TEXT - Fitch rates Deer Valley USD No. 97, Arizona GOs
Dec 10 - Fitch Ratings assigns an 'AA-' rating to the following Deer Valley Unified School District No. 97 of Maricopa County, Arizona (DVUSD, or the district) general obligation (GO) debt: --$24 million school improvement bonds, project of 2008, series D (2013). The bonds are scheduled for a negotiated sale as early as Dec. 13th. Proceeds will be used for various campus improvements and to pay related costs of issuance. In addition, Fitch affirms its 'AA-' rating on the district's approximately $186.6 million in outstanding GO debt. The Rating Outlook is Stable. SECURITY The bonds are general obligations of the district payable from an unlimited ad valorem tax levied against all taxable property in the district. KEY RATING DRIVERS WEAK ECONOMY; SIGNS OF MODEST RECOVERY: Area economic conditions remain weak, characterized by sluggish development that is well below pre-recessionary levels. However, employment and housing market trends reflect evidence of modest year-over-year improvement. Fitch anticipates a continued, slow pace of economic recovery that may not return to pre-recessionary levels over the near term. Income and wealth levels are generally above average. MULTI-YEAR TAX BASE DECLINES: The secondary assessed valuation (SAV) decline in fiscal 2013 was reduced from earlier projections, but nonetheless added to a substantial, cumulative decline of more than 50% over the last four fiscal years (2010-2013); the drop reversed previously rapid tax-base expansion. Taxpayer concentration is minimal. CONTINUED ENROLLMENT DECLINES: Another modest enrollment decline was realized in fiscal 2013, reflecting a cumulative decline of nearly 7% since fiscal 2010. STABLE FINANCIAL POSITION DESPITE LIQUIDITY PRESSURES: The district's financial position is sound. Audited fiscal 2011 results were bolstered by the inclusion of historically available fund balances outside the general fund per GASB 54. Actual financial performance typically outperforms annually budgeted spending. Operating results for fiscal 2012 year-end are estimated to generate a modest surplus on a cash basis and projections for fiscal 2013 are comparable. Nonetheless, the district remains exposed to year-end delays in state aid that have necessitated additional short-term borrowing to meet the district's liquidity needs. MODERATE LONG-TERM LIABILITIES: Overall debt levels are moderate, assisted by rapid tax-base growth and state funding for schools in prior, high-growth years. Principal amortization is very rapid and offsets the district's high debt service burden at 15.3% of fiscal 2011 spending. NEAR-TERM CAPITAL FUNDING CONSTRAINED: Fitch anticipates a continuation of reduced capital funding from the state, given expectations of a slow-paced economic recovery in the state. In conjunction with recent tax-base declines and non-renewal of the local capital override, the district has limited ability to raise funds for its capital needs. However, the district is reportedly well positioned in its capital program while maintaining some capital reserves as well as capacity in existing facilities. WHAT COULD TRIGGER A RATING CHANGE WEAKENED FINANCIAL PERFORMANCE: Deterioration of the district's financial profile and/or liquidity would be viewed negatively. FURTHER TAX BASE DECLINES: Ongoing tax base declines could add pressure to the district's operations and capital funding ability. CREDIT PROFILE Deer Valley Unified School District is geographically one of the largest in the state. It encompasses nearly 370 square miles and has a population of approximately 240,000 residents. The district is part of the larger Phoenix-Mesa-Glendale metropolitan statistical area (MSA) economy and employment base. Interstate 17 bisects the district from north to south. SLOW ECONOMIC RECOVERY EXPECTED FOR PHOENIX METRO AREA As measured by median household income and per capita money income, local wealth levels exceed those of the state and nation. District enrollment peaked at nearly 35,000 in 2009 and has since registered modest annual declines of about 1.5% due in part to an overall weaker economy and housing market as well as some competition from local charter schools. Nonetheless, district officials point to demographic projections that indicate stable-to-modest enrollment growth beginning in fiscal 2014, which Fitch believes is reasonable given signs of an evolving economic recovery. The MSA's large, diverse economy and employment base remains the hub of the state's economy, despite having realized significant weakening from a housing market collapse that was one of the most severe in the nation. The area has begun to show signs of modest economic improvement. Healthy employment gains have led to lowered unemployment levels of 6.9% in September 2012 (down from an elevated 8.5% a year ago) that fall below those of the state (8.0%) and the U.S. (7.6%). In addition, housing data reflect recent gains in home values, which is in line with information provided by district officials. TAX-BASE DECLINES SOFTEN; PROP 117 TO LIMIT FUTURE SAV GAINS The district's tax base is largely residential and taxpayer concentration is moderate at 7.4%. Roughly half of the land in the district is state-owned. Rising home values as well as ongoing residential and attendant retail/commercial expansion contributed to the very rapid run-up in assessed valuation prior to 2010. The district experienced the first of several SAV declines in fiscal 2010, registering a nearly 5% drop. The pace of decline accelerated the next two years, and through fiscal 2013 , the cumulative decline is just over 50%. For fiscal 2013, the SAV decline was a more moderate 8%, down to $2.1 billion and closer to pre-2007 levels. Initial estimates for fiscal 2014 SAV project another relatively modest decline of 5.5% before leveling out or registering a very modest gain in fiscal 2015. Proposition 117 was approved by Arizona voters in November 2012 as a constitutional amendment, which will limit annual increases in existing property values to 5%, beginning in fiscal 2016 (2014 real property valuations). Fitch will continue to monitor the evolving impact of Proposition 117 as it reflects a significant change to the property assessment process. LIQUIDITY PRESSURES REMAIN, GIVEN DELAYED, YEAR-END STATE AID PAYMENTS State aid has comprised about 45% of the district's operating revenues the past several years. Reduced state funding for education as well as delayed year-end payments from the state beginning in fiscal 2009 have led to liquidity pressures at the district level. The cuts and timing issues contributed to negative general fund balances reported by the district in fiscal 2009 and 2010. The district typically issues tax anticipation notes at the start of its fiscal year to assist with its seasonal cash flow needs. Another delayed state aid payment, in the amount of $25 million at the end of fiscal 2012, required short-term borrowing by the district via a line of credit through the county superintendent's office for cash flow purposes (the delayed payment was received in full and within the fiscal year encumbrance period). However, state funding for local school districts appears to have stabilized somewhat as evidenced by no mid-year state aid reductions in fiscal 2012; nor are any anticipated for fiscal 2013. Management reports fiscal 2013 short-term borrowing trends remain comparable to fiscal 2012. IMPLEMENTATION OF GASB 54 AFFECTS FISCAL 2011 PRESENTATION Fiscal 2011 year-end results reflected a large $22.5 million (or nearly 12% of spending) unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) that incorporated various balances previously held outside of the general fund (totaling about $28 million) that were reclassified due to the implementation of GASB 54. As a result of this accounting change, the fiscal 2010 general fund audited results were restated. The revised year-end fiscal 2010 general fund balance was $20.7 million. A key to maintaining a measure of financial flexibility for the district in light of the recent state budget pressures has been the 10% M&O budget override. Approved by district voters in November 2010, the operating budget override allows the district to increase its levy by 10% above the prescribed limit for rolling seven-year periods, adding nearly $16 million to the annual operating budget. Operating results for fiscal 2012 are positive and on a budget basis include $3.2 million in positive carry forward (about 2% of operations), as spending stayed below budget. On an audited basis, management projects the general fund position to remain comparable to fiscal 2011. Budget-to-budget, the fiscal 2013 expenditure budget of $179 million is flat. Incorporated in the budget is full use of the prior year's carry forward, along with a modest $2 million of reserves. Fitch believes it is likely the district may still generate some savings, given prior years' trends and conservative budgeting practices. Looking ahead, Fitch expects some continued revenue pressure on the district assuming a continued, slow economic recovery and the loss of a temporary, one-cent statewide sales tax after fiscal 2014 that was largely dedicated towards stabilizing education funding. However, statewide revenue performance has strengthened since the low point of the state's fiscal crisis, and Fitch believes this trend bodes well for further, modest state revenue gains that should result in relatively stable education funding. MODERATE DEBT BURDEN AND OTHER LONG-TERM LIABILITIES The district's debt position is generally favorable. At 3% of market value or about $2,100 on a per capita basis, overall debt levels remain moderate despite multi-year SAV declines. Including this issuance, principal amortization of the district's debt is very rapid and favorably offsets the high debt service burden; nearly 100% is retired within 10 years. This issuance is the fourth portion of a $148 million bond authorization approved by 66% of voters in November 2008; proceeds will be used for various modernization and energy efficiency improvements to existing facilities. The majority of the remaining $34 million in bond authorization is scheduled for fiscal 2014, although issuance plans depend on SAV and enrollment trends. Plans for a new elementary school included in the original bond authorization have been delayed given recent enrollment declines. The district's pension plan, as well as disability, death and healthcare benefits, is through the Arizona State Retirement System (ASRS); the district has made 100% of its annual required contribution (ARC) in fiscal years 2009-2011, equivalent to $13 million in fiscal 2011 or a moderate 7% of the year's operating expenditures. ASRS pension funding levels are satisfactory at 75.8% at June 30, 2011, but fall to a below-average funded position at approximately 68% after adjusting for a more conservative 7% investment rate of return assumption. The district also offers other post-employment (OPEB) healthcare benefits to a limited pool of retirees. Funding is done on a pay-go basis presently, although management expects a sizeable reduction to the OPEB liability over time as most retirees have been shifted to the ASRS healthcare system from the district's own self-insured health care program. NEAR-TERM CAPITAL FUNDING CONSTRAINED Renewal of the district's annual capital override that generates about $7.5 million in property taxes in order to provide additional funding for critical 'soft capital' needs such as textbooks and technology failed in the November 2012 election. Management may approach voters for renewal in future election cycles, but current plans call for meeting those needs over the near term with available capital reserves that total about $7 million (on a restricted basis) of the fiscal 2011 general fund balance. In addition, Fitch notes the district's diminished bonding capacity within its class B bond statutory limit (no more than 10% of net SAV in indebtedness) after sizeable SAV declines since fiscal 2010. Future debt issuances will not only be dependent on the pace of existing principal repayment, but on the return of SAV gains as well. While the state has historically provided facility funding for growing school districts and some building improvements, the future availability of such funding remains uncertain.
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