Debt / Full Value (%)

1.0%

0.9%

0.9%

0.7%

0.6%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x)

0.8x

1.0x

1.4x

1.7x

1.7x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%)

0.9%

1.4%

1.9%

2.4%

2.5%

Source: Moody's Investors Service

Recent Developments Recent developments are incorporated into the Detailed Rating Considerations.

Detailed Rating Considerations Economy and Tax Base: Moderately Sized Tax Base in Greater Tacoma Area Encompassing a 10-square-mile area, the district serves most of the city of Fife, and portions of Milton, Edgewood and Pacific, and a small portion of Tacoma (Aa3 GO Rating). The district's residential population is relatively small compared to other similarly rated districts with an estimated 21,784 residents as of November 2016. The district is located along Interstate 5, two miles from the deep water Port of Tacoma, and just 30 miles south of the City of Seattle (Aaa GO rating). Wealth levels in the district are by some measures weaker than similarly rated peers, however they are above-average nationally. Median family income, as of the 2015 American Community Survey, was 108.9% of the national median. Full value per capita, a proxy measure of tax base wealth, is stronger at $154,000 as of 2017. Income measures are lower than similarly rated peers, while full value per capita is higher, in part due to the large regional impact of Joint Base Lewis-McChord (JBLM), which is adjacent to the district. The This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

2

24 May 2017

Pierce King Counties S.D. 417 (Fife), WA: New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3

MOODY'S INVESTORS SERVICE

U.S. PUBLIC FINANCE

local economy is otherwise supported by retail, housing, manufacturing, industry, and various other industries. The top taxpayer is U.S. Oil, which operates a refinery at the Port of Tacoma that supplies jet fuel, by pipeline, to JBLM and also provides other petroleum-based products to the region. Full value is moderately sized for the rating level at $3.3 billion in 2017. Following a decline of 24% from a pre-recession peak in 2009 of $3.5 billion, the previous four years of growth, with a cumulative increase of 26% from 2013 to 2017, have demonstrated recovery typical of the Puget Sound area. We expect the economy to continue to recover, with corresponding increases in full value and the district's socioeconomic profile. Financial Operations and Reserves: Healthy Reserves Compared to Similarly Rated Districts in Washington; Enrollment Management is Healthy The district's reserves are healthy compared to similarly rated districts in the state, though they remain somewhat below national averages for the rating category. Washington school districts tend to maintain relatively narrow General Fund reserves (Aa2 median is approximately 10%), which reflects the stable and substantial flow of funding from the state and the timing of the fiscal year. Fife's available General Fund reserves were stronger than the state median, as of audited 2016 financials, at 15.3% of revenues ($6.3 million), and have generally been higher than the state median the last few years. Across operating funds, inclusive of the General and Debt Service funds, the district's reserves were stronger at 17.2% ($7.7 million) in fiscal 2016. Similar to other Washington school districts, General Fund operations are supported primarily by enrollment-based state aid (69%), followed by local property taxes (25%) and federal revenue (6%). Enrollment for the district is a source of notable financial strength because the district attracts students from the large neighboring districts due to its “boutique” size with one high school. This allows Fife to accept students from outside of their boundaries as long as space allows; with limited capacity in some grade levels, district officials report they deny student transfer requests. However, if in-district enrollment declined, they could begin accepting more outof-district students to make up for the declines in enrollment. Current enrollment of 3,576 in fiscal 2016 shows an average annual growth just above 1% for the past five years. Management budgets conservatively for enrollment, a positive for their financial flexibility. Local support is in the form of a maintenance and operations (M&O) levy, which was most recently reauthorized by the district's voters in 2014 at a strong 69% approval (only a simple majority is required for approval). The levy is approved by amount ($9.5 million in fiscal 2018) and the tax rate is set to collect the appropriate levy amount. The district's M&O collections are limited by state law based on a calculated “levy lid,” however the district is only at 90% of their levy lid. A small capital projects levy, which is used for technology, was approved in 2016 for approximately $1.2 million each year from 2017 to 2022. Looking forward, the district is expecting to make investments in curriculum, staff support, and some facility needs. Though the district is budgeting to use some fund balance, we do not expect a substantial weakening of fund balance over the next several years. LIQUIDITY

Net cash is healthy in both the General Fund and across the operating funds, with General Fund cash of $6.6 million (16% of revenues) and operating funds cash of $8 million (17.8% of revenues). Debt and Pensions: Low Debt Profile; Manageable Pension Burden The district's debt profile is low, with this issuance refunding all of the district's outstanding GOULT debt. Post-issuance, debt is a low 0.5% of 2017 full value and 0.3-times operating revenues. The district is expected to seek voter authorization in 2018 for additional GOULT debt. Moody's views the legal structure of school district general obligation bonds in Washington as strong. Debt service on the bonds is paid from a dedicated and unlimited property tax levy. The property tax revenue associated with this levy is collected by the county treasurer, and debt service payments are remitted directly from the county to the trustee. This flow of funds provides an important enhancement to the security, and is a credit strength. DEBT STRUCTURE

All of the district's debt is fixed-rate and matures rapidly, with final payout in 2020. Debt service grows slightly each year until final maturity.

3

24 May 2017

Pierce King Counties S.D. 417 (Fife), WA: New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3

MOODY'S INVESTORS SERVICE

U.S. PUBLIC FINANCE

DEBT-RELATED DERIVATIVES

The district has no derivatives. PENSIONS AND OPEB

The district's pension liabilities are manageable and consistent with state peers. The district provides its employees' pension benefits through the state's Department of Retirement Systems (DRS). According to Moody's approach to evaluating pension liabilities, the district's three-year adjusted net pension liabilities (ANPL) are manageable at 1.7x operating revenues. As a percentage of 2017 full value, three-year ANPL is moderate at 2.3%. ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the district's or each pension group's reported liability information, but to improve comparability with other rated entities. Management and Governance Washington school districts have an institutional framework score of “Aa,” or strong. Revenues are highly predictable as districts are primarily funded by a state funding formula based on enrollment. Districts have a moderate ability to increase revenues through voterapproved supplemental property tax levies for maintenance and operations or capital. Districts do not have a permanent operating property tax levy. Expenditures mostly consist of personnel costs, which are highly predictable. The ability to reduce expenditures is moderate given the presence of collective bargaining groups and the need to maintain educational services.

Legal Security The current offering is secured by the district's full faith, credit, and unlimited property tax pledge. The Washington State School Bond Guarantee Program pledges its full faith and credit to make whole any shortfall in debt service by the district, if necessary, on a timely basis for payment to bondholders.

Use of Proceeds The proceeds of the bonds will be used to refund certain maturities of the district's outstanding GOULT debt.

Obligor Profile The district is located in Pierce and King counties, and serves most of the city of Fife, and portions of Milton, Edgewood and Pacific, and a small portion of Tacoma. The district has an estimated population of 21,784, and encompasses approximately 10 square-miles. The District serves approximately 3,570 students, as of fiscal 2017, and operates one primary school, two elementary schools, one middle school, one junior high school, and one high school.

Methodology The principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December 2016. The principal methodology used in the enhanced rating was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

4

24 May 2017

Pierce King Counties S.D. 417 (Fife), WA: New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3

U.S. PUBLIC FINANCE

MOODY'S INVESTORS SERVICE

Ratings Exhibit 2

Pierce & King Counties S.D. 417 (Fife), WA Issue

Rating

Unlimited Tax General Obligation Refunding Bonds, 2017 Rating Type Sale Amount Expected Sale Date Rating Description Unlimited Tax General Obligation Refunding Bonds, 2017 Rating Type Sale Amount Expected Sale Date Rating Description

Aa2 Underlying LT $12,715,000 06/06/2017 General Obligation Aa1 Enhanced LT $12,715,000 06/06/2017 General Obligation

Source: Moody's Investors Service

5

24 May 2017

Pierce King Counties S.D. 417 (Fife), WA: New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3

MOODY'S INVESTORS SERVICE

U.S. PUBLIC FINANCE

© 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. 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 or in preparing the Moody’s publications. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER

6

24 May 2017

1072745

Pierce King Counties S.D. 417 (Fife), WA: New Issue - Moody's Upgrades Pierce & King Counties S.D. 417 (Fife), WA's GOULT Bonds Underlying Rating to Aa2 from Aa3