SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Washington County School District, Utah (the district) general obligation (GO) bonds:
--$39.1 million GO school building and refunding bonds (Utah School Bond Guaranty Program), series 2013.
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, which is rated 'AAA' with a Stable Outlook by Fitch.
Fitch also 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.
In addition, Fitch affirms the underlying rating on the district's $167.7 million in outstanding GO school building bonds at 'AA'. The Rating Outlook associated with the underlying rating is revised to Negative from Stable.
The series 2013 bonds will sell via competitive sale on Nov. 12, 2013. Proceeds will be used to build and refurbish school facilities and to refund outstanding GO bonds, series 2004, 2004A, and 2005 for present value savings.
The bonds are payable by an unlimited property tax to be levied, without limitation as to rate or amount, on all taxable properties within the district. 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
LOWER UNRESTRICTED GENERAL FUND BALANCE: The Negative Outlook reflects the risk that the district's unrestricted general fund balance could settle at a level inconsistent with an 'AA' rating.
STILL SOUND FINANCIAL OPERATIONS: Recent drawdowns of the district's general fund balance were larger than Fitch expected. Nevertheless, the district maintains strong liquidity and good financial flexibility on both the revenue and expenditure sides.
ECONOMY CONTINUING TO STRENGTHEN: The local economy is geographically isolated, remains somewhat dependent on economically volatile industries, and was very hard hit by the recent recession. Economic conditions are improving, however, as the employment base expands, the unemployment rate drops significantly, and the population grows.
TAX BASE STABILIZING: The district's tax base is well diversified, but was severely affected by the housing-led recession, dropping a cumulative 23% between fiscal years 2009-2012. It is beginning to rebound due to both new development and existing properties' rising values.
SOUND DEBT PROFILE: The district's debt levels are low, principal amortization is extremely rapid, carrying costs are moderate, and further bond issuances (subject to voter approval in November) would not greatly alter the current debt profile.
Prolonged maintenance of the district's unrestricted general fund balance at a level inconsistent with an 'AA' rating could result in a downgrade. The district retains a number of revenue and expenditure flexibility options which could facilitate renewed unrestricted general fund strength and lead to restoration of a Stable Outlook.
The district is coterminous with Washington County, operating 43 schools and several alternative programs which serve a population of approximately 142,000 in southwestern Utah. While the district is geographically isolated, it is also well situated along major transportation routes. The district economy remains somewhat reliant on industries that are vulnerable to economic volatility such as tourism and transportation and distribution. The district experienced extremely rapid growth until the housing-led recession severely pressured the local economy. The outsized local construction industry was particularly hard-hit. Wealth indicators are largely below average, partially reflecting larger family sizes and the substantial retiree population.
ECONOMY CONTINUING TO STRENGTHEN
The county is showing good signs of recovery after a difficult recessionary period in which the county's employment base shrank significantly, unemployment rose to a 2010 high of 10.4%, and taxable assessed value (TAV) declined 23% between fiscal years 2009-2012. In July 2013, the unemployment rate was down to 5.4% as both employment opportunities and the labor force rebounded. Population continues to grow as a result of both the local birth rate and in-migration (the district is projecting an additional 6,000 students by 2020). TAV regained 2.9% in fiscal 2013 and 4% in fiscal 2014 from both new construction and existing properties' improved values. In March 2013, a large distribution center for Family Dollar Stores opened, reaffirming the county's strategic location for long-haul transportation and distribution.
GENERAL FUND UNDERPERFORMED EXPECTATIONS
The district recorded a general fund drawdown of $1.1 million in fiscal 2012, contrary to Fitch's expectation of a small operating surplus. The negative variance was attributed to financial management system incompatibilities related to payroll data; the school board has approved the acquisition of a new payroll system to prevent this problem in the future.
The district projects that the general fund will end fiscal 2013 with a $4.3 million net operating deficit, rather than the previously projected $500,000-$700,000 drawdown. This was caused by increased wage and benefit costs, an employee bonus, and the loss of $2 million in revenues due to lower than expected student enrollment. For fiscal 2014, the district is projecting a further general fund drawdown of approximately $2 million caused by rising employee benefit costs and another one-time employee bonus.
While these drawdowns are greater than expected, the district's unrestricted general fund balance is projected to end fiscal 2013 at $15.2 million or a still adequate 9.1% of spending. However, this is currently expected to be eroded by up to a further $2 million in fiscal 2014 which would drop the unrestricted general fund balance to approximately 7.9% of spending. The district's multiyear projections indicate the unrestricted general fund balance could stay at this lower level.
The multiyear projections assume that the approximately $2 million structural imbalance caused by employee salary and benefit cost pressures will be addressed on the revenue side by a combination of growing student enrollment, state revenue increases, and higher local property tax revenue collections. Further assistance could be provided by utility and employee benefit expenditure controls and the district's elimination of its OPEB liability. Fitch considers the assumptions underlying the multiyear projections to be largely reasonable but notes that it will be policy decision on the part of the school board as to how increased resources are actually used (e.g. restoring the unrestricted general fund balance versus meeting expenditure increase demands).
DISTRICT RETAINS GOOD FINANCIAL FLEXIBILITY
The district retains a number of options with regard to future revenue and expenditure flexibility, despite the pressures on its general fund. The district could borrow from its $2.3 million student activity fund and transfer up to $9 million from its capital projects fund over two years, if necessary. It could raise up to $42.7 million more per year, subject to the advisory truth-in-taxation public hearing process, under its voted, board, and capital local tax levies. The district could also reduce its capital outlay levy and commensurately increase its operations and maintenance levy to direct more tax revenues to the general fund.
A material degree of expenditure flexibility exists as far as class sizes, number of teaching days, and health insurance benefit costs. The district is also focusing on reducing its utility costs.
SOUND DEBT PROFILE
The district's debt profile is good. Overall debt levels are low at $1,795 per capita and moderate at 2.5% of TAV. Debt amortization is extremely rapid, with 94% of principal maturing within 10 years. The series 2013 bond issuance exhausts the district's current bond authorization. The district will be seeking voter authorization for a further $185 million in GO bonds in November. If approved by voters, additional debt issuances would be staggered over 2014-2019, not adding greatly to the overall debt burden as old debt rolls off. The new bonds would primarily fund school facility needs related to projected student enrollment growth.
The district participates in two, adequately funded, state-wide cost-sharing pension plans. Cumulative carrying costs for debt service, annually required pension contributions, and OPEB prefunding costs were a moderate 19.7% in fiscal 2012. After five years of increases, pension contributions will remain elevated going forward, but the district's OPEB plan has been discontinued and its small remaining liability of $148,472 will be fully amortized by August 2014.
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, 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