Fitch Affirms Washoe County School District, NV GOs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following Washoe County School District, NV ratings at 'AA-':

--$289.2 million outstanding general obligation (GO) limited tax bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the district backed by the full faith and credit of the district for the payment of principal and interest, subject to state constitutional and statutory limitations on the aggregate amount of ad valorem taxes.

KEY RATING DRIVERS

STRUCTURAL IMBALANCE CONCERN: Although the district achieved a modest surplus in fiscal 2014 after two years of deficits it has a large budgeted deficit for the current year. Reserves remain adequate, tempering near-term risk to credit quality.

EASING REVENUE PRESSURE: The district's diverse revenue base has experienced two years of gains as economic conditions gradually improve, and the state approved higher per pupil funding for fiscal 2015 for the third consecutive year.

ECONOMIC INDICATORS MIXED: The regional economy is highly dependent on gaming and casinos, though it has experienced some diversification. Sharp tax base declines experienced during the economic downturn have begun a slow recovery, unemployment has decreased, and income levels are average.

MODERATE TO HIGH DEBT: Overall debt levels are moderate and amortization of principal is above average, but carrying costs are high. The district has prudently established an irrevocable trust to fund its other post-employer benefits (OPEB) liability.

UNFUNDED CAPITAL NEEDS: The district's rolling bond authorization expired in 2012 and its recent proposed sales and property tax rate increases to fund capital failed, thus it does not currently have a means of funding substantial and growing capital needs.

RATING SENSITIVITIES

BALANCED OPERATIONS: Management will be challenged to maintain fiscal balance given expectations for continued slow revenue recovery and narrowing expenditure flexibility. Fund balance dilution may pressure the current rating. However, given the current state legislative session to determine the fiscal 2015-2017 biennial budget Fitch expects some resolution to education and capital funding.

CREDIT PROFILE

Washoe County School District is Nevada's second largest district with an enrollment of approximately 63,000 students. The district's boundaries are coterminous with those of the county and include the cities of Reno and Sparks, as well as Incline Village on Lake Tahoe.

PRESSURED REVENUES

District revenues are somewhat diverse, consisting of property taxes (22%), local school support sales tax (LSST; 36%), and state revenues (36%). LSST revenues have increased by 13% since the tax rate was raised to 2.6% from 2.25% effective fiscal 2010, helping to offset a portion of the decline in property tax receipts due to tax base contraction. The tax increase was extended through fiscal year-end 2015, and the Governor has proposed making the increase permanent. Its expiration would be a negative credit factor given already pressured revenues. The Governor's proposed biennial budget also includes increased funding for education via a business license fee hike.

After several years of declines in the state-funded per pupil amount the state increased the amount annually from fiscal 2013 to 2015. Enrollment declined modestly through fiscal 2012 as a result of the economic downturn; however, it has since increased about 1.2% through fiscal 2014 and is estimated to increase .34% in fiscal 2015 to 63,200 students. The district is somewhat protected from further enrollment erosion due to the state's hold-harmless provision which allows districts to receive funding based on the higher of the current year or prior year enrollment.

RESERVES REMAIN HEALTHY

Historical operations demonstrate the district's conservative budgeting and strong financial discipline. Despite budgeting annual deficits, the district achieved surpluses (after transfers) in each of fiscals 2003-2011. The district posted two years of deficits, equal to 2.9% and 1.1% of spending in fiscals 2012 and 2013, respectively, which were well below budgeted drawdowns, before returning to surplus in fiscal 2014 (1.35% of spending). As a result, the unrestricted fund balance stood at $57.5 million or a still healthy 13.8% of spending at fiscal year-end 2014.

FISCAL 2015 BUDGET LEAVES SIZEABLE GAP TO CLOSE

The district is again facing a large budget gap for fiscal 2015, equal to $35.7 million due to budgeted spending rising faster than revenues. The current budget would bring the unrestricted fund balance to about 4.7% of spending. However, management expects to come in $10 million to $20 million under budget in spending due to turnover savings, spending controls, and flat health care premiums. The district provided teachers and principals with a 1.5% compensation raise in fiscal 2015 after several years of flat to declining compensation and expects about the same for all other labor groups. The district's board-approved policy is maintenance of at least a 2% unrestricted fund balance, which Fitch considers weak given the revenue instability.

WEAK ECONOMY SHOWING SIGNS OF STABILIZATION

The area's hard hit economy is showing some signs of improvement. The tax base, which experienced an overall decline of 28.6% from fiscal 2010-2013, was flat in fiscal 2014 and has begun a modest recovery with a 7.9% increase in fiscal 2015. The top taxpayers remain diverse representing just 2.8% of assessed value (AV) but the tax base and economy are concentrated in hotel/casinos.

The county unemployment rate has improved to 6.1% as of October 2014 from 8.8% the prior year, primarily due to increasing employment. The county's largest employers are in government, health care, and leisure including the district and Washoe County, the University of Nevada, Reno, the Renown Medical Center, and the Peppermill Hotel and Casino, Silver Legacy Resort, and Atlantis Casino.

Construction employment is up 1.8% year over year while housing prices remain down a significant 32% from their peak according to Zillow. However, recent stabilization is evidenced by an increase in Washoe County home prices by 12.7% to $241,800 year over year as of November 2014. The county expects to benefit from the location of the $5 billion Tesla factory just over the county border. The factory is estimated to generate up to 6,500 jobs and 22,000 indirect jobs. Management estimates the enrollment impact at up to 4,384 additional students (7% of current enrollment).

MODERATE DEBT RATIOS; HIGH CARRYING COSTS; GROWING CAPITAL NEEDS

District debt ratios are moderate at $2,067 per capita or 2.5% of market value, and amortization is above average with 61% of principal retired within 10 years. However, carrying costs, which include debt service, pension, and OPEB payments, are high at 25.3% of total governmental spending.

The district makes the statutory annual required contribution to the Public Employees Retirement System of the State of Nevada. The system-wide funded ratio of 64%, adjusted by Fitch to assume a 7% rate of return, is considered low. The district prudently established an irrevocable trust for OPEB in 2008 and has achieved a funded ratio of 32.6% as of July 1, 2013.

The district's capital needs are significant and include $308 million in capital renewal needs and $426 million in new school construction needs over the next 10 years. However, the district has no remaining bond authorization and no capital funding stream. The district's 10-year rolling bond authorization, which permitted the issuance of GO bonds payable within the existing debt service tax rate, expired in 2012. The district has not attempted to renew it due to the slow recovery of property taxes. Legislation (Assembly Bill 46) that would have enacted a 0.25% sales tax increase and $0.05 property tax increase to generate approximately $20 million per year for capital was approved in June 2013. The bill included an amendment that required the Washoe County Board of Commissioners to pass the measure. In November 2013, commissioners decided not to vote on the bill, and it was allowed to expire on Jan. 1, 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.

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=979548

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 415-732-5611
or
Committee Chairperson
Karen Krop
Senior Director
+1 212-908-0661
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 415-732-5611
or
Committee Chairperson
Karen Krop
Senior Director
+1 212-908-0661
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com