SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Canyons School District Board of Education (the district), Utah general obligation (GO) bonds:
--$80 million series 2012.
The 'AAA' rating is based on a guaranty provided by the Utah School Bond Default Avoidance Program, whose Insurer Financial Strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.
In addition, Fitch assigns an underlying rating of 'AA+' to the bonds, reflecting the district's credit quality without consideration of the guaranty provided by the Utah School Bond Default Avoidance Program. The Rating Outlook is Positive.
Fitch has also affirmed the 'AA+' underlying rating on the following GO bonds:
--$68 million series 2011.
The series 2012 bonds will be sold competitively on Aug. 21, 2012.
SECURITY
The bonds are secured by the proceeds of an ad valorem property tax levied at a rate sufficient to pay principal and interest.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: The district ended its second fiscal year of operation (fiscal 2011) with an increasingly strong unrestricted general fund balance, good financial flexibility, a low debt burden that amortizes rapidly, and well-funded pension and other post-employment benefit liabilities.
POSITIVE OUTYEAR PROJECTIONS: While conservative fiscal 2012 and outyear projections indicate general fund balance decline, district officials expect actual fiscal 2012 results to outperform budget. Management projects further general fund balance increases through fiscal 2016.
CONTINUED FINANCIAL FLEXIBILITY: The district retains the flexibility to make staff reductions, increase class sizes, and increase taxes if necessary. The district continues to benefit from positive labor relations which allow it to partially offset remuneration cost increases with significant labor concessions.
MANAGEABLE CAPITAL IMPROVEMENT NEEDS: The district has identified significant facility repair and replacement costs, but it is not being pressured by student enrolment growth and has sufficient facility capacity. Therefore, it can plan its capital improvement program and associated bond issues in stages to avoid pressuring local tax rates.
SOMEWHAT MIXED SOCIOECONOMIC CHARACTERISTICS: The district benefits from its proximity to the Salt Lake County economic hub and its own commercial tax base. However, socioeconomic characteristics are somewhat mixed and there has been unexpectedly significant local tax base decline. The district expects any future declines to be partially offset by new development. Fitch views this projection with caution given recent district expectations for tax base stabilization have not been met.
WHAT COULD TRIGGER AN UPGRADE OF THE UNDERLYING RATING:
ONGOING STRONG FINANCIAL PERFORMANCE: If the district maintains strong unrestricted general fund balances, low debt burden, and rapid debt amortization for a third consecutive year, Fitch will consider a rating upgrade.
CREDIT PROFILE
On Nov. 6, 2007, voters in the eastern portion of the previous Jordan School District approved a ballot measure to secede and form a separate district. Consequently, a new Canyons School District (the eastern portion) and the remaining Jordan School District (the western portion) began operations on July 1, 2009 (fiscal year 2010) under separate school boards. Canyons School District covers 192 square miles and has a 2012 enrolment of 33,489 students attending 45 schools and an adult and community education program.
CANYONS' RESPONSIBILITY FOR PAYMENT OF JOINT DEBT
Holders of the original Jordan School District GO bonds benefit from an unlimited property tax levy on the aggregate TAV of the previous Jordan School District. Both the debt and the TAV were divided proportionately between the two districts based on the TAV in the year immediately preceding the division. Canyons School District's share is 58%, and the remaining Jordan School District's share is 42%.
Each district is legally obligated to tax the residents within its boundaries for its share of the outstanding debt. Salt Lake County collects the property tax revenues from within each school district's boundaries and distributes those revenues to the two school districts. Jordan School District then invoices Canyons School District for its share of the full debt service payment. District officials report that both districts are working cooperatively and there have been no issues with repayment of the joint debt.
MANAGEABLE LONG-TERM LIABILITIES
The series 2012 bonds are the Canyons School District's second debt issuance under a $250 million bond authorization narrowly approved by 50.7% of voters on June 22, 2010. This new parity debt is secured by the proceeds from ad valorem property taxes levied on taxable property solely within the boundaries of the Canyons School District. The district intends to issue further tranches of bonds over the next four to five years, as funding is required for specific school capital projects. These tranches of debt will be sized so as not to increase the current tax rate assuming no further TAV declines. The overall debt burden will remain low.
Overall debt is a low $1,851 per capita and 1.6% of market value. Debt amortization is above-average at 66.6% in 10 years. The district meets fully its annual pension obligations to the Utah Retirement Systems and its OPEB liabilities are currently fully funded.
STRONG FINANCIAL OPERATIONS
The district ended fiscal 2011 with a significantly strengthened unrestricted general fund balance of $60.8 million or 30.8% of spending, up from an already strong $35.9 million (18.9% of spending) the year prior. This significant increase is attributable to one-time federal funding, savings from reducing the school year by five instructional days (subsequently reinstated in fiscal 2012), and restraining expenditures below budget. The district generated a $10.2 million net surplus, 12.5% better than its final budget. The district also received a $14.6 million transfer from the Jordan School District to fund its now separate OPEB liability.
Budgeted fiscal 2012 results and outyear projections conservatively indicate total general fund balance declines from $63.1 million (29.9% of spending) in fiscal 2012 to $48.7 million (21.1% of spending) in fiscal 2016. However, due to underexpenditures, district officials expect actual fiscal 2012 results to outperform budget with a $68-$70 million total general fund balance. From this stronger base, district officials project further total general fund balance increases thereafter, reaching $71-$74 million by fiscal 2016. The district intends to roll forward its fully funded 5% economic stabilization fund through fiscal 2013.
The district calculates that it has made $16 million in expenditure cuts to date and still has the flexibility to make staff reductions, increase class sizes, and increase taxes if necessary. Despite tax rate increases in fiscal years 2010-2012 totaling 17.2%, the district retains the option to increase its tax rate further given significant room remains under its tax rate caps.
The district continues to benefit from positive labor relations which allow it to partially offset remuneration cost increases with significant labor concessions, such as the incremental elimination of 10 professional development days for teachers.
All capital projects fund monies generated from the capital tax levy would be available for general fund support in an emergency situation if the state approved the necessary waiver. In terms of liquidity, the district currently has a total of $200 million in investments and cash net of unspent bond proceeds.
SOMEWHAT MIXED SOCIOECONOMIC CHARACTERISTICS
Canyons School District is primarily residential, with a strong commercial base, and continues to benefit from being an integral part of the Salt Lake County economic hub. The county's unemployment rate declined to 5.7% in April 2012 from 6.7% a year prior, in line with improving state and national trends, and reflecting some labor force contraction.
While the district's overall socioeconomic characteristics are good, with above-average per capita money income and median household income, and below-average individual poverty rate, the socioeconomic characteristics of specific communities within the district vary widely. The district includes some of the wealthiest communities in the state, while other areas are more socioeconomically challenged with significant portions of their students eligible for free and reduced lunch programs.
TAV declined 6.7% in fiscal 2011. Despite expectations that the district's TAV would stabilize in fiscal 2012, TAV declined 3.3% that year, followed by a further 3% decline in fiscal 2013. Utah's relatively high foreclosure exposure has continued to suppress housing values. Nevertheless, new residential and commercial developments currently underway might help stabilize TAV from fiscal 2014 onwards.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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