SAN FRANCISCO--()--Fitch Ratings has assigned an 'AAA' rating to the following Nebo School District, Utah (the district) bonds:
--$33.5 million general obligation (GO) refunding bonds, series 2013A.
The 'AAA' rating is based on the state's full faith and credit guarantee provided as credit enhancement to the district's GO bonds under the Utah School Bond Default Avoidance Program, rated 'AAA' by Fitch.
In addition, Fitch assigns an underlying rating of 'AA' to the bonds, reflecting the district's credit quality without consideration of the guarantee provided by the Utah School Bond Default Avoidance Program.
The bonds are expected to sell via negotiated sale on March 19, 2013. The proceeds will refund certain GO school building and refunding bonds, series 2005B maturities ($30.6 million par outstanding). The 2013A bonds mature serially, July 1, 2013-2020 and are subject to optional redemption prior to maturity.
Fitch also assigns the following ratings to all outstanding district GO bond debt ($192.1 million outstanding par):
--'AAA' with the guarantee provided by the Utah School Bond Default Avoidance Program;
--'AA' underlying rating.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem property tax pledge. Debt repayment also is guaranteed by the full faith and credit and unlimited ad valorem taxing power of the state of Utah under the provision of the Utah School Bond Default Avoidance Program.
KEY RATING DRIVERS
BALANCED FINANCIAL OPERATIONS FORECAST: Despite some structural imbalance in fiscal years 2010-2013, general fund balances and liquidity remain solid. The district expects to resume structurally balanced operations in fiscal 2014 given the budget balancing solutions available to it.
AFFORDABLE DEBT PROFILE: The district benefits from a low debt burden, rapid amortization, absorbable future debt issuance plans, a closed OPEB system, and manageable overall carrying costs, although pension costs are likely to rise.
SUPPORTIVE ECONOMY AND TAX BASE: Although its economy is somewhat limited, the district enjoys population growth, regional employment growth, largely above-average socio-economic characteristics, and a somewhat resilient tax base with good residential and commercial development potential.
COHESIVE MANAGEMENT AND ADMINISTRATION: The district's largely conservative financial management approach is directed by a financially astute school board, managed by tenured administrators, and supported by a collegial labor environment.
STABLE CREDIT CHARACTERISTICS: The rating is sensitive to shifts in fundamental credit characteristics, particularly related to the general fund's structural balance going forward. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The 1,300 square mile district is located in the southern half of Utah County, approximately 53 miles south of Salt Lake City. A population of approximately 123,000 is scattered across 18 different communities, the largest being Spanish Fork, Springville, and Payson. The district educates approximately 30,500 students at 40 schools.
The district has maintained high general fund balances and good liquidity during the recent recession. Fiscal 2012 ended with an unrestricted general fund balance of $28 million or 16.9% of spending. $8 million of that balance was committed for economic stabilization and set aside for contingencies or possible reductions in state funding. It cannot be used in the negotiation or settlement of contract salaries.
The district's strong general fund position is in spite of some structural imbalance since fiscal 2010. That year, the district's $2.4 million imbalance was caused by insufficiently reducing expenditures to respond to a 3% revenue decline and had to be partially solved by using reserves. Further structural imbalances of $4 million and $3 million in fiscal years 2011 and 2012 respectively were more than offset by the use of capital funding for operations. Since the district was already well positioned to meet its capital expenditure commitments, it chose to use this temporary funding flexibility, granted by the state, to strengthen its general fund balances, create an OPEB reserve, augment employee pay, and address one-time expenses.
With this funding flexibility no longer available, the district has reduced the structural deficit to $1 million in fiscal 2013 and expects to eliminate it in fiscal 2014. Fitch considers this to be realistic as the district has some relatively straightforward options available to reduce spending in fiscal 2014. These include slightly increasing class sizes, negotiating labor concessions, and delaying capital improvement projects.
The district continues to benefit from growing student enrollment which increased 18.6% between fiscal years 2007-2013. Student enrollment is projected to continue growing 1.2%-2.1% per year through fiscal 2023. Although the district's TAV declined during the recession, Utah property tax rates automatically adjust to compensate. Therefore, the district is insulated from property tax revenue declines but will not benefit from future TAV growth except from new development.
STRONG DEBT PROFILE
Despite annual bond issuances, the district's overall debt burden is a low to moderate $2,028 per capita or 2.9% of market valuation. Due to the district's preference for shorter 15 year maturities, its debt amortization is a rapid 71.8% in 10 years. Given student enrollment growth projections, the district expects to continue issuing a moderate amount of GO debt annually, structuring it to maintain roughly level debt repayment. There is no exposure to capital appreciation bonds, variable rate debt, or swaps.
Each year, the district makes its full actuarially required contributions (ARC) to the well-funded state retirement system and benefits from a closed other post-employment benefits (OPEB) plan. While pension contributions are projected to increase as the pension system recovers from recent investment losses, OPEB liabilities will decrease in the medium to long-term. In the meantime, the district has assigned $7 million of its fiscal 2012 general fund balance for OPEB obligations in case its annual pay-as-you-go approach needs additional support.
In fiscal 2012, debt service, pension ARC, and OPEB payments represented a manageable 17% of total governmental fund spending and transfers out, less capital.
SUPPORTIVE ECONOMY AND TAX BASE
The district continues to experience steady population growth and benefits from largely above-average socioeconomic characteristics, with the exception of below average per capita money income which is likely attributable to larger family sizes. While the local economy is somewhat limited, the regional economy contains significant employers in the education, health care, and government sectors, as well as retail and manufacturing. In fiscal 2012, employment growth exceeded labor force growth contributing to a very low county unemployment rate of 4.6% in November 2012. The region is currently experiencing employment growth in most sectors.
The district's TAV declined 7.3% in fiscal years 2010-2012 after an 11% increase in fiscal 2009. Residential construction continued throughout the recession, albeit at a much slower pace. The November 2012 opening of a well-received Costco in Spanish Fork appears to be stimulating adjacent commercial property development.
COHESIVE MANAGEMENT AND ADMINISTRATION
The district is directed by a school board that includes financial professionals, managed by experienced administrators, and supported by labor associations which receive regular budget briefings from the superintendent. Weaknesses, such as the lack of formal financial management policies and multiyear budgeting, are offset by consistently applied conservative budgeting and regular financial management discussions between the school board and administrators.
Labor agreements are flexible, with clauses permitting changes if necessary and no headcount specifications.
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, and National Association of Realtors.
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