Fitch Rates Nebo School District, Utah's GOs 'AAA' Enhanced/'AA' Underlying

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AAA' rating to the following Nebo School District, Utah (the district) bonds:

--$20.7 million general obligation (GO) school building bonds and refunding bonds, series 2015.

The 'AAA' rating is based on the state's full faith and credit guarantee provided as credit enhancement to the district's GO bonds under the Utah School Bond Default Avoidance Program (rated 'AAA' by Fitch).

In addition, Fitch assigns an underlying rating of 'AA' to the bonds, reflecting the district's credit quality without consideration of the guarantee.

The bonds are expected to sell via competitive sale on Aug. 18, 2015. The proceeds will fund school building construction and refund about $10.7 million of outstanding series 2005A bonds.

Fitch also affirms its 'AA' underlying rating on the district's $212.2 million outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax pledge. Debt repayment also is backed by the full faith and credit and unlimited ad valorem taxing power of the state of Utah under the provision of the Utah School Bond Default Avoidance Program.

KEY RATING DRIVERS

SIGNIFICANT RATING ENHANCEMENT: The Utah School Bond Default Avoidance Program provides valuable credit enhancement to the district's GO bonds as it is based on the state's full faith and credit guarantee.

BALANCED FINANCIAL OPERATIONS FORECAST: The district's general fund budget has returned to structural balance after a period of reserve spending during the last recession. Reserves have remained solid across the period and are currently strong.

AFFORDABLE DEBT PROFILE: The district benefits from a moderately low debt burden, very rapid amortization, affordable future debt issuance plans, and manageable post-employment liabilities.

EXPANDING ECONOMY AND TAX BASE: The district serves a growing suburban service area on the southern edge of Utah's economically vibrant Wasatch Front. The tax base is growing at a healthy pace again and appears to have significant residential and commercial development potential.

COHESIVE MANAGEMENT AND ADMINISTRATION: The district's conservative financial management approach is directed by a financially astute school board, managed by tenured administrators, and supported by a collegial labor environment.

RATING SENSITIVITIES:

The underlying rating is sensitive to shifts in fundamental credit characteristics, particularly related to the general fund's structural balance going forward. The enhanced rating would shift in line with any change to state bond ratings. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The 1,300 square mile district is located in the southern half of Utah County, approximately 53 miles south of Salt Lake City. A population of approximately 125,000 is scattered across 18 different communities, the largest being Spanish Fork, Springville, and Payson. The district educates just under 32,000 students at 41 schools.

SOLID FINANCES

The district's budget has returned to surplus operations after a period of manageable reserve spending during the last recession. The district's unrestricted general fund balance rose $4.1 million to $33.5 million, or 19% of spending in the fiscal year ended June 30, 2014. The fiscal year 2015 and 2016 budgets were structurally balanced without relying on capital transfers into the general fund. Management expects to end 2015 with a small addition to general fund balance (about $500,000), based on preliminary unaudited results.

The district is dependent on the state of Utah for funding, and experienced a period of structural imbalance during the last economic downturn, as state funding lagged and state lawmakers temporarily allowed school districts to draw down capital reserves to fund operations. The district's fund balances remained solid across the period. While the district has performed well, the district has legally limited, but adequate autonomy to adjust tax rates locally (with about $4.4 million of authority available on the board's local levy), and financial performance is likely to vary somewhat across economic cycles with the state funding environment. State funding accounts for about three-quarters of general fund revenues (76.2% in fiscal year 2014). Revenues totaled $177.7 million in fiscal year 2014.

Expenditure growth is largely driven by enrollment increases and related hiring of new teachers. The district has managed growth pressures well, and local voters have approved additional tax levy leeway to cover the costs of opening new schools. However, growth pressures require continued management focus on maintaining structural balance and continued requests to voters to approve funding for new schools. The district's enrollment has risen 11.4% since 2009 and is likely to continue with the development of open land in the district.

AFFORDABLE DEBT PROFILE

The district's direct and overlapping debt burden is moderately low at $1,896 per capita or 2.6% of market valuation. Principal amortization is very rapid with 86% of bonds repaid in 10 years and supported by the district's conservative practice of amortizing new GO bond issues over 15 years. Given student enrollment growth projections, the district expects to continue issuing a moderate amount of GO debt annually and may ask voters to approve as much as $150 million of new bonds in the next several years.

The district will have $18.4 million of remaining GO bond authorization after the current issue and plans to issue the bonds over the next two to three years. Given rapid amortization and very reasonable debt ratios, Fitch does not expect the planned borrowing to meaningfully reduce credit quality. The district's debt structure is conservative and made up entirely of fully amortizing fixed-rate bonds with no exposure to capital appreciation bonds, variable rate debt, or swaps.

Pension and other post-employment benefit (OPEB) liabilities are manageable. The district makes its full actuarially required contributions (ARC) annually to the Utah Retirement System's well-funded teachers' pension plan. After several years of increasing pension contributions, the state retirement system advised that contributions will hold steady for fiscal year 2016. The district closed its OPEB plan in 2006. The district's $52.5 million accrued actuarial OPEB liability will decrease over time as plan participants leave the system. In the meantime, the district has assigned $8.5 million of its fiscal year 2014 general fund balance for OPEB obligations.

Debt service, pension ARC, and OPEB pay-as-you-go payments cumulatively represented a manageable 18.4% of total governmental fund spending in fiscal year 2014.

SUPPORTIVE ECONOMY AND TAX BASE

The economy is growing and benefits from its location in the economically dynamic Wasatch Front, but it is somewhat limited as a fast developing bedroom community at the outer edge of the metropolitan area. The tax base remains somewhat limited in terms of commercial properties, leaving the district with fairly low market value per capita of about $74,000. Fitch expects the district's tax base to continue to deepen and broaden over time.

The district's assessed value has begun to grow at a healthy pace again after a cumulative decline of 11% in fiscal years 2010-2013. Estimated fair market value increased 2.9% in fiscal year 2013 and 9.3% in fiscal year 2014. The district estimates another very strong increase of about 11% in fiscal year 2015, based on preliminary estimates from the county assessor.

Although the district's TAV declined during the recession, Utah property tax rates automatically adjust to compensate. Therefore, the district largely is insulated from property tax revenue declines but typically will not benefit from future TAV growth except from new development.

The district continues to experience steady population growth and benefits from above-average socioeconomic characteristics. The regional economy contains significant employers in the education, health care, and government sectors, as well as retail and manufacturing. Utah County's non-seasonally adjusted unemployment rate was very healthy at just 3.6% in June 2015. Median household income is solid at 119% of the national level, and the individual poverty rate is low at 7.5%.

COHESIVE MANAGEMENT AND ADMINISTRATION

The district is directed by a school board that includes financial professionals, is managed by experienced administrators, and enjoys solid relationships with labor associations. The district consistently budgets conservatively and labor agreements are flexible, with clauses permitting changes if necessary and no headcount specifications.

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, and National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989225

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989225

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble, +1-415-732-5611
Senior Director
or
Committee Chairperson
Mike Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble, +1-415-732-5611
Senior Director
or
Committee Chairperson
Mike Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com