AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms Nadaburg Unified School District No. 81 of Maricopa County, Arizona's (the district) general obligation (GO) debt as follows:
--Approximately $1.3 million in outstanding school improvement bonds, series 2006A at 'BBB-'.
The Rating Outlook is Stable.
SECURITY: 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
ADEQUATE FINANCES MAINTAINED: Tighter staffing in light of enrollment declines in recent fiscal years has allowed the district to regain sound reserves and maintain low but adequate cash position on an audited basis. A manageable drawdown on reserves comparable to budget is anticipated at year-end.
SIGNS OF MODEST ECONOMIC TRACTION: The district is realizing a slow return of some new home construction after the recession, which has positively (albeit modestly) reversed declining enrollment trends. Fitch believes the pace of recovery will remain tempered in the near-term due to the district's more distant location in the Phoenix metropolitan statistical area (MSA).
SAV TREND REVERSED: The district's tax base is limited, somewhat concentrated, and largely comprised of vacant/agricultural land tracts. Modest growth in secondary assessed values (SAV), a lagging market indicator, has reversed course after a five-year period of significant deterioration.
MODEST LONG-TERM LIABILITIES: Debt levels are modest and principal amortization is rapid. Carrying costs are manageable.
RATING SENSITIVITIES
TREND IN FINANCES: The low 'BBB-' rating captures the inherent financial and economic uncertainty that still characterizes the district's credit profile, although now against the backdrop of evolving enrollment and tax base growth. The rating is sensitive to shifts in fundamental credit characteristics, including the district's ability to successfully manage its likely operating growth spending pressures over the near term. A continued trend of stable to modestly improving financial results would likely lead to positive rating action.
CREDIT PROFILE
DISTRICT LOCATED IN OUTSKIRTS OF PHOENIX MSA
Serving approximately 8,400 residents, this small district is located approximately 45 miles northwest of downtown Phoenix in Maricopa County, overlapping the city of Surprise. Population growth since 2000 has been very rapid. Socio-economic indicators are mixed but generally below average.
MODEST ECONOMIC, TAX BASE STRENGTHENING
Recent economic and tax base metrics evidence some modest improvement. The district's economy and tax base remain limited and somewhat fragile since the collapse of an overheated housing market during the recession that led to large tax base and population gains in the district. The area has begun to realize a slow return of some new home construction after the recession, which contributed to the first year of modest enrollment growth in fiscal 2014 after a five-year period of student losses that averaged about 3.4% annually. Enrollment as measured by average daily membership presently totals about 770 students. Fitch will continue to monitor the district's evolving enrollment trends as a key component of the district's credit profile.
Over half of the district's tax base is comprised of vacant/agricultural land tracts despite experiencing very large SAV gains during the pre-recessionary housing market boom. The district realized significant SAV decline over fiscals 2010-2014, somewhat above the levels experienced by most localities in the Phoenix MSA. SAV decline peaked at a high 45% in fiscal 2012, which with subsequent declines, reduced taxable values closer to pre-2006 levels. However, SAV in fiscal 2015 (which lags market values by roughly two years) has modestly reversed this trend with a 2.4% gain. Taxpayer concentration remains high at approximately 25%, led by Verizon/MCI Communications at about 7%. Further tax base and accompanying enrollment growth over the near term appears likely to Fitch given the modestly positive development trends underway. However, Fitch recognizes that this remains tempered by the pace of the housing market in the district's less developed tax base.
ADEQUATE FINANCES
The district's fiscal position has improved since the rapid and severe fiscal deterioration over fiscals 2008-2010, which was one of the primary contributors to Fitch's previous downgrade from 'A' to a low 'BBB-'. However, Fitch remains concerned about the district's ability to successfully manage its evolving growth trends over the near term, particularly considering the likely operating growth spending pressures and only modest liquidity levels.
The district's financial position remained sound in fiscal 2013. Break-even operations were realized as management addressed ongoing enrollment losses with further expenditure cuts and benefited from increased state aid accompanying a 20-day extension of the school year. This provided a modest offset to the first year of a tapered loss from a discretionary, 10% maintenance and operations (M&O) tax levy override, which was strongly rejected for extension by voters in 2011 and worth approximately $500,000 annually in total.
Unrestricted general fund reserves totaled $2.1 million or about 32% of spending at the close of fiscal 2013. Fitch notes that while reserves are large relative to spending, the dollar amount is still modest and Fitch expects it will remain so given the district's limited budget. Liquidity remains adequate, declining slightly in fiscal 2013 on a GAAP basis to $798,000 in general fund cash/investments or slightly over one month of operations from $931,000 in fiscal 2012.
The adopted fiscal 2014 budget grew modestly to $7.2 million due to enrollment growth. About $1.4 million of the district's year-end state aid payment will reportedly be deferred (comparable to fiscal 2013) with full payment expected within the fiscal 2014 encumbrance period. Nonetheless, management does not anticipate this delay will require the use of its standing line of credit for cash flow purposes. Year-end projections include the budgeted use of about $350,000 of reserves in support of operations while maintaining a positive financial cushion of about $1.7 million or approximately 25% of budgeted spending. The district's year-end cash balance is projected at $680,000 or about 9.5% of spending.
Budget plans for fiscal 2015 include balanced operations sized comparably to the revised 2014 budget. Management expects continued, modest enrollment growth; the district's budget will also benefit from the year's modest increase in per pupil state funding. The associated revenue gain is anticipated to allow the district to offset reduced revenue from the full loss of the district's prior 10% M&O override. The district also intends to return to its previously shorter, 180 day instructional schedule, due in large part to community dissatisfaction, which will allow for a corresponding decrease in spending, partially offsetting the loss of state aid revenue associated with the expanded school year.
LONG-TERM LIABILITIES MODEST
The overall debt burden is low at less than 1% of market value and about $295 on a per capita basis in fiscal 2014. The district's low debt position has benefited from state funding for new school facilities in prior growth years. Comparable to most Arizona school districts, principal amortization of the district's tax-supported debt is very rapid with 100% repaid in 10 years. Annual debt service remains relatively level at about $195,000 through payoff in 2021. The district's capital needs are manageable given relatively new school facilities and recent enrollment trends; management has no near-term debt plans. District officials do however plan to approach voters in November 2014 for a 7% capital override that would generate an additional $530,000 annually (if approved) for the next seven years to fund the district's 'soft' capital needs such as buses and technology, and provide some relief to the general fund.
The district's pension plan, as well as death, disability and health insurance benefits, are provided through the Arizona State Retirement System (ASRS). The district has made 100% of its annually required contribution (ARC) for fiscal years 2011-2013 as directed by the state, equivalent to approximately $420,000 in fiscal 2013.
The actuarially funded position for ASRS as of June 30, 2013 is 75.3% using the state's 8% assumed rate of return. However, funding of the state administered program falls closer to a below-average estimated 68% level based on Fitch's more conservative 7% investment return assumption. Carrying costs for debt service, pension and other post-employment benefits (OPEB) are low at 6.9% of fiscal 2013 governmental spending, and are expected to remain so even with probable ARC increases over the near term.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830965
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