Fitch Rates Deer Valley USD No. 97, Arizona's 2010 Bonds 'A+'; Outlook Negative

AUSTIN, Texas--()--Fitch Ratings assigns an 'A+' rating to the following Deer Valley Unified School District No. 97 of Maricopa County, Arizona's (the district) school improvement bonds:

--$30 million, project of 2008, series A (2010).

The bonds are expected to sell via negotiation as early as Jan. 21, 2010.

In addition, Fitch takes the following actions:

--$177 million in outstanding school improvement bonds affirmed at 'A+'.

The Rating Outlook is Negative.

RATING RATIONALE:

--The Negative Outlook results from the continued uncertainty of state funding levels and potential added financial pressure if an upcoming operating tax override will not be approved by voters.

--District officials have proactively managed the recent challenges of state funding through various expenditure controls and cuts, in line with moderating enrollment trends, and maintain special revenue and capital project reserves that provide some operational financial flexibility.

--Debt levels are modest; the district maintains a very rapid pace of amortization. The recent bond authorization allows the district to meet its various capital needs, despite state budget cuts in capital funding.

--Voter approved operating budget and 'soft capital' overrides provide additional property tax revenue sources.

--The district is part of the larger Phoenix-Mesa-Scottsdale metro area, which is the hub of the state's economy. The area economy (which has traditionally been a positive credit consideration) has substantially weakened due primarily to the notable downturn of the housing market.

--The district experienced a moderate tax base decline in fiscal 2010; district officials anticipate no increases in tax base for the district over the near term.

WHAT COULD TRIGGER A DOWNGRADE:

--Failure of an operating tax override election prior to the reduction/expiration of the current override would lead to potentially difficult mandatory budget reductions.

--Management's inability to absorb additional state funding cuts or payment delays would further weaken the district's financial position and overall credit profile.

SECURITY:

The bonds are secured by an unlimited ad valorem tax levied on all taxable property within the district.

CREDIT SUMMARY:

Comparable to all Arizona school districts, the district's financial operations have been challenged recently by state funding reductions that include the inability to retain a cash balance that exceeds budget capacity in the operating fund. Evidenced in its unaudited fiscal 2009 numbers, the district experienced additional state funding problems beyond the earlier, mid-year cut in state funding of almost $5 million. Due to a delayed May state payment that was not received until the next fiscal year and a year-end cash sweep that eliminated the district's modest level of carry forward reserves, the district's unaudited fiscal 2009 results reflected a negative general fund balance position of $10.5 million, equaling a negative 5.5% of spending. In conjunction with these cuts, the state has allowed districts to offset lowered levels of state maintenance & operations (M&O) funding with the use of 'soft capital' and unrestricted capital funds. In total, the district sustained approximately $11 million in state funding cuts for the fiscal year that it elected to make primarily by reducing capital funding.

District officials report that fiscal 2010 state payments have remained timely and complete so far. Fiscal 2010 liquidity was assisted by the district's issuance of approximately $30 million in tax anticipation notes in line with amounts of prior year borrowings. Currently, the district has absorbed a mid-year $5 million state funding cut, although steeper state budget cuts were originally projected. Budgetary savings were accomplished primarily through various staffing changes, and the district was able to recall almost all of the 105 teachers it had originally planned to eliminate. District officials estimate that the state has reached the minimum school district funding it is required to provide to receive federal stimulus dollars through June 30, 2011.

The district's current M&O budget override enables it to increase its levy by 10% above the prescribed limit until 2011, and a $7.5 million annual capital override in place through 2013 provides additional funding for critical 'soft capital' needs. The district anticipates approaching voters for a 15% operating tax rate override in March 2010 that will include extension of the existing M&O override as well as an additional 5% operating tax rate override. If this override election or subsequent attempts do not pass, financial flexibility would be impaired, potentially contributing to a rating downgrade.

The district's debt position is very strong. Debt ratios are modest and amortization is very rapid; all tax-supported debt is retired within 10 years. This issuance is on track with earlier projections and is the first portion of the $148 million bond authorization approved by 66% of the voters in November 2008. Projects incorporated in this issuance include modernization and energy efficiency improvements to various school facilities. As recent enrollment growth has been minimal with a modest decline of almost 1.5% in fiscal 2010, district officials currently report that the timeframe has been extended for issuance from the 2008 authorization for a new elementary school until 2012 or later. Fitch expects debt levels to remain moderate upon full issuance from the 2008 authorization.

With an estimated population of almost 215,000, the district is one of the largest in the state in land size, encompassing 367 square miles from the northern edges of Phoenix and Glendale in the south to the Maricopa County line and the Agua Fria River in the north. Interstate 17 bisects the district from north to south. Area wealth levels are typically above the state and approach national levels. In light of the weakened local economy, unemployment rates in Maricopa County have risen to 8.5% in October 2009, but remains slightly below the MSA, state, and nation. Although the tax base is predominately residential with ongoing retail/commercial development near I-17, roughly half of the land in the district is state-owned. The district experienced a moderate decline in its secondary assessed valuation (SAV) of almost 5% in fiscal 2010 from the prior year to $3.5 billion. Although tax base growth, a lagging indicator of changes in property values, has historically been very strong at over 16% on average annually over the last five fiscal years, district officials estimate minimal tax base growth over the near term.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009;

--'U.S. Local Government Tax-Supported Rating Criteria,' dated Dec. 21, 2009.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings, Austin
Rebecca C. Moses, 512-215-3739
Jose Acosta, 512-215-3726
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com

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Contacts

Fitch Ratings, Austin
Rebecca C. Moses, 512-215-3739
Jose Acosta, 512-215-3726
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com