SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Alpine School District, Utah (the district) general obligation (GO) bonds:
--$61,590,000 GO refunding bonds (Utah School Bond Guaranty Program), series 2015;
--$45,645,000 GO school building bonds (Utah School Bond Guaranty Program), series 2014;
--$75,000,000 GO school building bonds (Utah School Bond Guaranty Program), series 2013;
--$60,330,000 GO school building and refunding bonds (Utah School Bond Guaranty Program), series 2012B;
--$51,725,000 GO school building bonds (Utah School Bond Guaranty Program), series 2012;
--$8,855,000 GO refunding bonds (Utah School Bond Guaranty Program), series 2011;
--$47,875,000 GO school building bonds (Utah School Bond Guaranty Program), series 2009;
--$12,025,000 GO school building bonds (Utah School Bond Guaranty Program), series 2008;
--$12,390,000 GO school building and refunding bonds (Utah School Bond Guaranty Program), series 2007.
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 has also assigned an underlying rating of 'AAA' to the bonds, reflecting the district's credit quality without consideration of the guaranty provided by the Utah School Bond Default Avoidance Program.
In addition, Fitch has assigned an Issuer Default Rating (IDR) of 'AAA' to the district.
The Rating Outlook associated with the underlying rating and the IDR is Stable.
SECURITY
The bonds are general obligations of the district payable from an unlimited ad valorem tax levied on all eligible taxable property within the district's boundaries.
KEY RATING DRIVERS
Utah's largest school district provides educational services to approximately 75,000 students across 84 schools, serving grades K-12. The district's 'AAA' IDR reflects solid revenue growth prospects, strong expenditure control, a low debt burden, and exceptionally strong gap-closing capacity, supported by sound general fund reserves and a solid ability to raise revenues. The district benefits from a positive state funding environment, a very flexible labor environment, and manageable benefits liabilities. While the growing student population generates capital and operational cost pressures, it also results in increased state funding. Growth is moderating because of flattening in-migration, competition from charter schools, and a declining state birth rate. This should facilitate the school district's ability to respond to capital and operational needs.
Economic Resource Base
The district occupies the northern half of Utah County (the state's second largest county) which has a socioeconomically mixed population of approximately 318,000. The district is experiencing strong economic growth, particularly in relation to the high-technology manufacturing, education, construction, and service sectors. Employment opportunities and income levels are improving as higher paying businesses move into the county. The district's location, economic expansion, and relative affordability have attracted sustained residential construction. The district's population is likely to grow by multiples as its relatively empty western portion is developed. The district is also benefitting from strong commercial investment, especially in new office parks and on "Silicon Slopes" (Lehi) where a concentration of high technology firms continues to grow.
Revenue Framework: 'aaa' factor assessment
General fund revenue growth has been well above the level of U.S. economic performance. This reflects growing student enrollment and increased state funding support.
Expenditure Framework: 'aa' factor assessment
The rate of spending growth is expected to be in line with, to marginally above, expected revenue growth. The district enjoys solid expenditure flexibility, with moderate carrying costs and a very flexible labor environment.
Long-Term Liability Burden: 'aaa' factor assessment
The district's debt and unfunded pension liability is low relative to its resource base. Future debt plans are expected to be very manageable and amortization is rapid. Although a small portion of its overall liabilities, a particular credit strength is the district's focus on paying down the unfunded liability associated with its closed other post-employment benefits (OPEB) plan.
Operating Performance: 'aaa' factor assessment
The district has exceptionally strong gap-closing capacity and has demonstrated strong financial resilience during downturns.
RATING SENSITIVITIES
FINANCIAL OPERATIONS: Fitch expects that the district will continue to exercise sound budget management and maintain solid reserves through the economic cycle.
CREDIT PROFILE
The district's tax base grew by a strong 31% between fiscal years 2012 and 2016. The tax base is projected to increase by a further 6% in fiscal 2017 with continued tax base growth anticipated in the medium term, particularly in the district's sparsely populated western portion. There is no taxpayer concentration.
Revenue Framework
Funding for schools in Utah is a shared responsibility between the state (which has a constitutional responsibility for public education) and local school districts. Funding is provided from a combination of property taxes imposed by the local school district, state-imposed personal income taxes and corporate franchise taxes, and federal sources. The weighted pupil unit (WPU) is the statutory allocation methodology for equalized school funding across the state.
The district has experienced strong revenue growth over the past 10 years, exceeding both national GDP and inflation growth. In fiscal 2015, the state provided 75% of the district's general fund revenues, with a further 17% coming from local property taxes. That year, state revenues increased due to new funding, increased student enrollment, and a match of certain local property tax revenues. Simultaneously, tax base growth generated higher local property tax revenues despite a decrease in the tax rate.
State revenues increased 7.1% in fiscal 2016 due to a WPU increase (4%) and student enrollment growth (despite simultaneous charter school growth). There were no property tax rate increases in fiscal 2016 and there is no intention to increase property tax rates in fiscal 2017 when the WPU will increase again (3%) and there will be further student enrollment growth.
The district updates its five-year student enrollment projections annually and has a good history of accuracy. The district's projection shows moderating growth due to flattening in-migration, competition from charter schools, and a shrinking differential between outgoing seniors and incoming kindergarten entrants (reflecting the state's birth rate decline). Nevertheless, the district is still projecting a student body of 80,000 in fiscal 2019.
The district has considerable headroom in its tax rates. Its voted local levy rate of 0.0013 is below the voter-approved maximum allowable rate of 0.0016 (a difference of $9.7 million annually). The district typically keeps the levy flat, lowering the levy rate down for five years with the state filling the gap; in the sixth year, the district returns to the voter-approved rate cap to avoid losing the state dollars. The district's board local levy of 0.0012 is below the maximum allowable rate of 0.0018 (a difference of $11.1 million annually).
Expenditure Framework
The majority of expenditures are on instruction (72% of the fiscal 2016 general fund budget).
Personnel and operational costs will increase due to student enrollment growth and as new schools come on-line. Charter school expansion has relieved growth pressures to some degree. However, as a policy priority, the district is increasing teacher numbers to decrease its class sizes. In fiscal 2016, the district absorbed a 4% COLA and a 3.2% increase in health insurance costs (without requesting an increased employee contribution). There was no increase in the Utah Retirement System contribution rate.
The district has built in expenditure flexibility by historically funding one-time expenses from ongoing revenues (for example, the district has given a number of one-time bonuses rather than ongoing cost of living adjustments) and has used surplus revenues to prepay OPEB. This has protected the district against needing to do layoffs during recessionary periods. Annual labor agreements with certificated and classified employees are flexible. The agreements can be reopened during the year, furloughs and layoffs are permitted, there are no minimum class size or staffing requirements (apart from counselors, which the district exceeds), no mandatory binding arbitration over compensation, and the results of contract mediation are advisory only. While employees can strike, this has not happened. District officials characterize management/labor relations as very good.
Long-Term Liability Burden
The district's direct debt profile consists almost entirely of general obligation bonds issued to fund new facility construction and seismic upgrades of existing facilities. The overall debt burden is low and amortization is above-average.
After a period of increased contributions to the Utah Retirement System, the district's pension contributions have stabilized.
The district's OPEB plan is closed and was 34% funded as of July 2015. The district established an irrevocable OPEB trust, making an $11.7 million contribution in fiscal 2014 and a $3.9 million contribution in fiscal 2015. Additionally, the district has identified $16 million of its current general fund balance to be contributed to the trust (the district has not done so to date in order to maintain general fund flexibility). Beginning in fiscal 2017, $3.2 million in payroll charges will flow into the trust each year. The district does not plan to make any payouts from the trust until its funding goal is reached (100% funded on an actuarial basis). It expects to be fully funded in eight years (assuming a 6% discount rate).
Operating Performance
The district has exceptionally strong gap-closing capacity and has demonstrated strong financial resilience during downturns. Even at its most recent low, in fiscal 2010, the district ended with an unreserved general fund balance of $33.9 million or 9.9% of spending. This is well in excess of Fitch's 'aaa' reserve safety margin for the district of 3% (based on the district's revenue volatility and budget flexibility).
Since fiscal 2011, the district has been committed to building up its general fund balances and reducing liabilities. The small net operating deficit after transfers in fiscal 2014 was largely the result of making the $11.7 million transfer of assigned general fund balance to its irrevocable OPEB trust, thereby reducing its unfunded OPEB liability. The management team remains committed to budgeting conservatively, protecting its solid general fund balances, and maintaining financial flexibility.
The district will close the budgeted fiscal 2016 operating deficit of $8.6 million which resulted from conservatively estimated revenues and aggressively budgeted expenditures (for example, the district budgets median salaries and does not redistribute unfilled position salaries during the year). The budget did not include $4 million of additional state revenues which have subsequently been released. This contributes to the district's current projection that general fund revenues will exceed expenditures by $3 million-$5 million.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004564
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004564
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.