TEXT - Fitch rates Colorado's Douglas Cty, SD RE1 GOs
Jan 29 - Fitch Ratings assigns an 'AA+' rating to the following Douglas County School District RE1, Colorado (the district) unlimited tax bonds: --$28.8 million general obligation (GO) refunding bonds, series 2013. The bonds are secured further by the Colorado School Credit Enhancement Program, which is rated 'AA' by Fitch. The bonds are scheduled for a negotiated sale on or about January 31, 2013. Proceeds from the refunding bonds will be used to refund portions of the District's outstanding debt for interest savings. In addition, Fitch affirms the following rating: --$509.2 million (pre-refunding) in outstanding unlimited tax bonds at 'AA+'. The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited ad valorem tax pledge of the district. SENSITIVITY/RATING DRIVERS FORTIFIED FINANCIAL RESERVES: The district's financial cushion has improved significantly in each of the last two fiscal years, driven by large operating surpluses and conservative financial management. STRONG MANAGEMENT TEAM: The district's management team has displayed a comprehensive, conservative budgeting approach designed to reduce the district's reliance on periodic voter-approved levy overrides historically obtained to address growth-related financial pressures. SOLID ECONOMIC FOUNDATION: The district has a mature and diversified local economic base, low unemployment rates, and wealth levels that are well above state and national averages. MANAGEABLE ENROLLMENT PRESSURES: Voters' rejection of a large bond authorization in 2011 has not hampered the district's ability to serve its growing enrollment base, given an ongoing strategic alliance with charter schools and existing capacity in district schools. ELEVATED DEBT BURDEN: The district's overall debt per capita burden is above average, but Fitch believes this risk is somewhat offset by the district's limited future capital demands, high wealth levels, and reasonable prospects for continued growth in the district. CREDIT PROFILE Located between Denver and Colorado Springs, the district covers a large and wealthy area that has had strong residential, retail, and office development. Mainly coterminous with Douglas County, the district serves a population of 294,000 which has grown approximately 66% over the past decade. Student enrollment is large at over 64,500. Annual enrollment growth has been rapid over the past decade at over 6%, but has moderated in recent years to around 3.6% or 1,500 new students each year, easing new facility needs. The district continues to benefit from easy access to both the Denver and Colorado Springs labor markets and its reputation for strong academic performance. FISCAL PRESSURES PROVE MANAGEABLE The district's financial profile is healthy, aided by prudent changes to financial management. Over the last few years, conservative revenue projections and spending cuts have helped the district increase reserves and reduce its dependence on ballot initiatives for budget balance. While voter support for incremental tax increases was historically strong, with four successful referenda since 1989, it appears to be cooling with failed referenda in both 2008 and 2011. As a result of this more conservative budgeting approach, Fitch expects the district to generally sustain the higher level of balance sheet cushion reflected in fiscals 2011 and 2012 than reported in the years prior. SPENDING CUTS AND CONSERVATIVE BUDGETING The district's financial profile has also been pressured in recent years by statewide cuts to education funding (the result of a weakened economy and reduced revenues). However, despite the state revenue cutbacks, and the continued enrollment pressures, the district has been able to maintain structural balance and bolster reserves to strong levels. In fiscal 2011, management imposed district-wide budgeting reforms and cut $26 million in expenses and planned increases, a meaningful 7% of the year's $388 million in general fund expenditures and transfers out. Results included an operating surplus of $20 million. Fiscal 2011 general fund reserves were boosted further by an auditor's decision to combine certain operating funds with the general fund, resulting in a restated combined ending fund balance of $80.5 million, $68 million (16% of spending) of which was unrestricted. This improved liquidity position is significant, considering unrestricted levels in fiscal 2009 were just $6 million or 1.4% of spending. In fiscal 2012, the district faced an initial budget shortfall of $21.7 million due to increased fixed costs and reductions in state funding of over $300 per pupil. Management cut spending by approximately $10 million, and the adopted 2012 budget showed an $11.7 million operating deficit and use of reserves. However, through conservative budgeting, staffing vacancies and growth in the school's carry forward balance, audited results included another large surplus of $19.8 million. The ending unrestricted fund balance for fiscal 2012 was $86.7 million, or a strong 20% of general fund spending. BUDGET OUTLOOK IMPROVES Due to stabilizing state revenues beginning in 2012, state per pupil funding in fiscal 2013 was held steady with the prior year, including funding for new student growth. The district's 2013 budget includes a deficit of $21 million, and assumes total use the school's carry forward balance of $19 million in addition to the 1% contingency reserve. Management's current expectation is for a modest use this carry forward balance by fiscal 2013 year-end. The preliminary outlook for the 2014 budget is positive. The governor's formula-driven budget for school district funding includes components for new student growth in addition to step increases for inflation. Given past practices and results, Fitch believes management will continue its proactive financial planning practices and budgetary oversight in order to maintain its sound financial position. PART OF THE DENVER METRO ECONOMY The district has a mature and diversified local economic base anchored by telecommunication, healthcare, retail, and business and professional services. The unemployment rate in the Douglas County has trended downward after spiking in 2009 and 2010. The county's October 2012 rate of 6.1% was well below both the Colorado and U.S. averages (both 7.5%) for the month. Wealth levels are well above state and national averages; per capita money income is 140% of the Colorado average and 155% of the U.S. average, and median household income is roughly 175% of the state average and 190% of the U.S. average. Taxable values declined in fiscal 2012 as softening residential and commercial property values work through the multi-year appraisal/review process. The district's taxable assessed valuation (TAV) fell roughly 8% to $4.5 billion, on the heels of flat values the prior year. TAV registered a 1% increase in fiscal 2013, but management projects another modest decline in the next reassessment year, affecting revenues in fiscal 2014. This projection appears reasonable, as it is consistent with those of other Denver-area entities for the near term and with recent home price data. MANAGEABLE DEBT PROFILE; LOW PENSION FUNDING The district's overall per capita debt level is relatively high at $5,000, but it is balanced by the area's high wealth levels; debt as a percentage of 2013 taxable values is moderate at 3.7%. Debt amortization is above average, with 63% of principal retiring in 10 years. In November 2011, in addition to rejecting the mill levy override, voters also turned down a $200 million bond authorization designed to add new classrooms, reinvest in existing facilities and provide technology improvements. The district has been able to manage most of these capital reinvestments with annual pay-go funding, but there still remains a sizable deferred maintenance balance of approximately $160 million. A strategic alliance with charter schools within the district is currently in place, whereby students can enroll at the charter campuses; this arrangement has eased facility pressures in the district. Also, management has stated the district could accommodate future enrollment growth by turning to four-track year-round schedules at up to 38 schools. Given the lack of recent voter support for the district's capital needs, Fitch will continue to monitor this situation as enrollment increases in the next few years. Employee pensions and post-employment healthcare benefits are administered by PERA, the state's defined benefit CSME pension plan. Contributions are set by statute according to actuarial analysis. District pension contributions are currently set at 15.65% of covered salary, and have increased in each of the last five years 2013. Statewide funding levels are low at 60.2%. Carrying costs for debt and pension/OPEB liabilities are manageable at 20% of fiscal 2012 governmental spending.