Fitch Rates Deer Valley USD No. 97, Arizona's 2008 Bonds 'A+'; Upgrades Outstanding Debt

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Deer Valley Unified School District No. 97 of Maricopa County, Arizona's (the district) $21 million school improvement bonds project of 2004, series C (2008). In addition, Fitch upgrades its rating to 'A+' from 'A' on the district's outstanding $189.5 million school improvement bonds. The Rating Outlook is Stable.

The bonds are payable from an unlimited ad valorem tax levied on all taxable property within the district. Proceeds will fund school and administration facility construction and improvements and pay costs of issuance. The bonds are scheduled to sell via negotiation on June 9, 2008.

The upgrade to 'A+' from 'A' reflects the district's improved budgetary control measures that have enabled the district to operate with positive reserve levels and demonstrate stability in its financial position for the last three fiscal years. This improvement followed a period of operating losses which culminated in a negative general fund position in fiscal 2003. The rating also reflects a moderate debt burden with rapid amortization, manageable capital needs, and voter approved operating budget and 'soft capital' overrides that provide additional property tax revenue sources. Fitch notes that the area economy, which traditionally has been a positive credit consideration, is currently experiencing significant weaknesses, due largely to the slowdown in the housing market.

The district encompasses 367 square miles from the northern edges of Phoenix and Glendale in the south to the Maricopa County line and the Agua Fria River in the north, with an estimated population of 218,000 residents. Tax base growth, which generally has been steady in recent years, jumped 54% in fiscal 2008 due to the new construction that has occurred over the past two years and the revaluation of existing properties. Secondary assessed valuation (SAV), from which debt service tax revenues are generated, totals $3.2 billion for fiscal 2008, up 44% from $2.2 billion last year. This tax base expansion has enabled the district to reduce its property tax rate on average nearly 7% annually over the last five fiscal years. Estimated valuations provided by the Arizona Department of Revenue point to a 15% increase in SAV for fiscal 2009.

Following a string of operating losses and declines in reserves that began in fiscal 2000, a new superintendent was hired in 2003 and assembled a new administrative team charged with restoring financial stability, primarily through expenditure control. Staffing levels were tightened and employee pay raises were limited. As a result, fiscal 2005 operating results posted the first surplus in five years, and the general fund balance was restored to an acceptable level of $4.1 million, or 2.4% of expenditures. By virtue of the state funding formula, Arizona school districts typically maintain only a marginal reserve to be used in the event of lower than budgeted student enrollment growth. For fiscal 2007, the district ended with a $2.4 million unreserved general fund balance (1.4% of expenditures). Greater than expected revenues from property taxes enabled the district to post net income of $1.1 million for the year.

For fiscal 2008, the district expects to end the year with a modest $1.4 million carry-forward and officials concede that only minimal reserves likely will be maintained in the future, given the anticipated operating costs for new schools and the state's expected basic allotment increases of only 2% per year. However, the district does maintain some financial flexibility with the recent voter approved maintenance and operation budget override that will enable the district to exceed its M&O budget by 10% of its prescribed limit, and a $52 million capital override providing additional local support to fund critical 'soft capital' needs.

Given the amount of available land within the district and planned roadway improvements, both tax base and enrollment growth are expected to continue, but at a more moderate pace than in recent years. The student population, currently at 34,800, expanded rapidly from 24,800 in fiscal 2000. The slowing pace of growth is providing school administrators a measure of relief over recent rapid growth pressures. Enrollment gains are expected to be more moderate - in the 1%-2% range annually - over the near term.

The current sale is the third offering from a $90 million bond authorization approved by 69% of the voters in November 2004. Approximately $17 million remains from the 2004 authorization, and district officials anticipate that this amount will be sold within the next two years. The authorization will fund various school and administrative facility improvements, including new buildings, expansion, renewal and standardization of existing buildings, safety and energy efficiency improvements, and support facilities. Given the pace of TAV growth, no impact on the debt service tax rate is anticipated. The current authorization, along with the state's ongoing School Facility Board building program, will fund district needs through about 2010, at which time plans are underway to seek additional authorization to fund facility needs through 2015. Debt ratios are moderate and payout is rapid, with all outstanding bonds repaid by 2018.

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