SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Canyons School District Board of Education (the district), Utah ratings:
--Issuer Default Rating (IDR) at 'AAA';
--$233 million general obligation (GO) bonds, series 2011, 2012, 2013, and 2015 at 'AAA'.
The Rating Outlook is Stable.
The IDR, underlying ratings, and Rating Outlook reflect the district's credit quality without consideration of the guaranty provided by the Utah School Bond Default Avoidance Program.
The bonds are general obligations of the district, payable from the proceeds of unlimited ad valorem property taxes levied on all taxable property within the district.
Canyons School District has a parity obligation to repay 58% of GO bonds issued by the Jordan School District (rated 'AAA', Stable Outlook), which are payable from an unlimited ad valorem property tax levied on all eligible taxable property within the former, more extensive boundaries of the Jordan School District. Canyons School District occupies the former eastern portion of the Jordan School District and was created by voters on Nov. 6, 2007. It began operations in fiscal 2010 under its own school board.
Existing Jordan School District GO bondholders benefit from an unlimited ad valorem property tax on the aggregate taxable assessed valuation (TAV) of the previous Jordan School District footprint. Each of the Jordan and Canyons school districts is legally obliged to tax the residents within its boundaries for its share of the outstanding debt. Salt Lake County collects the property tax revenues from within each school district's boundaries and distributes them to the two school districts. Jordan School District then invoices Canyons School District for its share of the full debt service payment. This debt repayment process has worked smoothly for the past seven years. In 2014, Jordan School District issued GO refunding bonds supported by an interlocal agreement between the Jordan and Canyons school districts, which creates a contractual obligation in addition to the existing statutory obligation.
KEY RATING DRIVERS
The 'AAA' IDR and underlying rating on the outstanding GO bonds reflect the district's solid financial operations, flexible labor environment, and low debt burden. The district's superior inherent budget flexibility has resulted in exceptionally strong gap-closing capacity. The GO bonds are supported by a growing tax base and, during periods of TAV decline, protected by automatic tax levy adjustments.
Economic Resource Base
Canyons School District covers about 192 square miles of southeast Salt Lake County. It has approximately 34,000 students attending 47 schools and an adult and community education program, making it the fifth largest school district in Utah. The district's TAV rebounded strongly after a 7% recessionary decline. Due to new growth and rising valuations for existing properties, TAV grew 18% between fiscal years 2013 and 2016, with the district projecting further 4%-6% growth annually because of ongoing residential and commercial construction.
Revenue Framework: 'aaa' factor assessment
Strong general fund revenue growth will likely continue in line with, or above, national economic performance. The district's independent legal ability to raise revenues is high, which is unusual for a U.S. school district.
Expenditure Framework: 'aa' factor assessment
Spending growth will likely remain in line with, to marginally above, anticipated revenue growth. The district enjoys solid expenditure flexibility and a very productive labor environment.
Long-Term Liability Burden: 'aaa' factor assessment
The district's combined debt and unfunded pension liability is low relative to its resource base. Fitch does not expect the district's direct debt burden to increase materially with the issuance of new debt in the short- to medium-term. The liability related to the closed other post-employment benefits (OPEB) plan is winding down.
Operating Performance: 'aaa' factor assessment
The district has exceptionally strong gap-closing capacity, which will ensure financial resilience during economic downturns.
Solid Financial Operations: Fitch expects that the district will continue to exercise sound budget management. Continued balanced operations and sufficient reserve levels through the economic cycle would enable the district to maintain a 'AAA' IDR.
The district is primarily residential with an established commercial base, and it benefits from being an integral part of the Salt Lake City metro economy. Nevertheless, wealth characteristics vary markedly among the district's component communities, which include the cities of Midvale (IDR 'AA'/Outlook Stable), Cottonwood Heights, Sandy, and Draper. The district includes some of the wealthiest communities in the state, while other areas are more challenged with significant portions of their students eligible for free and reduced lunch programs.
The district's funding comes from a combination of property taxes imposed by the school board, state-imposed personal income taxes and corporate franchise taxes, and federal sources. In fiscal 2016, local revenues accounted for almost 40% of general fund revenues and state sources almost 54%, with the balance coming from federal sources. The weighted pupil unit (WPU) is the statutory allocation methodology for equalized school funding across the state. It increased by 4% in fiscal 2016 and 3% in fiscal 2017.
Fitch expects that strong general fund revenue growth will likely continue in line with, or above, national economic performance. The district has experienced strong revenue growth since its inception. Assuming a proportionate share of pre-fiscal 2010 Jordan School District revenues, its 10-year revenue growth has exceeded national GDP growth. This has been the result of slowly increasing student enrollment and improved state funding. The district expects student enrollment to remain stable in fiscal 2018 and thereafter.
The district has a high independent legal ability to raise revenues. It could raise up to nearly $65 million more per year (27% of fiscal 2016 general fund revenues), subject to the advisory truth-in-taxation public hearing process, under its board and capital local tax levies. Such increases would not result in a reduction of state funding. 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. However, the district has not increased property taxes since its inception, and has no plans to hold a truth-in-taxation public hearing in fiscal 2017.
The majority of spending is on instruction costs (61% of fiscal 2016 general fund spending) and facilities operating costs (10%). The district's fiscal 2017 general fund budget absorbed almost $6 million in increased employee remuneration and benefit costs (approximately 2% of budgeted spending).
Based on the district's patterns of revenue and spending, Fitch expects the district's future general fund expenditures to be in line with, to marginally above, general fund revenue growth. The district's carrying costs related to debt repayment and pension contributions are moderate relative to the district's resource base, leaving solid expenditure flexibility.
The district considers personnel costs to be its area of greatest expenditure flexibility. If the district needed to reduce expenditures, it would likely focus on forgoing step and column increases and cost of living adjustments. It could increase class sizes, eliminate support positions, and move more support employees to hourly positions without benefits. The district's labor relations have traditionally been productive and its annual teacher contracts are flexible.
Long-Term Liability Burden
The district's overall debt and pension burden is low at 5% of personal income and 2% of TAV. The majority of the debt burden is direct district debt, which amortizes at a moderate 54% in 10 years. Direct debt includes a 58% portion of the GO debt issued by Jordan School District prior to the division of the two districts in fiscal 2010 and subsequent GO refunding bonds, series 2014.
Although the district's stable student enrollment projections mean that it does not face pressure to construct new schools, it has identified $300 million in needed facility upgrades due to the age of its existing facilities. The district has exhausted its 2010 GO bond authorization. Consequently, the district is likely to seek voter authorization for up to $250 million in GO bonds sometime in the short- to medium-term. District officials advise that bond issuance would be structured over four or five series, starting in spring 2018 at the earliest, with a goal of keeping the property tax rate as close to its current level as possible. Based on this information and the moderate rate of amortization of outstanding debt, Fitch does not expect the district's direct debt burden to increase materially with the issuance of new debt.
The district participates in the state retirement pension system and makes its annual actuarially determined contributions. Using Fitch's 7% discount rate, which is more conservative than the state retirement pension system's 7.5% rate, the district's pension liabilities are approximately 80% funded in fiscal 2016. The district's employer contributions have now stabilized after some years of increases to offset recessionary investment losses. The district's annual costs related to its closed OPEB plan's remaining liability will start to decline in fiscal 2018 as the program winds down.
The district has exceptionally strong gap-closing capacity. It has consistently increased or maintained its unrestricted general fund balance every year since inception in fiscal 2010. Consequently, the district's unrestricted general fund balance remains well in excess of Fitch's 'aaa' reserve safety margin for the district of 3.6%. Given moderately low revenue volatility and superior inherent budget flexibility, the district should maintain a 'aaa' reserve safety margin even during any periods of economic stress.
The district ended its seventh year of operations with a strong unrestricted general fund balance, and ample liquidity and borrowable resources. Since its inception, the district has increased its unreserved general fund balance to almost $74 million (31% of spending) in fiscal 2016, from nearly $36 million (19% of spending) in fiscal 2010. The district continues to roll forward its economic stabilization reserve at the maximum allowed by state statute (5% of fiscal 2017 general fund budgeted expenditures; over $12 million). Additionally, the district continues to fully fund its retirement benefit plan by committing 105% of its accrued actuarial liability ($23 million) within the committed general fund balance.
The budgeted net operating deficit after transfers in fiscal 2017 of almost $5 million, followed by smaller deficits in fiscal years 2018 and 2019, is in large part due to state budgetary requirements. The district has to budget use of the entire unassigned general fund budget (almost $21 million at fiscal 2016 year-end). Typically the district significantly outperforms its conservative budgets and its general fund balances are expected to remain very strong.
In addition to strong general fund liquidity, the district could also borrow from its capital outlay fund in an emergency. The capital outlay fund's current balance is $102 million, all of which would be borrowable. However, this amount is expected to decline to $30 million on completion of the district's final current construction project in fall 2018.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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