Fitch Affirms Fountain Hills USD No. 98, AZ School Improv & Rfdg Bonds at 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--As a part of routine surveillance, Fitch Ratings has taken the following rating action on Fountain Hills USD No. 98, Arizona's (the district) bonds:

--$5.1 million school improvement and refunding bonds affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The district's substantial tax base wealth remains a key credit strength as it provides the district with sufficient financial flexibility to accommodate another projected loss of taxable values next fiscal year.

--Management has addressed recent revenue declines with necessary budget cuts in order to maintain reduced but still healthy reserve levels that remain in line with this rating category. Furthermore, voter-approved operating tax levy overrides provide additional revenues, although such levies require voter renewals every seven years.

--The district's enrollment base is small and has experienced modest annual enrollment declines in recent years. However, a return to enrollment growth is anticipated over the long term in light of the area's planned residential development.

--The area economy continues to demonstrate weaknesses, characterized in high unemployment and above average home foreclosures and delinquency trends.

--Debt levels are low; principal amortization is very rapid. Capital plans appear manageable.

--Area wealth levels are above average.

KEY RATING DRIVER:

--Maintaining healthy reserve levels and fiscal balance particularly in light of enrollment trends and rising levels of delinquent property taxes will be integral to sustaining credit quality.

SECURITY:

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

CREDIT SUMMARY:

Located in central Maricopa County in the eastern portion of the larger Phoenix metro area, this small district encompasses approximately 25 square miles and presently operates four schools. Area wealth levels are above average. Local unemployment levels rose sharply in 2009 in light of the economic downturn, although recent data indicates that jobless levels in the Phoenix metro area are currently below those of the state and U.S. at 8.4% in December 2010 versus 9.1% for Arizona and the U.S.

As residential development expanded in the district during the late 1990s and early part of the decade, enrollment grew at a solid pace of about 3% annually. Most recently, however, modest annual enrollment declines of about 2% have occurred over the past five fiscal years, resulting in average daily membership that totaled approximately 2,100 in fiscal 2011. Management attributes enrollment declines largely to the maturation of existing neighborhoods with higher-valued homes as well as delays in planned residential development projects from the metro area's generally weakened economic conditions. However, over the long term, demographers indicate a slower but continued return to enrollment growth in the district as economic conditions bolster additional residential development activity that will lengthen earlier projections for the district's eventual build-out.

The district's tax base is primarily residential and has historically experienced strong growth annually. Residential assessed valuation is higher than average; the district is considered property wealthy. Consistent with many other Arizona local governments, the district experienced its first secondary assessed valuation (SAV) decline in recent years as of fiscal 2010. The weakened housing market and absence of new development resulted in a steeper 11% decline in fiscal 2011; a 20% drop in SAV is projected for fiscal 2012 that would bring SAV to roughly $475 million or closer to pre-2008 levels. Nonetheless, management still anticipates that base level/per pupil operational revenue can still be generated from the local tax base without additional support from the state using a tax levy that remains comparatively low and well below the tax rate used to determine state aid.

District financial operations have been stressed over the last few years due to several factors including rising property tax delinquencies and the state's fiscal imbalance that has included the hold-back of state funds. To address the declining revenue and enrollment environment and to provide more stable financial footing, management implemented significant, multi-year operating efficiencies, which included workforce reductions. Notably, the district has not required short-term borrowing for its cash flow needs, but has instead relied on internal liquidity from its various levy funds. Also, the district adjusted its property tax levy in order to recapture previously uncollected property tax revenue from prior years.

On a budgetary basis, Arizona school districts do not maintain large fund balances -- no more than 4% of maintenance and operations (M&O) spending pursuant to state law. While school district spending is primarily controlled through their expenditure budget, districts can seek voter approval for extra local funding through capital and M&O overrides. As the district is property-wealthy, the majority of its funding comes from property taxes, historically aided by all available overrides which were recently re-authorized by voters in 2009 for a period of seven years. Unlike many other Arizona school districts, timely voter renewal has allowed Fountain Hills USD to maintain optimal financial flexibility in recent fiscal years (the 10% M&O override levy is worth approximately $1.1 million as implemented in fiscal 2011); its three overrides have remained at full value and thus, not required accompanying budgetary cuts in subsequent fiscal years.

While general fund reserves have more recently dropped from their previous above-average levels, they remain in line with the district's historical financial profile. Assisted by sound financial management practices, the district continues to maintain healthy reserves; audited fiscal 2010 results reflected a modest operating surplus of roughly $207,000 that brought the unreserved general fund balance up to $311,000 or 2.4% of spending, along with additional reserves in the unrestricted and soft capital funds. Further spending cuts were part of developing the $12.5 million fiscal 2011 M&O expenditure budget, although to date, management projects additional savings from the year's operations that will allow the district to add approximately $100,000 to reserves and bring the reserve/carry forward level to approximately the state maximum of 4%, as well as positive balances in other funds which provide an additional financial cushion.

Debt levels are low and have benefited from state funding for new school facilities in prior growth years; overall debt levels equal less than 1% of market value in fiscal 2011 or about $1,400 on a per capita basis. Comparable to many Arizona school districts, principal amortization of the district's tax-supported debt is very rapid with nearly 100% repaid in 10 years. Management reports preliminary plans to approach voters in November 2012 for $11 million to $15 million in new bond authorization that would fund capital spending for buses, energy saving, and replacement/renewal facility projects. The district's pension plan, as well as disability, death and healthcare benefits, is through the Arizona State Retirement System (ASRS); the system's funded position remains satisfactory at 79.3% as of June 30, 2009. The district has made 100% of its annual required contribution (ARC) for fiscal years 2008-2010.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax Supported Rating Criteria' (Oct. 8, 2010).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

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