U.S. PUBLIC FINANCE

CREDIT OPINION26 May 2017

New Issue

Contacts

Heather Correia 214-979-6868Analystheather.correia@moodys.com

Orlie Prince 212-553-7738VP-Sr Credit Officer/Managerorlie.prince@moodys.com

Silver Consolidated School District 1 (GrantCounty), NMNew Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced toSilver CSD 1, NM's GO Bonds; Outlook is Negative

Summary Rating RationaleMoody's Investors Service has assigned a Baa2 to Silver Consolidated School District 1(Grant County), NM's $5 million in General Obligation School Bonds, Series 2017. We havemaintained the Baa2 rating on $1.4 million in outstanding bonds. Moody's has also assignedan Aa2 enhanced rating to the Series 2017 GO bonds based on the New Mexico SchoolDistrict Enhancement Program (NMSDEP) - Post March 30, 2007. The outlook is negative.

The Baa2 reflects the district’s limited financial position compounded by mid-year state cutsand declining enrollment. The rating further incorporates the district’s sizeable and stablebase, elevated pension liabilities, and very modest debt profile.

The Aa2 enhanced rating on the Series 2017 General Obligation School Bonds is based onour assessment of the NMSDEP - Post March 30, 2007 and a review of the district's proposedfinancing. For additional information on the program, please see Moody's report dated May4, 2008.

Credit Strengths

» Modest debt burden

» Large, stable tax base

Credit Challenges

» Limited reserve position further challenged by state aid cuts

» Declining enrollment due to charter competition

» Elevated pension liabilities

Rating OutlookThe negative outlook reflects the ongoing uncertainty and challenges surround the district’sprimary revenue source given state budgetary challenges, which is further exacerbated bydeclining enrollment due to charter school competition. These factors will limit the district’sfinancial flexibility over the near-term.

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Factors that Could Lead to an Upgrade (and Removal of the Negative Outlook)

» Substantial improvement in reserve position

Factors that Could Lead to a Downgrade

» Continued deterioration of reserves

Key Indicators

Exhibit 1

Silver Consolidated S.D. 1 (Grant County), NM 2012 2013 2014 2015 2016

Economy/Tax Base

Total Full Value ($000) $ 1,615,125 $ 1,651,846 $ 1,721,099 $ 1,750,850 $ 1,749,419

Full Value Per Capita $ 74,709 $ 77,395 $ 80,640 $ 83,641 $ 83,572

Median Family Income (% of US Median) 72.5% 77.0% 77.0% 77.6% 77.6%

Finances

Operating Revenue ($000) $ 25,303 $ 25,717 $ 26,634 $ 26,969 $ 26,692

Fund Balance as a % of Revenues 12.3% 8.5% 7.3% 7.3% 8.5%

Cash Balance as a % of Revenues 8.4% 5.1% 5.6% 5.8% 5.7%

Debt/Pensions

Net Direct Debt ($000) $ 8,350 $ 6,635 $ 5,395 $ 4,115 $ 2,790

Net Direct Debt / Operating Revenues (x) 0.3x 0.3x 0.2x 0.2x 0.1x

Net Direct Debt / Full Value (%) 0.5% 0.4% 0.3% 0.2% 0.2%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 4.8x 5.4x 6.3x 4.8x 4.1x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 7.6% 8.4% 9.8% 7.4% 6.2%

*Operating Revenues include both General Fund and Debt Service Fund revenuesSource: District's Audits; Moody's Investors Service

Recent DevelopmentsIn fiscal 2017, amid a financial crisis of its own, the State reduced K-12 funding by 1.5%, which in Silver's case, equated to a $350,000decline in revenues. Although a majority of the cut was offset with savings built into the budget, a modest decline in cash balance isstill expected.

Detailed Rating Considerations - EnhancedMoody's has assigned an enhanced rating of Aa2 to the Series 2017 General Obligation School Bonds, equivalent to the NMSDEP-PostMarch 30, 2007 programmatic rating. Ratings on individual intercept financings depend on the programmatic rating as well as ourevaluation of the sufficiency of interceptable revenues, the timing of the state's fiscal year relative to scheduled debt service paymentdates and the transaction structure.

Based on the district's state equalization guarantee (SEG) funds for fiscal year 2016, interceptable state-aid provides an ampleminimum of 15.86 times coverage of maximum periodic debt service. Further, state revenues provide an adequate minimum 14.54times maximum periodic debt service coverage when coverage is stressed by deducting the state's final monthly state aid paymentwithin a fiscal year. State-aid funding levels for New Mexico school districts have been stable in recent years, but are subject to mid-year cuts, as observed most recently in fiscal 2017. This weakness, however, is mitigated by ample debt service coverage even in eventaid is curtailed over the course of the year. Principal payments are scheduled for August, early in the State's fiscal year providing for anaverage interval to mitigate the risk of late budgets. The program requires the appointment of a third-party fiscal agent, who is requiredto notify the state if an intercept of SEG is required. The Bank of Albuquerque is the fiscal agent for the current sale.

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 26 May 2017 Silver Consolidated School District 1 (Grant County), NM: New Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced to Silver CSD 1, NM's GO Bonds;Outlook is Negative

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Detailed Rating Considerations - UnderlyingEconomy and Tax Base: Stable Tax Base; Enrollment Declines Driven by Charter School CompetitionThe district’s tax base is sizeable, and will likely remain stable over the mid-term given expectations of limited development. Locatedin western New Mexico in Grant County (A2) along the Arizona border, the district's base has expanded steadily since fiscal 2004,benefitting from positive reappraisals. Fiscal 2016 and fiscal 2017 experienced modest declines; however, the base remains materiallyunchanged, with a full value of $1.7 billion. No major development is currently in progress, but the district reports that residentialconstruction is noticeable within the community. The local economy is somewhat anchored by a copper and gold mine, owned byFreeport-McMoRan Inc. (B1 positive), which employs 1,400 people, and Western New Mexico University, with enrollment of around3,500 students.

District enrollment has declined over the past decade; since fiscal 2016, average annual loss was 1.9%. Fiscal 2017 enrollment (40thday count) was 2,759, down 4.7% year-over-year. Enrollment losses are attributed to charter school competition coupled with out-migration, as families move elsewhere for jobs. Declines in student numbers directly impact operating revenues, as over 90% offunding comes from state aid, which is awarded based on headcount. The district is focused on retaining students, and hopes tostabilize enrollment in fiscal 2018. Management explains they plan to offer new programming and additional electives. Additionally,officials are exploring a four-day school week, which could increase attendance of both students and teachers. Another benefit is that itwould save the district between $100,000 to $200,000 per year.

Resident wealth levels are below average as measured by both the 2015 American Community Survey’s per capita income and medianfamily income that represent 87.2% and 77.6% of the US, respectively. As of March 2017, unemployment in Grant County was 6.5%, inline with the state (6.6%), but exceeding the national level (4.6%).

Financial Operations and Reserves: Limited Financial Position Currently; Management is Focused on Rightsizing OperationsThe district's financial position is limited, which is further exacerbated by the State's budgetary challenges. However, the newmanagement team is focused on increasing reserves, and has demonstrated a willingness to curb expenditures, as necessary. Followingthree years of deficits, the district has returned to balanced operations in fiscal years 2015 and 2016, improving General Fund reservesto approximately $754,000, a still narrow 3.0% of revenues. Officials attribute the $344,000 surplus in fiscal 2016 to significant cutsto salaries and elimination of positions through attrition. Including the debt service fund, total available operating reserves were $2.3million or a more favorable 8.5% of revenues.

In fiscal 2017, the district intended to continue increasing reserves, with a target of 5% in cash balance. As such, management reducedstaff, reallocated teachers and installed a new procurement system to realize efficiencies. Unfortunately, due to budgetary pressure atthe State level, the governor signed a bill reducing aid by 1.5%, which in Silver's case, translated to a $350,000 decline in revenues.Regardless, management reports that they will close out the year with between $600,000 to $700,000 in cash balance (reported on abudgetary basis, not GAAP/GASB).

The fiscal 2018 budget is balanced without use of cash balance. Management has assumed state aid, which represents over 90% ofrevenues, will decline by another 2%. The district continues to curb expenditures, reducing administrative and teaching staff for savingsof over $200,000. Management is willing to cut expenditures with a focus on increasing reserves. Future reviews will focus on thedistrict's ability to grow their cash balance.

LIQUIDITY

The district’s cash balance is narrow, in line with fund balance. The General Fund cash position significantly improved in 2016 from$61,000 to $891,000 due to both the surplus operations and receivables collected. The cash levels represent a modest 3.5% ofrevenues. In the operating funds, cash levels totaled $1.5 million or 5.7% of revenues. The debt service fund cash position fell from theprior year, and the fund shows an $873,000 receivable due from other funds (grants). Both the auditor and district officials report nocash was actually loaned from the Debt Service Fund. Officials attribute the receivable reflects timing discrepancies for federal andstate grant reimbursement.

Debt and Pensions: Modest Debt Profile; Elevated Pension BurdenDespite planned borrowings, the district's debt burden will likely remain modest given the payout structure and tax base size. Inclusivethe of the new issuance, the district's debt burden is a low 0.4% of fiscal 2017 full value. Voters approved $20 million in authorization

3 26 May 2017 Silver Consolidated School District 1 (Grant County), NM: New Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced to Silver CSD 1, NM's GO Bonds;Outlook is Negative

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in February 2017, with Series 2017 being the first issuance of four. The debt is front-loaded, with a sizeable principal payment due in2018, which will allow for the layering in of additional debt without adjustment to tax rates.

DEBT STRUCTURE

All of the district’s debt is fixed rate and amortizes over the long term. Ten-year principal amortization is average at 59.7%, with alldebt retiring by 2036.

DEBT-RELATED DERIVATIVES

The district is not party to any swap or derivative agreements.

PENSIONS AND OPEB

The district’s pension liabilities are elevated and could pressure operations over the long term. The district participates in the multi-employer cost sharing plan administered by the Educational Retirement Board. The district made the full statutorily requiredcontribution of about $2.4 million in fiscal year 2016, equal to 8.8% of total operating revenues, though this contribution trailsactuarial requirements. Moody's adjusted net pension liability (ANPL) for the district, under our new methodology for adjustingreported pension data, is $91.4 million, or an above average 3.4 times operating revenues for fiscal 2016. The three-year average ANPLis $108.6M, or an above average 4.1 times operating revenues.

Total fixed costs, including debt service and pension contributions, were $4.15 million or a manageable 15.6% of operating revenues.While the district has contributed the full statutorily required amount, contribution levels have fallen short of actuarial requirements.Using the “tread water” and debt service, the district's fixed costs are still manageable at 19.6% of fiscal 2016 operating revenues. The“tread water” indicator measures the annual contributions required to prevent the reported net pension liability from increasing, underreported assumptions.

Management and GovernanceThe district is governed by a five member board, with members serving four-year terms. At the beginning of 2017, Silver Consolidatedhired a new superintendent and director of finance, both of whom are focused on increasing the district's reserve levels.

New Mexico School Districts have an Institutional Framework score of A, which is moderate compared to the nation. InstitutionalFramework scores measure a sector's legal ability to increase revenues and decrease expenditures. The sector's major revenue source,state aid or SEG, is subject to a cap, which cannot be overriden (in that, the State determines annual appropriations based primarilyon student enrollment). Reliance on state funding limits revenue-raising ability; school districts do not collect property taxes foroperation. Unpredictable revenue fluctuations tend to be moderate, or between 5-10% annually. Across the sector, fixed and mandatedcosts are generally less than 25% of expenditures. However, New Mexico has public sector unions, which can limit the ability to cutexpenditures. Unpredictable expenditure fluctuations tend to be moderate, between 5-10% annually.

Legal SecurityThe bonds are General Obligation School Bonds of the district and are payable from general ad valorem taxes which may be leviedagainst all taxable property within the district without limitation as to rate or amount.

Use of ProceedsProceeds of the Series 2017 bonds will be used for roof improvements, gym floor upgrades, portables and playgrounds.

Obligor ProfileSilver Consolidated School District 1 is located in southwestern New Mexico along the border with Arizona. Fiscal 2017 enrollment is2,759.

MethodologyThe principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December2016. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Defaultpublished in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

4 26 May 2017 Silver Consolidated School District 1 (Grant County), NM: New Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced to Silver CSD 1, NM's GO Bonds;Outlook is Negative

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Ratings

Exhibit 2

Silver Consolidated S.D. 1 (Grant County), NMIssue RatingGeneral Obligation School Bonds, Series 2017 Baa2

Rating Type Underlying LTSale Amount $5,000,000Expected Sale Date 05/31/2017Rating Description General Obligation

General Obligation School Bonds, Series 2017 Aa2Rating Type Enhanced LTSale Amount $5,000,000Expected Sale Date 05/31/2017Rating Description General Obligation

Source: Moody's Investors Service

5 26 May 2017 Silver Consolidated School District 1 (Grant County), NM: New Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced to Silver CSD 1, NM's GO Bonds;Outlook is Negative

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REPORT NUMBER 1073845

6 26 May 2017 Silver Consolidated School District 1 (Grant County), NM: New Issue: Moody's Assigns Baa2 underlying/Aa2 enhanced to Silver CSD 1, NM's GO Bonds;Outlook is Negative