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
In addition, Fitch affirms its 'AA-' rating on the district's approximately
$186.6 million in outstanding GO debt.
The Rating Outlook is Stable.
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
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.
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
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
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.