Fitch Rates Pendergast ESD No. 92, AZ Bonds 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the Pendergast Elementary School District No. 92 of Maricopa County (Pendergast ESD), Arizona's $6.895 million school improvement bonds, project of 2012, series C (2014).

The bonds are scheduled for a negotiated sale the week of Aug. 25. Proceeds will finance various school improvements in the district.

In addition, Fitch affirms the following ratings at 'AA-':

--$4.4 million school improvement bonds, project of 2006, series F (2012);

--$4.3 million school improvement bonds, project of 2012, series A (2013);

--$11.5 million school improvement bonds, project of 2012, series B (2013).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

ADEQUATE FINANCIAL MARGINS: Cost reductions and increased voter-approved taxes have partially offset the impact of recessionary tax base losses and state funding declines of the past five years. Fitch expects reserves to stabilize at their current modest level.

LOCAL ECONOMY GROWTH: Most recently reported taxable values reflect healthy development activity currently underway and a residential market that shows signs of recovery after a multiple-year slide in values. Fitch continues to view the long-term economic prospects of the Phoenix metro area favorably.

STATE FUNDING RELIANCE: The district relies heavily on state funding for the majority of its operating needs, despite an upturn in the tax base, and remains vulnerable to delayed distribution of state payments. Fitch will continue to monitor the impact of state funding uncertainties and state funding delays on district finances.

MODERATE DEBT BURDEN: The district's overall debt levels are average, with moderate near-term issuance plans. Borrowing capacity is limited, but the rapid amortization of principal should generate capacity. Carrying costs, including debt service, pension and other post-employment benefits (OPEB) are manageable.

RATING SENSITIVITIES

TAX BASE REVERSAL: Unanticipated tax base declines would further constrain the district's borrowing capacity.

FINANCIAL WEAKNESS: Weakening of reserves below the modest statutory limits could put further pressure on liquidity and may cause a downgrade.

CREDIT PROFILE

Pendergast ESD is located in the west valley of Maricopa County. The district comprises 20 square miles that includes portions of the cities of Phoenix, Glendale, and Avondale.

COST SAVINGS, RATE HIKES AND OVERRIDES MITIGATE LOSS OF STATE FUNDING

The district's financial operations have been challenged by declining state funding levels and delays in state aid payments, similar to other Arizona districts over the past several years. State funding - 68% of the district's fiscal 2013 operating revenues - is down $11.7 million (25%) from the recent peak in fiscal 2008, reflecting severe pressure on the state's budget. Management implemented various cost-saving measures including staff reductions, increased class sizes, consolidations, and reorganizations, to address state funding uncertainty.

Property taxes contribute roughly 20% to the district's operations. An increase in tax rates partially offset the approximate 50% loss of tax base over the past five years, but still left the 2013 levy 36% below the 2010 peak. Voters approved a special 15% operating override beginning in fiscal 2011. This override has a seven-year duration and the district plans to seek reauthorization over the coming year. Combined, these actions have enabled the district to maintain fairly modest reserves typical of Arizona school districts.

Fiscal 2013 unrestricted reserves of $2 million (3.8% of spending) are less than half of that in fiscal 2011, reflecting the phase out of state programs reflected in reserves over the past several years. Fitch expects fiscal 2014 and near term reserves to remain modest, approximating the statutory carryover equal to 4% of the district's revenue control limit (roughly equivalent to the fiscal 2013 level of unrestricted general fund balance). The fiscal 2015 balanced budget benefits from stabilized enrollment and ongoing cost controls.

SHORT-TERM BORROWING TO CONTINUE

The district borrows short-term to manage cash flow shortfalls related to timing of both property taxes and state funding. The district issues tax anticipation notes (TANs), in anticipation of property tax revenues. Beginning in fiscal 2012, the district began using a line of credit (LOC) with Maricopa County to manage the timing mismatch between state funding and expenditures; this cash flow need had previously been managed through an off-balance sheet warrant system with the County. TAN and LOC balances are paid off annually in July.

An increased trend of reported short-term borrowings over the past several years reflects the balance sheet recognition of the district's LOC, as well as ongoing state funding delays. Fiscal year-end 2013 short-term borrowings of $17 million (TANs of $7.5 million and an LOC of $9.5 million) represented a sizable 32% of the district's general fund spending. The district anticipates that short-term liquidity borrowing needs to moderate as timeliness of state funding improves with a recovering economy.

MODERATE DEBT BURDEN

Overall debt is low at about $916 per capita and moderate at 3.3% of market value. Amortization is quite rapid with 100% of principal retired within five years. This issue represents the third portion of the district's $31.2 million GO authorization approved by voters in November 2012 to fund facility improvements and technology upgrades. The district anticipates issuing the remaining $8.5 million in fiscal 2016.

The district participates in a state sponsored, cost-sharing multiple-employer pension program. The state established annual contribution levels, and the district's contributions are required by statute to equal actuarially determined rates of members' payrolls. The state program's funding level at fiscal 2013 year-end was 75.3% but below average at an estimated 67.8% based on Fitch's more conservative 7% investment rate.

The district provides post-employment healthcare benefits to retirees, and the participation and financial contributions are relatively small. Fiscal 2013 carrying costs for debt service, pension and OPEB were unusually low at 11.2% of governmental fund spending, due to an uneven amortization schedule. Fitch expects carrying costs will place a higher, although generally moderate, burden on the budget going forward.

STRENGTHENING PHOENIX-AREA ECONOMY

By most economic indications, the Phoenix area economic recovery is well underway. Area cities are generally realizing their third year of local sales tax and employment base growth. Phoenix area unemployment rates in the range of 5.5% to 5.8% (May 2014) are favorable to the U.S. rate of 6.1% for the same period. The district's median household income falls moderately above and per capita money income moderately below state and national averages.

The district's fiscal 2015 secondary assessed valuation (SAV) gained 8.2% following a five-year, 54% loss. The valuation reflects a two-year reporting lag. Officials report the resumption of home construction, reasonably supporting the expectation for further near term SAV gains. Metro housing prices also continue to rebound, up roughly 35% in 2013. While proposition 117 limits fiscal 2016 tax base growth to 5% per annum, this cap does not apply to new construction.

The top 10 taxpayers, comprising a moderate 14% of primary assessed valuation, include real estate development, sports and tourism, retail and utility interests.

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, CoreLogicCase-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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849634

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com