AUSTIN, Texas--()--Fitch Ratings assigns an 'AA+' rating to the following Denver School District No. 1, CO general obligation (GO) bonds:
--$450 million GO bonds, series 2012B;
--$16 million GO qualified zone academy bonds (taxable) series 2012C;
--$67.2 million GO refunding bonds (taxable) series 2012D.
The bonds are scheduled to price via negotiation during the week of Dec. 3, 2012. Proceeds will be used for various capital needs and to refund a portion of the district's outstanding debt for savings.
In addition, Fitch assigns an 'AA+' rating to the following outstanding bonds totaling $973 million:
--GO qualified zone academy bonds, series 2001;
--GO bonds, series 2001C;
--GO bonds, series 2004;
--GO refunding bonds, series 2004B;
--GO refunding bonds, series 2004C;
--GO refunding bonds, series 2005A;
--GO bonds, series 2009A;
--GO qualified school construction bonds, series 2009B;
--GO build America bonds, (taxable) series 2009C;
--GO refunding bonds, series 2009F;
--GO refunding bonds, series 2009G;
--GO qualified school construction bonds, series 2010A;
--GO build America bonds, (taxable) series 2010B;
--GO refunding bonds, series 2010C;
--GO refunding bonds, series 2012A.
The Rating Outlook is Stable.
The bonds are secured by an annual unlimited property tax levy.
KEY RATING DRIVERS
LARGE ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government. While having experienced a strong recessionary impact, moderate job gains in recent months suggest local economic conditions are improving.
IMPROVED FINANCIAL PROFILE: The district's financial performance has improved despite state aid cuts and assessed value (AV) declines, aided by the district's practice to budget contingency reserves and voters' consistent support for mill levy overrides. A large majority of voters approved the most recent override in 2012, which Fitch considers an important revenue enhancement. Fitch also views the district's new fund balance policy as a positive credit factor.
GROWING BUT MANAGEABLE DEBT LEVELS: Overall debt levels are high, due in part to the district's large voter-approved bond programs and its use of certificates of participation (COPs) to fund its pension system obligations. Debt service carrying costs are high, but Fitch notes that total carrying costs for the district's bonds, COPs, and contributions for its pension and other post-employment benefits (OPEB) obligations are moderate. Principal amortization for the GO bonds and COPs is well below average. Due to a recent COP restructuring, the district's variable-rate exposure has declined to a moderate level.
FAVORABLE OPEB FUNDING: The district's OPEB obligations have been funded on an actuarial basis since 2005, well ahead of most school districts and municipalities.
Favorable Long-Term Economic Prospects
Coterminous with the city and county of Denver (unlimited tax GOs rated 'AAA' by Fitch), the district's economic diversity benefits from its role as the hub of a 10-county MSA and the capital of Colorado. After posting job losses in 2009-2010 and stabilizing in 2011, recent employment gains led by professional and business services and education and health services fueled a modest 0.9% increase in employment for the 12 months ended Sept. 30, 2012.
Similarly, the MSA's unemployment rate trended up notably during the recession but declined to 7.9% in Sept. 2012, down from 8.8% one year earlier; the rate remains above the state and national averages of 7.4% and 7.6%, respectively. Although overall new construction activity has risen, it remains modest compared to pre-recession levels. Ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including the massive Denver Union Station project, will benefit the city's medium-term economic prospects.
Enrollment Pressures Facilitated by Charter Schools
Denver School District No. 1 is the fastest growing large district in Colorado. At an estimated 77,267 funded pupil count (FPC) in fiscal 2013, the district's FPC has grown by an annual average of 2% over the last five years. Charter school enrollment represents 13.7% of the total funded pupil count and is not considered a financial pressure for the district by Fitch based on the collaborative relationships that promote the use of shared campuses to facilitate enrollment growth, and the sharing of facility operating costs.
Mill Levy Overrides Help Mitigate Recent Tax Base Declines
After growing by a solid compound annual average of almost 8% in fiscal years 2006-2011, the district's AV declined by 8.6% in fiscal 2012, driven by 13% and 4.8% declines in commercial and residential property reappraisals, respectively. AV declined only modestly in fiscal 2013 and the district expects it to expand only modestly in the next reappraisal year in fiscal 2014. Additionally, the district projects reappraisal gains of 3.7% and 4% over the next two reappraisal years in 2016 and 2018, respectively, which Fitch considers reasonable given pre-recession trends. The tax base is diverse.
The district has benefited from voter support for mill levy overrides approved in 1988, 1998, 2003, 2005 and 2012. Unlike prior overrides, the 2012 override is comprised of a fixed mill levy which will generate additional property tax revenue as AV grows and which Fitch considers a positive revenue enhancement. Notably, a high 68% of voters approved the 2012 override amid a still recovering economy.
Overall Debt Burden Elevated
The current offerings include the entire $466 million bond authorization approved by voters in November 2012 plus a $67 million refunding for interest cost savings. The overall debt burden is elevated at $7,066 per capita and 5.7% of full value, including $808 million in pension COPs. The district's GO principal pay-out rate is slightly below average with 44% maturing in 10 years. Fitch notes that the combined pay-out rate of the GOs and COPs is well below average at 33% in 10 years.
Due in part to pension COPs, debt service carrying costs are elevated at 22% of general and debt service fund expenditures in the fiscal 2013 budget. Because the district's pension annual required contributions net out the base rental payments of the pension COPs, Fitch notes that the total carrying cost of GO and COP debt service plus pension and OPEB costs does not materially increase from the debt cost alone.
High Community Support for Capital Program
The 2012 authorization, approved by a high 64% of voters, will fund district-wide improvements, renovations, new construction, and technology updates. Notably, the district's variable-rate debt declined from one-third of the district's debt portfolio to a more moderate 17.5% after a large pension COPs refunding in 2011. All of the district's variable-rate COPs are hedged with swaps. Fitch notes that the district plans to refund all or a part of its variable-rate COPs upon certain market conditions.
Stabilized Finances Poised for Further Improvement
The district's financial profile has improved recently, as shown by large operating surpluses in the last two audited fiscal periods that were aided by substantial unused contingency appropriations. Most recently, fiscal 2011 posted a $41.8 million general fund operating surplus (equal to 6.1% of spending) which increased the unrestricted general fund balance to $113.8 million or a strong 16.7% of spending (adjusted for the large COP refunding).
Audited fiscal 2012 results include a planned $14.8 million drawdown, the result of additional targeted instructional spending and transfers to the capital reserve. The fiscal 2012 financial cushion, which includes combined 6% emergency and contingency reserves, totals about $98 million or a still strong 15.3% of spending. Operations have been aided by the pension COPs issuance, which allowed the district to reduce its contribution rate from 14% to 7% of pay - equivalent to $20 million in annual general fund savings.
Based on a conservative projection of flat enrollment, the fiscal 2013 budget appropriates $23.5 million (3.6% of spending) of the general fund balance. However, the district now expects to increase its reserves due to a positive 1,400 variance in the FPC (a 1.9% increase over fiscal 2011) and voters' approval of the fixed mill levy override in November 2012. The permanent 4.86 mill levy override is estimated to generate $49 million in additional property taxes in fiscal 2013, which Fitch considers to be an important revenue enhancement given recent state aid cutbacks.
Fitch also takes comfort in the district's adoption of a formal fund balance policy in fiscal 2012 that targets an unassigned fund balance of 15% of spending. District management expects to reach its fund balance target by the end of fiscal 2013, which Fitch considers reasonable given recent positive trends in enrollment.
A current $60 million fund balance in the district's special revenue fund for teacher compensation increases the district's liquidity cushion considerably, although Fitch notes that these funds are restricted in their use. Financial operations are also assisted by a city imposed sales tax dedicated to expanding pre-school education.
Pension Adequately Funded / OPEB Provided Through Trust
Effective Jan. 1, 2010, all employees of the district became members of the Public Employee Retirement Association (PERA) as a result of its merger with the Denver Public Schools Retirement System (DPSRS). PERA is a cost-sharing multiple employer defined benefit plan although the assets, liabilities and obligations of DPSRS remain separate and distinct from the other schools within PERA. As of Jan. 1, 2011, DPSRS' funded ratio was adequate at 81.5%. The district's OPEB benefits are also provided through PERA through a trust fund initially established by the district in 2005.
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 informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria