U.S. PUBLIC FINANCE

CREDIT OPINION2 April 2019

Contacts

Jennifer CardBernhardt

+1.312.706.9983

Analystjennifer.card@moodys.com

David Levett +1.312.706.9990VP-Senior Analystdavid.levett@moodys.com

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West Fargo Public School District 6, NDUpdate to credit analysis

SummaryWest Fargo Public School District (PSD) 6, ND's (Aa3) has an adequate financial position,which is expected to stabilize following favorable revenue trends and recent expenditureadjustments. The district has a high and growing debt burden which is the product of rapidgrowth in the Fargo (Aa1 negative) metropolitan area including substantial expansion of thetax base, population and district enrollment. The district also has a high pension burden.

Credit strengths

» Large and rapidly growing tax base favorably located in the Fargo and Moorheadmetropolitan area

» Strong resident income levels

» Growing enrollment trends, which factors positively into the state aid distribution formula

Credit challenges

» Recent operating pressure due to its rising expenditures

» Elevated debt burden with additional debt planned to accommodate a growing studentpopulation

» Exposure to underfunded state cost-sharing pension plan

Rating outlookOutlooks are generally not applicable for local government credits with this amount of debt.

Factors that could lead to an upgrade

» Material and sustained increases in operating reserves and liquidity

» Significant moderation of debt and unfunded pension liabilities

Factors that could lead to a downgrade

» Further declines in operating reserves and/or liquidity

» Growth in leverage related to long-term debt or pension liabilities

» Weakening of the district's tax base and/or resident income levels

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Key indicators

Exhibit 1

West Fargo Public School District 6, ND 2014 2015 2016 2017 2018

Economy/Tax Base

Total Full Value ($000) $4,766,073 $5,898,122 $7,013,047 $7,800,938 $8,255,453

Population 55,049 58,824 62,439 64,166 64,166

Full Value Per Capita $86,579 $100,267 $112,318 $121,574 $128,658

Median Family Income (% of US Median) 115.1% 116.3% 114.0% 119.3% 119.3%

Finances

Operating Revenue ($000) $102,126 $112,101 $124,015 $135,989 $140,487

Fund Balance ($000) $18,492 $19,867 $18,659 $22,039 $22,936

Cash Balance ($000) $19,430 $17,088 $18,337 $23,144 $25,419

Fund Balance as a % of Revenues 18.1% 17.7% 15.0% 16.2% 16.3%

Cash Balance as a % of Revenues 19.0% 15.2% 14.8% 17.0% 18.1%

Debt/Pensions

Net Direct Debt ($000) $130,617 $120,985 $164,606 $201,246 $202,337

3-Year Average of Moody's ANPL ($000) $248,942 $240,025 $244,929 $277,166 $321,255

Net Direct Debt / Full Value (%) 2.7% 2.1% 2.3% 2.6% 2.5%

Net Direct Debt / Operating Revenues (x) 1.3x 1.1x 1.3x 1.5x 1.4x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 5.2% 4.1% 3.5% 3.6% 3.9%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 2.4x 2.1x 2.0x 2.0x 2.3x

The table above reflects data through the close of fiscal 2018 and does not reflect the $107 million in GO authorized debt passed by voters in September 2018.Source: Moody's Investors Service; West Fargo PSD audited financial statements; US Census Bureau

ProfileThe district is located in eastern North Dakota (Aa1 stable) in Cass County (Aa3) and includes the cities of West Fargo (A1 negative),Harwood, Horace, and portions of Fargo. The district covers an area of around 80,000 acres and serves a population of approximately64,000. The district currently has 18 schools plus 6 other facilities. Enrollment for the 2018/2019 school year is 10,957.

Detailed credit considerationsEconomy and tax base: large and growing tax base favorably located near FargoWe expect the district's local economy to remain healthy due to diversity of employment and continued tax base growth. The districtencompasses the city of West Fargo, the city of Harwood, the city of Horace, portions of Fargo as well as some of the surroundingunincorporated areas. The Fargo and Moorhead metropolitan area has grown substantially in recent decades, expanding in taxablevaluations, population and employment. The district's population has grown steadily, increasing 68% from 2000 to 2010 and 31%between 2010 to 2017 to 64,000. The district's tax base has also nearly doubled in the last decade, from a large $3.7 billion in 2010 toa robust $8.3 billion as of 2018. Part of this growth was driven by the annexation of 2,000 acres for development in 2005 which morethan doubled the city's size from 2,074 acres in 2000 to 4,484 acres currently. Over the last five years the district's full value has grownby an average annual rate of 14%.

The local economy is supported by large institutional employers including Sanford Fargo Medical Center (9,349 employees), NorthDakota State University (4,156 employees) and Essentia Health (2,690 employees). At 2.1% in December 2018, the unemployment ratein Cass County was below both the state (2.4%) and nation (3.7%). Median family income is solid at 119% of the US median.

With the recent flooding in the Midwest, the cities of Fargo and West Fargo declared a state of emergency, however as of now thedistrict reports there has been no flooding and no damage.

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 2 April 2019 West Fargo Public School District 6, ND: Update to credit analysis

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Financial operations and reserves: reserves expected to stabilize following expenditure adjustmentsThe district's financial profile is stabilizing following recent expenditure adjustments and favorable revenue trends. In fiscal 2018, thedistrict posted a $38,000 surplus in the General Fund, resulting in an available fund balance of $11.7 million, or a limited 9.3% ofrevenues. The surplus marks a departure from a previous trend of declines that were driven by operationing costs from opening newfacilities. General Fund reserves are materially down from the peak $15.4 million or 17.5% of revenues in fiscal 2014. The available fundbalance across all operating funds (General, Debt Service and Special Reserve Funds), totaled $23 million, or a solid 16.3% of operatingrevenues at the close of fiscal 2018.

The board recently updated the district's General Fund balance policy to reflect a preferred range of 10% to 14%, but not less than9%. To keep in line with the policy, for fiscal 2019 the district amended its budget to reflect a $615,000 surplus in the General Fund,as opposed to its originally budgeted $380,000 surplus. The projected surplus is driven by a combination of increased state and localrevenues and expenditure reductions. Going forward, the district has no plans to draw down fund balance and plans to make thenecessary required adjustments to either maintain or grow the fund balance.

LIQUIDITYThe district's net cash position in its operating funds closed fiscal 2018 at $25.4 million, or a solid 18.1% of revenues.

Debt and Pensions: rapid economic growth triggers growing debt burden with moderate fixed costs; elevated pensionliabilitiesDriven by rapid economic and enrollment growth, the district’s debt burden is high at 2.7% full valuation and more moderate relativeto operating revenues at 1.6x. The debt burden includes $33.4 million of General Obligation (GO) School Building Bonds the districtplans to issue in April 2019. Of the $223.8 million of debt outstanding (post April 2019), $192.3 million is comprised of rated (A1)general obligation unlimited tax (GOULT) debt, $21.1 million is (A1) general obligation limited tax (GOLT) and $10.4 million is SpecialAssessments Payable. The district's overall net debt burden is very elevated relative to full value at 8.5%, of which a large portionrepresents large borrowings from the cities of West Fargo and Fargo.

The district has expanded and built new facilities to accommodate growing enrollment. In September 2018, voters authorized theissuance of $107 million in GO debt to build a new High School, Middle School, expansions of two of its elementary schools andsecurity upgrades. The $33.4 million issuance in April 2019 reflects the first borrowing for the authorized debt. The remaining $73.5million is expected to be issued in 2020 and 2021. Including all authorized debt, the district's debt burden would be elevated at anestimated 3.6% of full value and 2.1x fiscal 2018 operating revenues though tax base growth and revenue growth could moderate theactual increase. Going forward the district will need to address capacity issues within some of its elementary school facilities whichcould require further borrowing in the next five to ten years.

Debt service was $14.8 million, or a moderate 10.6% of operating revenues in fiscal 2018, while total fixed costs, including pension andother post employment contributions (OPEB), was $24 million or a moderate 17% of operating revenues.

DEBT STRUCTUREAll of the district’s debt is long-term and fixed rate. Principal amortization is below average with 57.2% of all debt retired in ten years.

DEBT-RELATED DERIVATIVESThe district does not have any exposure to any debt-related derivatives.

PENSIONS AND OPEBThe district's pension burden is high, however its annual costs to fund benefits are low. The district participates in two multiple-employer cost-sharing plans, the North Dakota Public Employees Retirement System (NDPERS) and the Teachers Fund for Retirement(TFFR). The Moody's adjusted combined net pension liability (ANPL) for the district, under our methodology for adjusting reportedpension data is $355 million as of fiscal 2018. The ANPL over the past three years averaged 2.3x operating revenues and 3.9% of fullvaluation. The ANPL uses a market-based interest rate to value accrued pension liabilities. While contributions will likely rise in thefuture given the trajectory of the plan, we do not foresee a material increase in contributions that would stress the district's budgetover the next several years.

3 2 April 2019 West Fargo Public School District 6, ND: Update to credit analysis

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North Dakota statutes establish local government retirement contributions as a percent of covered compensation. The employercontribution rates are currently set at 12.8% of payroll for TFFR and 7.12% of payroll for NDPERS. The district's total fiscal 2018 pensioncontribution for both plans was $9 million, equal to 6.4% of operating revenues.

Contributions to TFFR from all participating governments in aggregate amounted to only 79% of the plan’s “tread water” indicatorin 2017, down from 92% of the plan’s “tread water” in 2016, while contributions to NDPERS from all participating governments inaggregate amounted to only 66% of the plan’s “tread water” indicator in 2017. Employer contributions that tread water equal the sumof current year service cost and interest on reported net pension liabilities at the start of the year, using reported assumptions. If planassumptions are met exactly, contributions equal to the tread water indicator will prevent the reported net pension liabilities fromgrowing.

The district's other post-employment benefits (OPEB) liability reflects a cost-sharing multiple employer defined benefit plan. Thedistrict's contribution was $206,000 in fiscal 2018, or a modest 0.1% of operating revenue. The district's total unfunded OPEB liabilitywas $1.2 million as of June 30, 2018, the date of the most recent actuarial valuation report.

Management and governance: moderate institutional framework; levying at maximum amountNorth Dakota school districts have an Institutional Framework score of A, which is moderate. Institutional Framework scores measurea sector's legal ability to increase revenues and decrease expenditures. North Dakota school districts are highly dependent on state aid,averaging 70% of General Fund revenues. State aid is moderately predictable and is based on a per pupil funding formula, with someadjustments for wealth and need. The sector's second revenue source, property taxes are subject to a cap, which can be overridden withvoter approval only. However, school districts generally have significant revenue raising ability below the cap of 70 mills. Unpredictablerevenue fluctuations tend to be high but unpredictable expenditure fluctuations tend to be moderate. Across the sector, fixed andmandated costs are generally high and driven mainly by debt service and pension costs. North Dakota is a Right to Work state,providing expenditure-cutting ability.

State aid accounts for the largest portion of operating fund revenues for the district at 66.5% in fiscal 2018. State aid is distributed ona per pupil basis, using the prior year's count. While state revenues are projected to grow in fiscal 2019 due to estimated enrollmentgrowth, high levels of exposure to state revenues leave the district vulnerable to state aid cuts or delays in the future. Enrollmenthas increased in conjunction with the economic growth with an average annual increase of 5% per year over the last five years. Mostrecently, enrollment jumped 3.7%, or by 388 students, bringing total district enrollment to 10,957. Going forward, managementexpects to see annual growth of approximately 500 students for each of the next five years.

Property taxes were the second source of revenue for the district, comprising 28.8% of operating revenues in fiscal 2018. Rather thanlevying the maximum 70 mills, the district is currently levying the maximum allowable amount in the General Fund, which is limited bya 12% increase over the prior year's levy in dollars.

4 2 April 2019 West Fargo Public School District 6, ND: Update to credit analysis

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5 2 April 2019 West Fargo Public School District 6, ND: Update to credit analysis

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6 2 April 2019 West Fargo Public School District 6, ND: Update to credit analysis