NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the following Yuma Union High School District No. 70, AZ (the district) unlimited tax general obligation (ULTGO) bonds:
--$2.5 million ULTGO bonds, Project of 2005, series A (2006).
The Rating Outlook is revised to Negative from Stable.
SECURITY: The bonds are secured by a continuing, direct, annual unlimited ad valorem tax sufficient to pay all principal and interest.
KEY RATING DRIVERS
WEAKENED FINANCIAL POSITION: The Negative Outlook reflects concerns regarding the maintenance of adequate financial flexibility. The district's fiscal 2014 finances, challenged by state funding reductions, were further negatively affected by recent changes in federal grant funding policies.
WEAK ECONOMIC INDICATORS: Local wealth and income indicators are below average and unemployment levels are very high. Taxable assessed value (TAV) has been declining in recent years, but preliminary fiscal 2016 figures indicate a return to growth.
AVERAGE DEBT PROFILE: District debt ratios and debt service as a percentage of governmental spending are average. Amortization of debt is rapid. However, additional debt issuance is expected to fund facilities needs. Combined debt service, pension, and other post-employment (OPEB) costs are manageable.
STABILIZATION OF FINANCES: Fitch expects the district to maintain adequate financial flexibility to counterbalance concerns regarding state and federal aid uncertainties and potential further tax base declines. Inability to stabilize finances, with maintenance of adequate available reserves will result in downward pressure on the rating.
The Yuma Union High School District is located in south-western Arizona within Yuma County. District population, 194,655 in 2013 has grown by 23% since 2000. District enrollment is about 10,600, including students in the cities of Yuma, Somerton, and San Luis. Annual enrollment growth had been strong, but declined by 1-2% annually in 2011 through 2013 and was flat in the last two years. The district is expecting modest growth in the near term, as lower grade enrollment is seeing increases.
FINANCES CHALLENGED BY STATE, FEDERAL FUNDING ISSUES
The district's reliance on state funding for operations has historically been high, though the percentage has been decreasing due to recent year state aid declines. Unlike many other Arizona school districts, Yuma Union High School District does not have any voted budget overrides in place to supplement operating revenues. State aid reductions and payment deferrals, together with district tax base weakening, have negatively affected general fund operations in recent years.
Fiscal 2014 was further challenged by a change in federal grant practices that resulted in 2014 grant awards being received as reimbursements after the end of the fiscal year. Management believes this was a non-recurring timing adjustment and that federal grants will fully cover spending in the special revenue fund into which they are received. The general fund covered these expenditures, and according to management will not be reimbursed directly. Due to its low wealth levels, the district is more dependent on federal revenues than most other Arizona school districts.
In addition, in response to a state directive, the district opted to transfer $1.4 million of 'soft capital' moneys from the general fund into the unrestricted capital outlay fund to avoid budgetary basis operating reserves exceeding the state maximum. While the transfer's impact on overall financial flexibility was neutral, as balances in the unrestricted capital outlay fund are available for operations and capital spending, the combined impact of all of the above factors led to a fiscal 2014 general fund deficit after transfers of $4.5 million (8.1% of spending) and an unrestricted general fund ending deficit balance of $3.1 million (5.4% of spending).
The prior two fiscal years had ended with general fund surpluses that increased the unrestricted general fund balance to $1.5 million at the end of fiscal 2013, or 2.7% of spending. Arizona school districts have little ability to carry large general fund balances as the state reduces funding by the fund balance amount exceeding 4% of spending(on a budgetary basis) to encourage balanced operations.
Balances in the unrestricted capital outlay fund are available to the general fund for any operational or capital expenditure needs. The fiscal 2014 fund balance, following the general fund transfer, totaled $8.4 million. The district estimates about $1.8 million in fiscal 2015 capital spending from this fund. Even with this spending, the year-end balance is estimated to increase to $8.9 million based on fiscal 2015 projected revenues (primarily state aid). The availability of these funds provides good general fund support, with balances exceeding $5 million since fiscal 2011.
The district is projecting a fiscal 2015 surplus that will result in a positive fiscal 2015 general fund ending balance. In addition, the unrestricted capital outlay fund balance is projected to increase. Positive results will depend on actual revenue performance, including state aid (which has seen declines recently), at sufficient levels to help reverse a recent trend of declining overall fund balances. No significant transfers out of the general fund are expected. In addition, the projected receipt of federal grant reimbursements will lessen the burden on the general fund.
WEAK ECONOMIC INDICATORS
Principal economic activities in the district relate to agriculture, government, light industry, and tourism. The U.S. government is the top district employer, with the U.S. Marine Corps air station, the U.S. Army Proving Ground, and U.S. Border Patrol combined employing almost 10,000 people, or about 14% of total district employment. Local government (city, county, and school districts) and the Yuma Regional Medical Center are also major employers. County unemployment as of December 2014 is exceptionally high (22.1%) as compared to state (6.5%) and national (5.4%) levels. Unemployment levels have historically been high, due to the area's seasonal agricultural and tourism employment. Personal income levels are below average, with district per capita money income at 74% and 67% of the state and national levels, respectively. The district's poverty rate (20%) is above average as compared to 18% for the state and 15% for the nation.
District taxable assessed value (TAV) saw annual declines of about 7% to 9% for fiscal years 2012 through 2014. The decline was lower in fiscal 2015 (2.8%), and initial estimates for fiscal 2016 indicate growth of 1.8%.
Yuma Regional Medical Center has expanded operations, adding an additional wing for a new surgical center. Continued growth is expected at the U.S. Marine Corps air station related to the new F-35 fighter jets stationed there. Taxpayer concentration is moderate. The district's top 10 taxpayers make up about 9.7% of fiscal 2014 total taxable assessed value (TAV), with the top taxpayer, a utility, at 5.6%. Major taxpayers include utilities, retail establishments, and telephone, railroad and gas pipeline companies.
AVERAGE DEBT RATIOS; MANAGEABLE OVERALL CARRYING COSTS
The district's debt ratios are average at about $2,191 per capita and 4.3% of market value for fiscal 2014, largely reflecting overlapping debt of the city of Yuma and school, library, and community college districts. Debt service as a percentage of governmental spending is also average (about 9.4% of spending), but debt amortization is rapid, with 100% maturing within 10 years. The district is considering a bond election this year, or possibly next, to address school facility needs. The amount of proposed borrowing has not yet been determined.
The district contributes to a cost-sharing, multiple-employer defined benefit pension plan, health care plan, and long-term disability plan, all of which are administered by the Arizona State Retirement System (ASRS). The district is required by statute to contribute at an actuarially determined rate and regularly contributes 100% of the annual required payment. As of June 30, 2014, the ASRS funded ratio was 75% or 68% using Fitch's more conservative 7% discount. Combined debt service and retirement costs are manageable at about 15% of governmental expenditures.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria