Fitch Rates Granite School District, Utah GO Bonds 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AAA' rating to the following Granite School District (the district), Utah general obligation (GO) school building bonds:

--$80 million series 2010.

The 'AAA' rating is based on a guaranty provided by the Utah School Bond Default Avoidance Program, whose financial insurer strength is rated 'AAA' by Fitch.

In addition, Fitch assigns 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.

The Rating Outlook is Stable.

The bonds are expected to sell via negotiation on May 4, 2010.

RATING RATIONALE:

--The district benefits from a strong, stable administration, consistently conservative financial management, a preference for pay-as-you-go capital financing, good management/labor relations, stable student enrolment levels, and good community support.

--Even within a tightening general fund revenue environment, the district has maintained strong fund balances, operating surpluses, liquidity, and reserves by working closely with its labor units to reach mutually agreed, ongoing expenditure reductions.

--The district's debt burden is very low and its pension obligations and post-employment health benefit obligations are fully funded.

--The district is centrally located within the Salt Lake metropolitan statistical area (MSA) which remains Utah's economic hub, despite current economic contraction, and is well placed to benefit from future Utah expansion and diversification.

KEY RATING DRIVERS:

--Maintenance of strong financial results, supported by continued adherence to sound financial management policies and procedures.

--Continued management, labor, and elected official collaboration on protecting the district's financial position and educational quality simultaneously.

SECURITY:

The bonds are secured by unlimited ad valorem property taxes. Debt repayment is guaranteed by the full faith and credit and unlimited ad valorem taxing power of the State of Utah under the provisions of the Utah School Bond Default Avoidance Program.

CREDIT SUMMARY:

The district covers 257 square miles in the northern half of Salt Lake County. It is Utah's largest school district based on student population (almost 69,000 in 2009) and operates 86 elementary, junior high, and high schools, as well as special programs. The series 2010 bonds are the first issuance under a $256 million authorization approved by approximately 58% of voters in November 2009 for new school construction and renovation of existing properties. The district's Board of Education has committed to not raise taxes to pay for the bonds. Two further issuances, which are likely in fiscals 2011 and 2012, are expected to deplete the full voter authorization.

The district has a well established, financially conservative management team which has cultivated strong working relationships with its elected Board of Education, its labor bargaining units, and the communities within the district boundaries.

In response to lower than budgeted revenues in fiscal years 2008 and 2009, the district made significant mid-year cuts, thereby enabling unreserved general fund balance growth to $85.1 million or 20.6% of spending. This figure includes $48.2 million designated for the full funding of employee retirement plan obligations, a $17 million rainy day reserve, and an undesignated/unreserved balance of $6.3 million (1.5% of spending). Since midyear budget cuts in fiscal 2010 have achieved greater savings than expected, the district expects to add to its unreserved general fund balance by fiscal 2010 year end. There has been no operating deficit for decades. Fiscal 2009 liquidity of $113.5 million was good at 26% of general fund revenues. Due to continued revenue reductions in fiscal 2011, the district will need to make $13 million-$15 million in ongoing expenditure reductions, of which it has already identified $9 million.

The district is centrally located within the Salt Lake MSA which is Utah's economic hub. While the region is benefiting from corporations moving their operations to Utah due to the state's lower costs of doing business, well educated workforce, better state financial conditions, and quality of life attractions, there has also been significant economic contraction. In the year up to December 2009, Salt Lake County employment opportunities declined 5.1% and the labor force declined 2.8%, compared to 3.8% and 1.1% declines nationally. Most employment sectors contracted, except education, health care services, and government. As a result, the unemployment rate rose to 6.2% from 3.8% a year prior, while remaining lower than the national unemployment rate (9.7%, up from 7.1%). The county's socio-economic characteristics are somewhat mixed with lower per capita money income than the nation, but higher median household income and a lower individual poverty rate. After a period of strong market valuation growth in the district, there was a 13.7% decline in 2009, and further decline is expected in 2010 before stabilizing. Nevertheless, the property tax base remains diverse at 58% residential, 36% industrial/commercial, and 6% personal.

The district maintains a very conservative approach to debt. It has had no outstanding GO debt since fiscal 1997 and no capital leases since fiscal 2005. The district's municipal building authority issued lease revenue bonds in fiscal 2004 to fund a portion of the cost of purchasing and remodeling the district's head office and adjacent educational facilities, but these were repaid by fiscal 2006. The district relies largely on pay-as-you-funding of its capital needs. However, since the district is embarking upon expensive individual capital projects which cannot be easily absorbed on a pay-as-you-go basis in a short space of time, the district is issuing GO debt for the first time in 14 years. With the issuance of the series 2010 bonds, net direct debt levels will be a very low $204 per capita, or 0.2% of market valuation (MV), and overall net debt will be a low $677 per capita, or 0.8% of MV. Issuance of the balance of the November 2009 voter authorized debt would result in a still low net direct debt of $653 per capita, or 0.8% of MV, and a low overall net debt of $1,126 per capita, or 1.3% of MV. The series 2010 bonds will fully mature in 20 years.

Applicable criteria available on Fitch's website at www.fitchratings.com:

--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.

--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Additional information is available at www.fitchratings.com.

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Contacts

Fitch Ratings, San Francisco
Alan Gibson, 415-732-7577
Robert Sakai, 415-732-5628
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com

Contacts

Fitch Ratings, San Francisco
Alan Gibson, 415-732-7577
Robert Sakai, 415-732-5628
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com