Fitch Affirms Clark County School District, NV's LTGOs at 'A'; Outlook Revised to Stable
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the following Clark County School District, NV (the district) obligations:
--$2.4 billion outstanding LTGO bonds;
--$635.2 million outstanding LTGO bonds (additional secured by pledged revenues);
--$46.4 million outstanding LTGO medium-term bonds.
The Rating Outlook is revised to Stable from Negative.
The bonds are direct and general obligations of the district. The full faith and credit of the district is pledged for the payment of principal and interest, subject to state constitutional and statutory limitations on the aggregate amount of ad valorem taxes.
Approximately $635.2 million of the district's GO bonds are additionally secured by and payable from a portion of the county-wide room and real estate transfer taxes.
KEY RATING DRIVERS
BALANCE RESTORED, RISKS REMAIN: The revision of the Outlook to Stable reflects recent improvements in district revenues and operating balance, a reversal from their downward trajectory over the past several years. Affirmation of the below-average 'A' rating on the LTGOs signals continued challenges despite recent gains.
LIMITED FINANCIAL FLEXIBILITY: The district has committed to increase reserve levels over the next several years but balances appear likely to remain somewhat weak, extending the district's vulnerability to revenue shortfalls. Funding increases are subject to legislative discretion and continued improvement in the state and local economy, as the district has no options for increasing revenues unilaterally. Employee contracts are settled through the end of fiscal 2014, but unanticipated growth in labor costs could challenge the district's recently restored operating balance.
STABILIZING ECONOMY: Tourism and sales taxes have experienced several consecutive years of growth and employment levels now exceed pre-recession peaks. Home values remain depressed but have recently seen strong gains.
CAPITAL PRESSURES CONTINUE: The district faces ongoing enrollment growth but has limited opportunities for funding capital needs for expansion or renovation following voters' rejection of a proposed tax rate increase in 2012.
ELEVATED FIXED-COST BURDEN: Overlapping debt levels are moderately high and district carrying costs for debt service and retiree benefits are elevated, in part due to rapid amortization of outstanding debt. Pension funding is weak.
ECONOMIC SOFTENING: A downturn in the historically volatile local economy would likely further reduce already weakened revenues and increase negative rating pressure.
CONTINUED FINANCIAL IMPROVEMENT: Continued stabilization of the district's finances and strengthening of reserves would increase upwards rating pressure, particularly if accompanied by resolution of the district's current challenges in addressing capital needs.
Clark County School District serves approximately 314,000 students, nearly three-quarters of Nevada's public school population. The district's boundaries are coterminous with those of the county, which covers approximately 8,012 square miles in the southern portion of the state. Population centers within the district include the cities of Las Vegas, North Las Vegas, Henderson, Boulder City, and Mesquite, as well as unincorporated areas of the county.
IMPROVING FINANCIAL CONDITION
The revision of the Outlook to Stable from Negative reflects improvement in the district's financial position and prospects. The district achieved a small operating surplus in 2013 after four years of deficits, and appears likely to record a second year of surplus results in 2014. Unrestricted fund balances saw their second consecutive year of growth in 2013, although they remain somewhat weak at 4.1% of general fund spending. Fitch expects unrestricted balances to continue to grow based on the district's commitment to increase unassigned general fund balances by 0.25% (approximately $5 million) per year over the next several years. Recent budgets have restored some teaching positions lost during the downturn and have avoided new expenditure reductions.
The recent turnaround in the district's finances has been primarily due to improved per pupil funding and rising enrollment, as well as sales tax recovery. General fund revenues increased a modest 1.3% in 2013 and management projects a 5.4% increase in general fund and special revenues for 2014. Expenditures have also begun to increase, although at a slower pace than revenues, due to enrollment growth and the partial restoration of positions lost during the downturn.
Labor costs comprise the district's largest category of expense and have proven challenging to control in recent years. Contracts are currently settled through the remainder of the fiscal year but are open for 2015. Management anticipates less contentious negotiations than in past years, however, the district's recently restored operating balance could be challenged again depending on the terms of future agreements
CONTINUED RECOVERY IN TOURISM AND GAMING
The Las Vegas metropolitan area has experienced sustained job gains and improvement in the tourism and gaming sectors. Employment levels have climbed steadily since the beginning of 2011 and recently surpassed pre-recession peaks. Clark County's 7.4% unemployment rate in April 2014 remained well above the national average of 5.9%, but has steadily improved over the last several years.
Employment growth has been supported by the ongoing recovery of the local tourism sector. Gaming revenues, hotel occupancy, and taxable sales continued to see gains in 2013, resulting in growing revenues for all levels of government, despite a 2.8% decline in visitor volumes. Tourism and gaming remain vulnerable to reductions in consumer spending, but continued growth in the region's dominant industry is encouraging for the district's economy and finances.
The district's housing market was among the nation's hardest hit by the recent recession but has seen steady price gains since early 2012. April 2014 home values for the Las Vegas metropolitan area reported by Zillow.com were 22% above prior year levels, while reduced foreclosures point towards a normalization of the local market for residential housing. With home values still at half of pre-recession peaks the district's housing recovery has far to go, but further gains appear likely given continued above-average population and employment growth in combination with low inventory levels. Assessed values for 2015 are projected to increase by 14%.
LIMITED FINANCIAL FLEXIBILITY
The district's weak reserve levels and limited ability to increase revenues leave it vulnerable to economic downturns, a key credit concern given the volatile nature of the tourism and gaming sectors. Sales and gaming-related taxes account for a high share of district funding and have proven sensitive to declines in consumer spending.
Property taxes generally provide a more stable source of revenues, but experienced unprecedented declines during the recent downturn, with district property tax revenues falling by one-third between 2009 and 2013. The district property tax levy for operations is at the maximum statutory rate and cannot be raised further. As a result, property tax revenue growth is dependent on recovery of the underlying tax base.
SCHOOL CAPACITY A KEY CHALLENGE
Local voters turned down a 2012 school levy for capital purposes by large margins, leaving the district with very limited options for addressing ongoing enrollment growth. Management has estimated the district's capital requirements at roughly $5 billion for new schools and modernization/renovation of existing schools. By comparison, the district expects to collect about $93 million in revenues restricted to capital in 2014, most of which is earmarked for debt service on prior issuances.
In the absence of new capital funding the district has resorted to year-round scheduling, rezoning school boundaries, and increased use of portable facilities. Ongoing enrollment growth, however, is equivalent to approximately four to five new elementary schools per year, creating a rising backlog of capital needs. Management has no options for addressing such needs short of a new ballot measure.
MIXED LONG-TERM OBLIGATIONS
Debt ratios are moderate, but debt service accounts for a high 17% of governmental fund expenditures due to the rapid amortization of principal. Annual property tax collections for debt service have been insufficient to fully fund debt service in recent years, requiring the district to draw down statutory GO debt service reserves. In addition to such drawdowns the district has recently restructured several series of outstanding GO bonds to avoid tax rate increases. Fitch views these efforts as credit neutral given the continued rapid amortization of the district's outstanding debt.
The district participates in the state's pension system, which is funded at a reported 69.3% or a Fitch-estimated 62.5% using a 7% rate of return. Costs are likely to rise in the coming years with increasing contribution rates to address underfunding. The district's other post-employment benefit (OPEB) liability stems from a now closed system, resulting in a modest annual obligation and total liability of $162 million (0.1% of market value) as of July 1, 2012. Carrying costs for debt service and retiree benefits accounted for a high 29% of governmental expenditures in 2013.
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, IHS Global Insight, and Zillow.com.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria