Fitch Takes Various Rating Actions on 4 Arizona School Districts' Impact Aid Revenue Bonds

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions as part of its continuous surveillance efforts on the four outstanding Arizona school districts' impact aid revenue bonds listed below:

--$5.5 million impact aid revenue bonds (Ganado Unified School District, Arizona), series 2003A affirmed at 'A-';

--$1.9 million impact aid revenue bonds (Tuba City Unified School District, Arizona), series 2004A affirmed at 'A-'.

--$1.9 million impact aid revenue bonds (Indian Oasis-Baboquivari Unified School District, Arizona), series 2002A affirmed at 'A-'.

--$1.9 million impact aid revenue bonds (Red Mesa Unified School District, Arizona), series 2002A, upgraded to 'A-' from 'BBB-';

All of the Rating Outlooks are Stable.

RATING RATIONALE:

--The rating is based on the provisions of the federal government's Impact Aid program as authorized by the Elementary and Secondary Education Act.

--Federal impact aid funding levels have generally remained stable. On average, the above-mentioned districts have experienced a modest 2% - 3% decline in this revenue stream in recent years, which still provides strong debt service coverage.

--Aid levels are subject to potential policy or budgetary changes at the federal level and the districts' ability to provide timely information to the federal Department of Education.

--Districts with high numbers of 'federally-connected' students, such as the four included in this rating action, have priority for impact aid payments over other districts.

--Strong structural provisions include receipt of impact payments well in advance of debt service payments, allowing for timely bond repayment even if delays in funding are extended.

--If impact aid payments are delayed, the districts maintain a final back-stop to ensure timely debt service in the form of cash-funded debt service reserve funds.

KEY RATING DRIVER:

--Use of the debt service reserve fund to meet current debt service payments would call into question the timeliness of impact aid payments.

SECURITY:

The bonds are secured by a first lien on the district's annual impact aid revenues.

CREDIT SUMMARY:

Although impact aid funding remains vulnerable to federal budgetary pressures and federal policy changes by Congress, the federal Impact Aid program has had a long and established history of nearly six decades. The federal government makes impact aid payments to public school districts with significant numbers of students who are 'federally connected' primarily due to their proximity to Native American tribal lands or military installations. Large shares of all four of the districts' budgets are dependent on impact aid revenues.

Over fiscal years 2008 - 2011, there was a modest 2 - 3% decline in the pledged impact aid revenues for most of these districts, reflecting in part ongoing enrollment declines. However, even with these modest declines, pledged revenues provide strong debt service coverage; fiscal 2011 pledged impact aid received by Indian-Oasis Baboquivari USD covered MADS a solid 3.7 times (x), the lowest coverage level for any of the four districts. This coverage is well above levels of many districts that receive credit enhancement through various state programs. Fitch takes comfort that under such high coverage levels, debt service would be paid under all but the most severe federal funding reductions. Bond covenants do not allow for any senior or superior pledges while these bonds are outstanding (Ganado USD maintains the final maturity due July 1, 2015). Additional parity debt can be issued if the lowest amount of impact aid revenue received in any of the three most recently completed fiscal years equals at least 3x MADS.

Program mechanics enabled by state law and legally structured in the bond documents allow for the Department of Education to make impact aid payments directly to a trustee-held debt service fund where the year's impact aid payment is typically intercepted many months ahead of the next fiscal year's debt service payment, and before district management can access the year's funds for general operations.

Another key structural protection for bondholders and a final back-stop is the debt service reserve fund, cash-funded and equivalent to MADS. If tapped, the reserve fund must be fully restored with any subsequent impact aid payments. All districts have filed their annual impact aid applications in a timely manner. However, of concern to Fitch are the recent instances of extended impact aid revenue payment delays by the Department of Education for the Red Mesa and Indian-Oasis Baboquivari districts that highlights an element of risk to bondholders. In this case, insufficient information provided by the districts to the Department of Education as well as reported lack of communication between both parties delayed payments by up to five months. Despite this delay, each district had a two to three month window following the receipt of impact aid revenues before debt service payment was due.

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

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, Case-Shiller, and IHS Global Insight.

Applicable Criteria and Related Research:

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

--'State Credit Enhancement Program Criteria', (Dec. 16, 2009).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

State Credit Enhancement Program Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=491794

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