Fitch Affirms Scottsdale USD No. 48, AZ's GOs at 'AA+'; Outlook Stable

AUSTIN--()--Fitch Ratings has taken the following action on Scottsdale Unified School District No. 48, Arizona's (Scottsdale USD, or the district) general obligation (GO) bonds as part of its routine surveillance:

--$10.9 million in outstanding GO refunding bonds, series 2003B affirmed at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--State funding of public education (which provides a per-pupil base funding level) is projected to remain stable over the near term due to a voter-approved, statewide sales tax increase for the next three years.

--Historically rapid tax base growth has halted; assessed values declined significantly in fiscal 2011 due in large part to lagging residential value declines, and further declines are anticipated.

--Enrollment has been declining modestly in recent years, but a stable enrollment base with minimal growth is projected over the near term.

--The area economy, which has traditionally been a positive credit consideration, has weakened due primarily to the downturn of the housing market. Nonetheless, local unemployment rates remain below state and national levels.

--The district's debt profile is strong, with low direct debt and very rapid amortization.

KEY RATING DRIVERS:

--Maintaining adequate reserve levels and fiscal balance particularly in light of rising levels of delinquent property taxes will be integral to sustaining credit quality.

--Further assessed value declines and state education funding cuts would pressure the district's financial profile, which relies on periodic voter approval for a meaningful portion of its revenue stream.

SECURITY:

The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district.

CREDIT SUMMARY:

Located in Maricopa County, the district is comprised of a portion of the cities of Scottsdale, Phoenix, Tempe and Paradise Valley. The district tax base is approximately 40% residential and still contains undeveloped land in the northern portion of its service area. Given that its boundaries encompass nearly two-thirds of the city of Scottsdale, the district benefits from the city's diverse economy. Estimated at 25,000 in fiscal 2011, average daily membership has remained fairly stable, declining modestly on average at about 1% annually over the past five years. Area unemployment levels rose sharply in 2009 due to the economic downturn, although recent data indicates that jobless levels in the Phoenix metro area are below those of the state and U.S.; the local unemployment rate of 8.5% in October 2010 is below the 9.3% rate for Arizona and 9.1% for the U.S.

The district's financial profile remains sound despite reductions in various revenues resulting from the severe economic climate in both the Phoenix metropolitan area and the state. District financial operations have been stressed over the last few years due to the state's fiscal imbalance and hold-back of state aid, which comprises roughly 15% of the district's operating revenues, and rising property tax delinquencies. The district's response to this and other revenue declines has been prompt; cost saving measures have included administrative staff reductions, restructuring of teaching assignments, higher fees for participation in athletic programs, and various cutbacks in discretionary spending. As a result of management's budgetary adjustments, operating reserves remain at healthy levels. Fiscal 2010 ended with a modest increase in operating reserves to bring the total general fund balance to $17.5 million, or 11% of annual expenditures. Consequently, unlike many other school districts in the state, Scottsdale USD has not required short-term borrowing for its cash flow needs despite delays/declines in state funding.

Further weakness in various revenue sources is evident in fiscal 2011 and 2012, but additional spending reductions are expected to keep any impact to operating reserves minimal. Additional state funding reductions have been stemmed in the near term with voter approval in May 2010 of the state-wide sales tax referendum. Beginning on June 1, 2010, the one-cent sales-tax hike is expected to raise about $1 billion per year over the next three years primarily for public education funding.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Oct. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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Contacts

Fitch Ratings
Primary Analyst:
Matt Dustin, +1-512-215-3727
Analyst
111 Congress Ave., Suite 2010, Austin, TX 78701
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Associate Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
or
Media Relations:
Cindy Stoller, New York, +1-212-908-0526
cindy.stoller@fitchratings.com
Additional information is available at 'www.fitchratings.com'.

Contacts

Fitch Ratings
Primary Analyst:
Matt Dustin, +1-512-215-3727
Analyst
111 Congress Ave., Suite 2010, Austin, TX 78701
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Associate Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
or
Media Relations:
Cindy Stoller, New York, +1-212-908-0526
cindy.stoller@fitchratings.com
Additional information is available at 'www.fitchratings.com'.