AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following general obligation (GO) bonds for the Maricopa County Community College District, Arizona (the district):
--$151.1 million, series 2013.
The bonds are expected to sell via competitive bid on May 29, 2013. Proceeds will be used for various capital improvements, equipment needs, and to pay related costs of issuance.
In addition, Fitch affirms the following ratings for the district:
--Approximately $615 million in outstanding GO unlimited tax (ULT) bonds at 'AAA'.
The Rating Outlook is Stable.
GOs of the district secured by an unlimited ad valorem tax levied against all taxable property within the district.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: Conservative, proactive financial practices and revenue raising flexibility have offset much of the effect of recent assessed valuation (AV) declines and the state's multi-year budget cuts, resulting in solid operating margins. Fitch expects the district will maintain a strong financial position given its fairly diversified revenue sources, ample tuition rate flexibility, and additional property tax levy capacity.
SIZEABLE BALANCE SHEET RESOURCES: The district maintains a stable and strong level of unrestricted reserves, well above the minimum required by policy.
TAX BASE DECLINES SOFTEN: The district's tax base is diverse and encompasses all of the Phoenix metro area. However, the district has experienced significant multi-year declines since fiscal 2010 due to higher than average declines in home values and minimal new construction. Some economic improvement is evident in the recently moderating secondary assessed valuation (SAV) declines that lag the market by about two years.
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 equal or exceed state, U.S averages.
FAVORABLE DEBT PROFILE: Overall debt levels are moderate. Principal repayment of the district's tax-supported debt is rapid. Capital needs have been addressed through the implementation of a large GO bond program over the past ten years. Carrying costs are manageable despite the rapid pace of amortization.
DETERIORATION OF FINANCIAL POSITION: Material deterioration of the district's financial position could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Maricopa County is the nation's fourth most populous county, representing about 60% of the state's population and encompassing the greater Phoenix metropolitan statistical area (MSA). The district is one of the largest providers of higher education in the United States, serving 246,000 students from a limited geographical area, offering coursework at multiple facilities throughout the county.
EVIDENCE OF MODEST ECONOMIC IMPROVEMENT
Fitch believes the district is favorably positioned over the intermediate to long-term to maintain a stable to growing enrollment base supported by a modest pace of regional economic recovery. Population expansion has been rapid since 2000. The MSA's large, diverse economy and employment base remains the hub of the state's economy.
The area has begun to show signs of modest economic improvement following significant weakening from a housing market collapse that was one of the most severe in the nation. Healthy employment gains have led to lowered unemployment levels of 6.5% in February 2013 (down from 7.7% a year ago) that fall below those of the state (7.7%) and the U.S. (8.1%).
The district's tax base is diverse and top taxpayers are led largely by utilities. 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 subsequent housing market collapse, above-average home value declines, and minimal new construction led to sizeable secondary assessed valuation (SAV) declines over the five most recent fiscal years (fiscals 2010-2014).
SAV is estimated at $32 billion in fiscal 2014, which is comparable to pre-2006 levels and reflects a staggering cumulative decline of 54%. Recent SAV performance has begun to show moderating declines from the trough of a 22% decline reached in fiscal 2012. The 6% SAV decline estimated for fiscal 2014 is roughly half of the decline realized in fiscal 2013. Initial estimates for fiscal 2015 SAV project a return to growth with a 5% gain. Fitch views this as optimistic but feasible based on recent positive economic trends.
STRONG FINANCIAL PROFILE AND SOLID RESERVES MAINTAINED
The district benefits from some revenue diversity, thus providing it with significant financial stability and flexibility. Property taxes are the district's largest revenue source, equaling just over half of fiscal 2012 revenues(followed by tuition and fees at about 17%). Reflective its historically strong financial position, the district uniquely maintains some 'banked' revenue-generating capacity (about $21 million) for future fiscal years given management's previous decision not to levy the maximum allowable operating property tax levy in each fiscal years since 2010.
State appropriations have declined since 2008 and contributed a low 1% or not quite $7 million in total revenues in fiscal 2012. Fitch views this as a relatively minimal amount of state aid after multiple years of reduced funding. As such, Fitch believes the district has lost some of its revenue diversity and is additionally reliant on its two, key revenue streams of property tax and tuition.
The district maintained its strong, stable financial position. This despite tightened financial performance in fiscal 2012 that saw the year's 5.4% operating margin narrow from a recent high of 11.5% in fiscal 2011 (but remain in line with historical trends). The district has consistently generated solidly positive operating margins over the last eight fiscal years. Management addressed the year's $38 million state appropriation cut by increasing tuition and its property tax levy while maintaining structurally balanced operations. Despite the year's increase, Fitch notes tuition remains affordable as compared to averages across the spectrum of community college nationwide and Arizona universities.
Management was able to boost reserves by a slightly higher than anticipated $4.5 million at fiscal 2012 year-end despite below budget enrollment growth. The unrestricted fund balance grew to $155 million (roughly 22.5%) general operational spending. This is well in excess of the district's minimum reserve policy of 8% of general fund revenues. In practice, the district maintains reserves well above this stated minimum, which is consistent with the district's high-grade rating.
The adopted $683.5 million general fund operating budget in fiscal 2013 was relatively flat and structurally balanced without any additional tuition or property tax levy increases. The budget included $15 million in spending cuts and $9.5 million in internal budgetary reallocations rather than significant revenue enhancements.
Year-to-date, revenues and expenditures are reportedly running in line with budget despite a modest 2% enrollment decline. Fitch believes this is likely due to the typical, counter-cyclic trend of community college enrollment against a slowly improving local economy. Management anticipates a further, modest addition of $2-$3 million to reserves by year-end, which Fitch believes is reasonable given the district's historical financial performance.
The working $715 million fiscal 2014 general fund operating budget maintains structural balance and includes added resources from a board-approved tuition increase of $5 per credit hour. This is expected to generate an additional $12.5 million as well as the use of the year's allowable 2% property tax levy increase.
MODERATE DEBT BURDEN AND OTHER LONG-TERM LIABILITIES
The district's debt profile remains favorable despite implementation of a sizeable capital program that has primarily relied on tax-supported vs. revenue-supported debt. This issuance exhausts the large $951 million bond authorization approved by voters in 2004 that was planned to meet the district's capital needs for roughly 10 years.
Overall debt levels remain moderate despite tax base decline over multiple fiscal years and approximate $2,000 on a per capita basis or 2.8% of market value. Rapid amortization of the district's GO debt at 81% in 10 years is a credit positive. On a similar note, Fitch views favorably management's decision to reduce its debt liability ahead of schedule with the recent defeasance of $10.5 million in outstanding revenue bonds (rated 'AA' with a Stable Outlook by Fitch).
The district's pension plan, as well as death, disability and health insurance benefits, is through the Arizona State Retirement System (ASRS). The district is one of the larger participating employers in ASRS. The district has made 100% of its annually required contribution (ARC) for fiscal years 2010-2012 as directed by the state, which totaled $32.9 million in fiscal 2012.
The actuarially funded position for the ASRS as of June 30, 2011 is 75.8% using the state's 8% assumed rate of return. However, funding of the state administered program falls closer to a below-average estimated 68% level based on Fitch's more conservative 7% investment return assumption. Carrying costs for debt service, pension and OPEB are manageable at 15% of total fiscal 2012 operating/non-operating expenditures. This despite the rapid pace of amortization and are expected to remain so even with probable ARC increases over the near-term.
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, 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