November 27, 2012 / 8:51 PM / in 5 years

TEXT-Fitch rates Denver School District 1, Colo. GOs 'AA+'

11 Min Read

Nov 27 - Fitch Ratings assigns an 'AA+' rating to the following Denver
School District No. 1, CO general obligation (GO) bonds:

--$450 million GO bonds, series 2012B;
--$16 million GO qualified zone academy bonds (taxable) series 2012C;
--$67.2 million GO refunding bonds (taxable) series 2012D.

The bonds are scheduled to price via negotiation during the week of Dec. 3,
2012. Proceeds will be used for various capital needs and to refund a portion of
the district's outstanding debt for savings.

In addition, Fitch assigns an 'AA+' rating to the following outstanding bonds
totaling $973 million:

--GO qualified zone academy bonds, series 2001;
--GO bonds, series 2001C;
--GO bonds, series 2004;
--GO refunding bonds, series 2004B;
--GO refunding bonds, series 2004C;
--GO refunding bonds, series 2005A;
--GO bonds, series 2009A;
--GO qualified school construction bonds, series 2009B;
--GO build America bonds, (taxable) series 2009C;
--GO refunding bonds, series 2009F;
--GO refunding bonds, series 2009G;
--GO qualified school construction bonds, series 2010A;
--GO build America bonds, (taxable) series 2010B;
--GO refunding bonds, series 2010C;
--GO refunding bonds, series 2012A.

The Rating Outlook is Stable.


The bonds are secured by an annual unlimited property tax levy.


LARGE ECONOMIC BASE: Denver's economy is fundamentally sound and diverse,
serving as the hub of commerce for a large 10-county metropolitan area and as
the seat of state government. While having experienced a strong recessionary
impact, moderate job gains in recent months suggest local economic conditions
are improving.

IMPROVED FINANCIAL PROFILE: The district's financial performance has improved
despite state aid cuts and assessed value (AV) declines, aided by the district's
practice to budget contingency reserves and voters' consistent support for mill
levy overrides. A large majority of voters approved the most recent override in
2012, which Fitch considers an important revenue enhancement. Fitch also views
the district's new fund balance policy as a positive credit factor.

GROWING BUT MANAGEABLE DEBT LEVELS: Overall debt levels are high, due in part to
the district's large voter-approved bond programs and its use of certificates of
participation (COPs) to fund its pension system obligations. Debt service
carrying costs are high, but Fitch notes that total carrying costs for the
district's bonds, COPs, and contributions for its pension and other
post-employment benefits (OPEB) obligations are moderate. Principal amortization
for the GO bonds and COPs is well below average. Due to a recent COP
restructuring, the district's variable-rate exposure has declined to a moderate

FAVORABLE OPEB FUNDING: The district's OPEB obligations have been funded on an
actuarial basis since 2005, well ahead of most school districts and


Favorable Long-Term Economic Prospects

Coterminous with the city and county of Denver (unlimited tax GOs rated 'AAA' by
Fitch), the district's economic diversity benefits from its role as the hub of a
10-county MSA and the capital of Colorado. After posting job losses in 2009-2010
and stabilizing in 2011, recent employment gains led by professional and
business services and education and health services fueled a modest 0.9%
increase in employment for the 12 months ended Sept. 30, 2012.

Similarly, the MSA's unemployment rate trended up notably during the recession
but declined to 7.9% in Sept. 2012, down from 8.8% one year earlier; the rate
remains above the state and national averages of 7.4% and 7.6%, respectively.
Although overall new construction activity has risen, it remains modest compared
to pre-recession levels. Ongoing redevelopment throughout the city and
substantial public and private investment in the downtown area, including the
massive Denver Union Station project, will benefit the city's medium-term
economic prospects.

Enrollment Pressures Facilitated by Charter Schools

Denver School District No. 1 is the fastest growing large district in Colorado.
At an estimated 77,267 funded pupil count (FPC) in fiscal 2013, the district's
FPC has grown by an annual average of 2% over the last five years. Charter
school enrollment represents 13.7% of the total funded pupil count and is not
considered a financial pressure for the district by Fitch based on the
collaborative relationships that promote the use of shared campuses to
facilitate enrollment growth, and the sharing of facility operating costs.

Mill Levy Overrides Help Mitigate Recent Tax Base Declines

After growing by a solid compound annual average of almost 8% in fiscal years
2006-2011, the district's AV declined by 8.6% in fiscal 2012, driven by 13% and
4.8% declines in commercial and residential property reappraisals, respectively.
AV declined only modestly in fiscal 2013 and the district expects it to expand
only modestly in the next reappraisal year in fiscal 2014. Additionally, the
district projects reappraisal gains of 3.7% and 4% over the next two reappraisal
years in 2016 and 2018, respectively, which Fitch considers reasonable given
pre-recession trends. The tax base is diverse.

The district has benefited from voter support for mill levy overrides approved
in 1988, 1998, 2003, 2005 and 2012. Unlike prior overrides, the 2012 override is
comprised of a fixed mill levy which will generate additional property tax
revenue as AV grows and which Fitch considers a positive revenue enhancement.
Notably, a high 68% of voters approved the 2012 override amid a still recovering

Overall Debt Burden Elevated

The current offerings include the entire $466 million bond authorization
approved by voters in November 2012 plus a $67 million refunding for interest
cost savings. The overall debt burden is elevated at $7,066 per capita and 5.7%
of full value, including $808 million in pension COPs. The district's GO
principal pay-out rate is slightly below average with 44% maturing in 10 years.
Fitch notes that the combined pay-out rate of the GOs and COPs is well below
average at 33% in 10 years.

Due in part to pension COPs, debt service carrying costs are elevated at 22% of
general and debt service fund expenditures in the fiscal 2013 budget. Because
the district's pension annual required contributions net out the base rental
payments of the pension COPs, Fitch notes that the total carrying cost of GO and
COP debt service plus pension and OPEB costs does not materially increase from
the debt cost alone.

High Community Support for Capital Program

The 2012 authorization, approved by a high 64% of voters, will fund
district-wide improvements, renovations, new construction, and technology
updates. Notably, the district's variable-rate debt declined from one-third of
the district's debt portfolio to a more moderate 17.5% after a large pension
COPs refunding in 2011. All of the district's variable-rate COPs are hedged with
swaps. Fitch notes that the district plans to refund all or a part of its
variable-rate COPs upon certain market conditions.

Stabilized Finances Poised for Further Improvement

The district's financial profile has improved recently, as shown by large
operating surpluses in the last two audited fiscal periods that were aided by
substantial unused contingency appropriations. Most recently, fiscal 2011 posted
a $41.8 million general fund operating surplus (equal to 6.1% of spending) which
increased the unrestricted general fund balance to $113.8 million or a strong
16.7% of spending (adjusted for the large COP refunding).

Audited fiscal 2012 results include a planned $14.8 million drawdown, the result
of additional targeted instructional spending and transfers to the capital
reserve. The fiscal 2012 financial cushion, which includes combined 6% emergency
and contingency reserves, totals about $98 million or a still strong 15.3% of
spending. Operations have been aided by the pension COPs issuance, which allowed
the district to reduce its contribution rate from 14% to 7% of pay - equivalent
to $20 million in annual general fund savings.

Based on a conservative projection of flat enrollment, the fiscal 2013 budget
appropriates $23.5 million (3.6% of spending) of the general fund balance.
However, the district now expects to increase its reserves due to a positive
1,400 variance in the FPC (a 1.9% increase over fiscal 2011) and voters'
approval of the fixed mill levy override in November 2012. The permanent 4.86
mill levy override is estimated to generate $49 million in additional property
taxes in fiscal 2013, which Fitch considers to be an important revenue
enhancement given recent state aid cutbacks.

Fitch also takes comfort in the district's adoption of a formal fund balance
policy in fiscal 2012 that targets an unassigned fund balance of 15% of
spending. District management expects to reach its fund balance target by the
end of fiscal 2013, which Fitch considers reasonable given recent positive
trends in enrolment.

A current $60 million fund balance in the district's special revenue fund for
teacher compensation increases the district's liquidity cushion considerably,
although Fitch notes that these funds are restricted in their use. Financial
operations are also assisted by a city imposed sales tax dedicated to expanding
pre-school education.

Pension Adequately Funded / OPEB Provided Through Trust

Effective Jan. 1, 2010, all employees of the district became members of the
Public Employee Retirement Association (PERA) as a result of its merger with the
Denver Public Schools Retirement System (DPSRS). PERA is a cost-sharing multiple
employer defined benefit plan although the assets, liabilities and obligations
of DPSRS remain separate and distinct from the other schools within PERA. As of
Jan. 1, 2011, DPSRS' funded ratio was adequate at 81.5%. The district's OPEB
benefits are also provided through PERA through a trust fund initially
established by the district in 2005.

Additional information is available at ''. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was informed by information from CreditScope,
University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global
Insight,, and National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria

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