TEXT - Fitch raises Utah's Canyons SD underlying GO rating
Feb 13 - Fitch Ratings has upgraded the underlying rating for the following Canyons School District Board of Education (the district), Utah general obligation (GO) bonds: --$134 million series 2011 and 2012 to 'AAA' from 'AA+'. The Rating Outlook is revised to Stable from Positive. The underlying rating and revised Outlook reflect the district's credit quality without consideration of the guaranty provided by the Utah School Bond Default Avoidance Program. SECURITY The bonds are secured by the proceeds of an ad valorem property tax levied at a rate sufficient to pay principal and interest. KEY RATING DRIVERS SOLID FINANCIAL POSITION: The district ended its third fiscal year of operation with an increasingly strong unrestricted general fund balance, ample liquidity, a low debt burden that amortizes rapidly, adequately funded pension liabilities, and fully funded other post-employment benefit liabilities. POSITIVE OUT-YEAR PROJECTIONS: Medium-term financial projections indicate maintenance of its strong general fund balances based on reasonable assumptions. CONTINUED FINANCIAL FLEXIBILITY: The district retains the flexibility to increase taxes, make staff reductions, modify labor agreements, and adjust class sizes if necessary. GOOD LABOR RELATIONS: The district continues to benefit from positive labor relations which have allowed it to partially offset remuneration cost increases with significant labor concessions. MANAGEABLE CAPITAL IMPROVEMENT NEEDS: The district has identified significant facility repair and replacement costs, but it is not being pressured by student enrolment growth and has sufficient facility capacity. Therefore, it can plan its capital improvement program and associated bond issues in stages to avoid pressuring local taxes. SOMEWHAT MIXED SOCIOECONOMIC CHARACTERISTICS: Proximity to the Salt Lake County economic hub enhances the district's own commercial tax base. However, socioeconomic characteristics are somewhat mixed and there has been significant local tax base decline. The state projects tax base stabilization, which appears to be supported by improving local property market conditions. RATING SENSITIVITIES: While the rating is sensitive to fundamental changes in financial management and performance, Fitch does not expect the district to alter its current conservative approach. CREDIT PROFILE In November 2007, voters in the eastern portion of the previous Jordan School District approved a ballot measure to secede and form a separate district. Consequently, a new Canyons School District (the eastern portion located in the southeast corner of Salt Lake County) and the remaining Jordan School District began operating in fiscal 2010 under separate school boards. Canyons School District covers 192 square miles and has a 2013 enrolment of 33,528 students attending 45 schools and an adult and community education program. CANYONS' RESPONSIBILITY FOR PAYMENT OF JOINT DEBT Holders of the original Jordan School District GO bonds benefit from an unlimited property tax levy on the aggregate TAV of the previous Jordan School District. Both the debt and the TAV were divided proportionately between the two districts based on the TAV in the year immediately preceding the division. Canyons School District's share is 58%. Each district is legally obligated to tax the residents within its boundaries for its share of the outstanding debt. Salt Lake County collects the property tax revenues from within each school district's boundaries and distributes those revenues to the two school districts. Jordan School District then invoices Canyons School District for its share of the full debt service payment. District officials report that repayment of the joint debt continues to proceed smoothly, including a mutually agreed prepayment of certain bonds on Feb. 1, 2013. MANAGEABLE LONG-TERM LIABILITIES In June 2010, 50.7% of voters approved a $250 million GO bond authorization for school capital improvement projects. To date, the district has issued $148 million of that authorization. The district intends to issue the balance by mid-2016 in tranches of debt sized to avoid pressuring the tax rate. The overall debt burden will remain low. The district anticipates requesting voter authorization in fiscal 2017 for further GO bonds on completion of the capital projects being funded by the 2010 authorization. Overall debt is a low $1,838 per capita and 1.7% of market value. Debt amortization is above-average at 67.3% in 10 years. The district's fiscal 2012 carrying costs related to annual debt service, annually required pension contributions, and OPEB payments amounted to a somewhat high 19.8% of total governmental spending less capital outlay. However, Fitch notes that the district meets fully its annual pension obligations to the adequately funded Utah Retirement Systems and the district's OPEB liabilities are currently fully funded. Further, Fitch does not expect that these carrying costs will increase to the point that they weigh unduly on the district's financial operations. STRONG FINANCIAL OPERATIONS The district ended fiscal 2012 with a strong unrestricted general fund balance of $63.8 million or 31.2% of spending, up from an already strong $60.8 million (30.8%) the year prior. This increase is attributable to increased property tax revenues and keeping expenditures below budget (due, in large part, to delaying hiring for a new high school until fiscal 2013 although the positions had been funded in the fiscal 2012 budget). The district generated a $5.2 million net operating surplus after transfers, rather than a budgeted $1.3 million net deficit. Projected fiscal 2013 general fund results and district officials' expectations regarding out-year projections suggest that the total general fund balance will hold around $65-$75 million through fiscal 2016 and beyond. The district intends to continue rolling forward its fully funded 5% economic stabilization reserve. The district experienced tax rate increases in fiscal years 2010-2013 totaling 17.2% due to reconfiguring its tax levies, as permitted by the state, and automatic adjustments for TAV declines. While the district retains the option to increase its tax rate further given the significant room remaining under its tax rate caps, it does not expect to do so. The district also has considerable financial flexibility related to staffing levels, class sizes, and number of school days (subject to state approval). In addition to strong liquidity from general fund cash and investments, the capital outlay fund includes monies generated from the capital tax levy that could be available for general fund support in an emergency situation if the state approved the necessary waiver. Including all governmental funds, the district has access to approximately $255 million in cash and investments (net of unspent bond proceeds). The district continues to benefit from positive labor relations which allow it to partially offset remuneration cost increases with significant labor concessions, such as the incremental elimination of 10 professional development days for teachers. Concerns about contention between a member of the board of education and the superintendent have abated as the parties appear to have developed a constructive working relationship. SOMEWHAT MIXED SOCIOECONOMIC CHARACTERISTICS Canyons School District is primarily residential, with a strong commercial base, and continues to benefit from being an integral part of the Salt Lake County economic hub. As employment opportunities grow and the labor force stabilizes, the county's unemployment rate declined to 4.9% in October 2012 from 5.8% a year prior, in line with improving state and national trends. While the district's overall socioeconomic characteristics are good, with above-average per capita money income and median household income and a below-average individual poverty rate, the socioeconomic characteristics of specific communities within the district vary widely. The district includes some of the wealthiest communities in the state, while other areas are more challenged with significant portions of their students eligible for free and reduced lunch programs. The district experienced a cumulative 5.9% TAV decline in fiscal years 2011-2012, with a projected further decline of 1.5% in fiscal 2013, primarily due to ongoing residential declines and price suppression as a result of Utah's relatively high foreclosure exposure. However, the state is predicting 1% annual TAV growth in fiscal 2014 onwards and district officials note positive signs in the local housing market such as faster sales, higher house prices, increased construction activity, and a tightening housing inventory since the majority of foreclosures have now worked their way through the system.