NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'A+' rating on the following outstanding bonds of Apache Junction Unified School District No. 43, AZ (the district):
--Approximately $20 million series 2001, 2003 and 2007 refunding bonds;
--Approximately $33 million series 2005A, 2006B and 2007C (Project of 2004) school improvement bonds.
The Rating Outlook is Stable.
The bonds are general obligations of the district payable from a direct annual ad valorem tax levied on all taxable property within the district without limit as to rate or amount.
KEY RATING DRIVERS
SUFFICIENT RESERVES DESPITE DRAWS: The district made significant cuts and drew down reserves in the past three fiscal years due to reductions in state aid and losses in average daily membership (ADM), though there is evidence these pressures may be abating. Despite these draws, the district maintains a healthy unrestricted general fund balance on par with pre-recession levels.
MULTIYEAR TAX BASE DECLINES: The trend in secondary assessed valuation (SAV) declines is continuing but moderating, although recent cumulative declines are substantial. Given the district's location on the outskirts of Phoenix, Fitch believes that district recovery will lag the metropolitan statistical area (MSA).
LIMITED ECONOMY AND SLOW RECOVERY: The narrow economy based on tourism weakened in the recession due to an outmigration of residents from the district. County wealth indices are below the state and national benchmarks, yet improvements in employment demonstrate recovery.
MODEST LONG-TERM LIABILITIES: Total district debt levels are moderate both on a full value and per capita basis and amortization is rapid. Pension and other post-employment benefits (OPEB) costs do not pressure the credit.
CONTINUED RESERVE USE AND STRUCTURAL IMBALANCE: Fitch believes the rating is capped at its current level given the limited economy and dependence on state aid. Continued structural imbalance and use of reserves for operations would further limit the financial flexibility of the district and could put pressure on the rating.
The district encompasses an area of 271 square miles in the north central portion of Pinal County (the county) and is one of 19 public school districts in the county. Most district residents live within the city of Apache Junction (the city, 2012 population 36,613), located about 35 miles from downtown Phoenix.
REDUCED STATE AID
School district funding is based on a state equalization formula that sets the annual expenditure budget for each district on a per pupil basis, ensuring each student in the state receives the same amount of resources. The state provides the largest portion of operating revenues for the district at 51.1% in fiscal 2012, with property taxes providing the second largest portion at 46.1% that same year.
State aid has fallen recently due to a reduction in the base amount of funding per pupil as well as a 24% loss in ADM within the district since 2007. The decline in state aid has gradually shifted the burden of school district funding to taxpayers via tax rate increases. The fiscal 2014 adopted budget includes a 10.4% increase in the tax rate, marking the third consecutive year of increases. However, due to the decline in assessed values Fitch believes the increase is manageable.
HEALTHY RESERVES DESPITE FUND BALANCE DRAWS
Typical of most Arizona school districts, the district has implemented cuts and utilized reserves in response to the state aid reductions and ADM losses. The district does not have a formal fund balance policy, but fiscal 2012 ended with an unrestricted general fund balance of a healthy 16.6% of spending after transfers. Despite the favorable fund balance level, fiscal 2012 was the third consecutive year of fund balance draws, and the balance reflects a 30% decline from the previous year. Preliminary figures for the fiscal year that ended June 30, 2013 are unavailable.
In the event of further revenue declines the district has additional flexibility to make cuts in athletics, staffing, health care benefits, and building maintenance. School districts in the state do not produce revenue budgets, but Fitch believes future cuts will not be necessary as the fiscal 2014 expenditure budget reflects only a slight decline.
MODEST ECONOMIC IMPROVEMENT WITH LAGGED RECOVERY
The Phoenix metro area continues its recovery from the severe recession and housing market collapse. Area cities have been reporting increasing sales tax revenues while employment totals also are showing improvement. County employment is up 1% over the past 12 months which helped to reduce the unemployment rate to a still high 9.5%, but down from 11.1% year-over-year. Wealth and income figures for the county fall slightly below state and national averages and there is no taxpayer concentration.
SAV lags market values by two years and both metrics show continued modest declines through fiscal 2014, although management expects fiscal 2015 values to stabilize. Fitch believes stabilization in property values is possible given the residential development that should come online in the next several years within the district's boundaries, as well as the demonstrated recovery of market values in the greater Phoenix MSA.
MODERATE DEBT AND LONG-TERM LIABILITIES
Debt levels are moderate with a debt burden at 3.6% of market value. Annual debt service costs are above average at 16% of government spending due in part to the district's rapidly amortized debt. The district does not prepare a capital plan, yet officials have no intention to issue new bonds in the foreseeable future as capital needs are not critical at this point. Building repairs are funded through state grants made available by the state school facilities board.
The district participates in a state-sponsored, cost-sharing, multiple-employer pension program. The state program's funding level at fiscal 2012 year-end was satisfactory at 75.8% but weaker at 68.1% based on Fitch's more conservative 7% investment rate. The state establishes statutorily required contribution levels, and the district's contributions equal the required amounts at a moderate 5% of general fund spending in fiscal 2012.
Management expects slight increases in the pension contribution rate in the near future but Fitch believes these increases will be manageable. The district also participates in the state-sponsored health benefit and disability program and regularly makes 100% of its required contribution. The total carrying cost of debt, pension and OPEB expenses in fiscal 2012 was a moderate 20% of government spending.
Additional information is available at www.fitchratings.com.
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