AUSTIN, Texas--()--Fitch Ratings assigns an 'AA' rating to the following Paradise Valley Unified School District No. 69 of Maricopa County, Arizona (the district) general obligation (GO) debt:
--$37.8 million school improvement bonds, project of 2011, series B (2013).
The bonds are scheduled for a negotiated sale the week of Feb. 4. Proceeds will be used for various campus improvements and to pay related costs of issuance.
In addition, Fitch affirms its 'AA' rating on the district's approximately $243.2 million in outstanding GO debt, which excludes the approximately $21.9 million in series 2010 GO refunding bonds that were privately placed.
The Rating Outlook is Stable.
The bonds are general obligations of the district payable from an unlimited ad valorem tax levied against all taxable property in the district.
SOLID FINANCIAL POSITION MAINTAINED: The district's financial position remains sound, characterized by reduced but still solid reserve levels. Structural operating imbalance has narrowed, but further drawdowns on reserves are projected over the near term to close annual budget gaps. Management's conservative budgeting and spending practices in addition to its multi-year planning efforts have historically enabled the district to outperform preliminary financial projections.
STABLE ENROLLMENT BASE: The large enrollment base has typically realized flat to very modest declines annually.
WEAK ECONOMY; SIGNS OF MODEST RECOVERY: Area economic conditions remain weak, characterized by sluggish development that is well below pre-recessionary levels. However, employment and housing market trends reflect modest year-over-year improvement. Fitch anticipates a continued, slow pace of economic recovery that may not return to pre-recessionary levels over the near term. Income, wealth and educational attainment metrics are all above average.
MULTI-YEAR TAX BASE DECLINES: As a lagging market indicator, secondary assessed valuation (SAV) has declined significantly over the past three fiscal years, largely reflective of falling home values and collapse of the housing market that were among the steepest in the nation. The drop reversed previously rapid tax-base expansion. Taxpayer concentration is moderate.
DEBT PROFILE AND OTHER LONG-TERM LIABILITIES FAVORABLE: Debt levels remain moderate despite significant tax base declines. Future capital needs are manageable even under fairly conservative, near-term tax base assumptions. The rapid pace of amortization largely drives the district's above-average carrying costs.
Located in the northeast portion of the Phoenix metropolitan statistical area (MSA), including a portion of Scottsdale (GO bonds rated 'AAA' by Fitch), this relatively mature district is one of the largest in enrollment in Arizona. Currently estimated at 31,400, average daily membership has remained fairly stable in recent years. Long-term potential for additional enrollment growth exists in the more affluent, northern portion of the district. Roughly one-third of the district is currently state-owned land, which is yet to be developed but planned largely for residential use.
SLOW ECONOMIC RECOVERY EXPECTED FOR PHOENIX METRO AREA
Median household income, per capita money income, and educational attainment levels are well above those of the state and nation. The MSA's large, diverse economy and employment base remains the hub of the state's economy, despite having realized significant weakening from a housing market collapse that was one of the most severe in the nation. The area has begun to show signs of modest economic improvement. Healthy employment gains have led to lowered unemployment levels of 6.9% in October 2012 (down from an elevated 8.3% a year ago) that fall below those of the state (8.1%) and the U.S. (7.5%). In addition, housing data reflect recent, modest gains in home values, which are in line with information provided by district officials.
TAX BASE DECLINES SOFTEN
The district's tax base is largely residential and taxpayer concentration is moderate with the top 10 comprising 8.4% of SAV. Rising home values as well as ongoing residential and attendant retail/commercial expansion contributed to the very rapid run-up in assessed valuation prior to 2010. The district experienced the first of several SAV declines in fiscal 2011, registering a 12% drop. The pace of decline accelerated the next year, and through fiscal 2013, the cumulative decline is approximately 45%.
For fiscal 2013, the SAV decline was a more moderate 11%, down to about $3 billion and closer to pre-2007 levels. Initial estimates for fiscal 2014 SAV conservatively project another relatively modest decline of 5%-6% before leveling out to flat in fiscal 2015. Fitch believes these projections are reasonable based on recent positive economic trends. Proposition 117 was approved by Arizona voters in November 2012 as a constitutional amendment, which will limit annual increases in existing property values to 5%, beginning in fiscal 2016 (2014 real property valuations). Fitch will continue to monitor the evolving impact of Proposition 117 as it reflects a significant change to the property assessment process.
STABLE STATE FUNDING LEVELS ANTICIPATED
School district spending is primarily controlled by the state through the annual expenditure budget that dictates the amount of taxes districts can levy on a per pupil basis. Property taxes provide the largest portion of operating revenues (just over 60% in fiscal 2012) while state funding contributes a lower 33%. The district typically issues tax anticipation notes at the start of its fiscal year to assist with its seasonal cash flow needs. The property tax revenue stream is bolstered by temporary, voter-approved operating and capital property tax overrides that must be renewed every seven years to provide extra local funding. Historically, the district has maintained all available overrides, which continues to provide the district with added financial flexibility. Currently at full value, the district's existing operating overrides are expected to generate $21 million in property tax revenue in fiscal 2013.
The district's financial profile has been pressured in recent fiscal years by statewide cuts and delays to education funding beginning in fiscal 2009 given the state's weakened economy and revenues. The cuts and timing issues contributed to a negative general fund balance reported by the district in fiscal 2009 and also led to liquidity pressures at the district level. Falling to a minimal $2.7 million in fiscal 2009, the district's cash position has since improved, reaching nearly $38 million or 2 1/2 months of general fund spending in fiscal 2012. The general fund liquidity position was also bolstered by various fund balances (nearly $17 million) previously held outside of the general fund that were reclassified due to the implementation of GASB 54 beginning in fiscal 2011.
The state has continued delaying its year-end state aid payments to local school districts creating some liquidity pressure. State funding remained stable at $58 million in fiscal 2012 due primarily to the state's modestly positive general revenue trends. Fiscal 2012 was the first in the last four fiscal years without a state-mandated, mid-year budget cut and a funding cut is not part of the state's fiscal 2013 budget.
Fitch expects some continued revenue pressure on the district assuming a continued, slow economic recovery and the loss of a temporary, one-cent statewide sales tax after fiscal 2014 that was largely dedicated towards stabilizing education funding. Statewide revenue performance has strengthened since the low point of the state's fiscal crisis, and Fitch believes this trend bodes well for further, modest state revenue gains that should result in a continuation of relatively stable education funding.
DECLINING BUT ADEQUATE RESERVES; OPERATING DEFICIT LESS THAN BUDGETED
The district outperformed budgeted expectations for fiscal 2012, comparable to historical trends. This was due largely to the implementation of various cost-saving measures as well as management's conservative budgeting and spending practices throughout the year. A reduced drawdown of $10.7 million in support of the year's operations was realized while maintaining $31.6 million unrestricted general fund balance or about 17% of spending. This was in contrast to the $18.5 million drawdown budgeted that represented roughly half of the district's reserves.
FURTHER USE OF RESERVES PLANNED
Operating results for fiscal 2013 are positive and on a budget basis include a conservative $1.6 million in positive carry forward (a modest 1% of operations), as spending reportedly stays below budget. The fiscal 2013 expenditure budget of $186 million is flat relative to the fiscal 2012 budget. Incorporated in the budget is full use of the prior year's carry forward (about $5.3 million), along with the use of approximately $13 million in reserves. Management anticipates maintaining nearly $18 million or 9.5% of general expenditures by fiscal 2013 year-end.
Fitch notes that projected operating structural imbalance has narrowed over fiscal years 2014-2016 given the ongoing cost savings from expenditure reductions previously implemented. The gap now totals just under $6 million in each of these three fiscal years. Although further, reduced use of reserves is preliminarily projected as an offset for fiscal years 2014-2016, Fitch expects solid reserve levels will be maintained over the near-term in line with the rating category given the district's historical conservative budgeting practices. Also, management continues to address the structural imbalance; the closure of two low-enrollment elementary schools and tighter staffing levels are preliminarily expected to cut the structural gap in fiscal 2014 by around $2 million. Overall, Arizona school districts are limited by statute to maintain reserves at no more than roughly 4% of general operational spending. Higher amounts must be used to reduce the next year's tax levy.
DEBT BURDEN AND OTHER LONG-TERM LIABILITIES MODERATE
The district's debt position is sound. The debt profile consists of current interest bonds with no exposure to variable-rate debt or derivatives. Debt ratios remain moderate despite multi-year SAV declines. Overall debt levels approximate $3,200 on a per capita basis and 3.5% of market value. Principal amortization is very rapid with about 78% of tax-supported debt retired within 10 years.
Capital needs are manageable given currently stable enrollment trends. This issuance is the second piece of a $203 million bond authorization approved by nearly 60% of the voters in November 2011, which positions the district well in meeting its various capital needs that include buses, technology, and improvements to existing school facilities. Planned issuances of the remaining bond authorization appear feasible to Fitch even under conservative SAV growth assumptions and current class B statutory debt limitations (no more than 10% of net SAV in indebtedness) despite sizeable SAV declines since fiscal 2011. Also, voters recently renewed the district's annual capital override that generates about $6 million in property taxes in order to provide additional funding for critical 'soft capital' needs such as textbooks and technology.
The district participates in the Arizona State Retirement System (a cost-sharing, multiple-employer plan) and its contributions equal the required amounts, which was $13.9 million in fiscal 2012 or about 7.4% of general fund spending. The system's funded position is slightly below average at 68.2% after adjusting for a more conservative 7% investment rate of return assumption.
The district also offers post-employment healthcare benefits to retirees. Funding is done on a pay-go basis, although the district's annual contributions have trended upwards over the last three fiscal years. In fiscal 2012, the district's contribution totaled 94% of the annual OPEB cost. The unfunded accrued actuarial liability at July 1, 2012 has declined to $17.5 million from $25.4 million a year ago due largely to freezing the district's reimbursement levels and increasing some employee contributions. A $4 million appropriation is included in the fiscal 2013 budget; this is expected to provide for both 100% of the annual required contribution and establishment of a trust in the near term. Carrying costs for the district (debt service, pension, OPEB costs) totaled a manageable 22.4% of governmental funds spending in fiscal 2012 due largely to the rapid pace of amortization.
TAX PROTEST YET TO BE SETTLED
A pending lawsuit between two top taxpayers in the district and the county assessor could result in a large liability to the district. The taxpayers (resort properties) represent about 2% of the district's tax base and, if resolved in favor of the lower assessment ratio currently under litigation, the district could be required to repay an estimated $27 million of back taxes, representing the disputed taxes for the period from fiscal year 2003 to the present. (The potential liability is large, but Fitch believes it is manageable given the state's obligation to pay the district roughly half the amount and the district's ability to refinance the obligation as unlimited ad valorem judgment bonds if necessary without affecting the district's debt capacity). In July 2012, the state supreme court vacated the Court of Appeals' opinion and remanded the initial case back to the Arizona Tax Court for further proceedings consistent with its opinion. (An earlier summary judgment by the Tax Court had been in favor of the county's higher assessment ratio).
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 report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, Zillow Inc, LoanPerformance, Inc, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria