NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the following bonds of Adams County School District No. 50, Colorado (the district) to 'AA' from 'AA+':
--$10.2 million outstanding general obligation bonds, series 2006.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the district secured by the levy of an unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
REDUCED BUT SATISFACTORY FINANCIAL FLEXIBILITY: The downgrade reflects Fitch's belief that continued state aid cuts and recent lack of voter support for increase revenues has reduced the district's financial flexibility. The district has made substantial expenditure cuts but still has some flexibility to reduce spending further, if necessary.
ADEQUATE RESERVES DESPITE ONGOING PRESSURES: Reserves remain satisfactory despite recent fund balance drawdowns. Projections point to balance to deficit operations in the near term.
MIXED ECONOMIC INDICATORS: Concerns about high taxpayer concentration and below average wealth levels are partially offset by the district's proximity to the diverse Denver area economy and recovery in the district's tax base.
MANAGEABLE LONG-TERM OBLIGATIONS: Fitch considers key debt ratios moderate and believes they will remain so based on the district's limited future capital needs and borrowing plans. Post-employment obligations are manageable.
RATING SENSITIVITIES
FINANCIAL STABILIZATION: Failure to maintain budget balance and keep general fund reserves at satisfactory levels would pressure the financial profile and could negatively affect the rating.
CREDIT PROFILE
The district incorporates a 17 square mile area within Adams County centrally located between Denver and Boulder. It includes part of the city of Westminster located about 20 miles from downtown Denver as well as portions of the cities of Arvada and Federal Heights. The district serves a population of about 75,000.
In addition to carrying the district's GO pledge, the bonds carry enhancement from the Colorado School Credit Enhancement Program, which Fitch rates 'AA'.
FINANCES PRESSURED BY REVENUE RAISING RESTRICTIONS
Continuation of state funding cuts and lack of voter support for override millages has led to the inability to address rising spending pressures. Due to the state's 'negative factor', 13% in fiscal 2014 down from 15% in fiscal 2013, state funding has been significantly cut. In 2013 and 2014, voters rejected overrides for $5.3 million and $2.5 million, respectively, the latter by a margin of 53% to 47%. After back-to-back voter rejections of mill levy overrides, the district does not plan to seek a mill levy override this fiscal year.
The combined effect of these limitations and spending pressures was a drawdown of $1.2 million (1.5% of spending) in fiscal 2013, followed by an additional drawdown of $3.8 million (4.5% of spending). This resulted in an unrestricted general fund balance of $10.7 million, equal to an adequate 13% of spending, down from 21% in fiscal 2012.
After $3.5 million (4.1% of spending) cuts to both teaching and support staff, the district estimates adding $4.8 million to general fund reserves in fiscal 2015. As a result, the district expects to conclude the fiscal year with an unrestricted balance of $15.5 million, equal to a sizeable 18% of spending. Management is adhering to fiscal policies which include the maintenance of a minimum 5% contingency reserve in addition to the required 3% TABOR reserve, and restricted use of excess fund balances for one-time expenditures.
The fiscal 2016 budget calls for the use of roughly $1.5 million (1.7% of spending) in restricted reserves, but similar to the prior year, management expects results to exceed budget. Since revenue enhancement measures seem unavailable, Fitch expects budget adjustments will need to come from additional expenditure cuts. Fitch believes the district retains a limited amount of flexibility to make such cuts.
MIXED ECONOMY BENEFITS FROM PROXIMITY TO DENVER
The district's economy, largely residential in nature, is supported by its proximity to the Denver area employment centers. The district's population has declined by less than 1% since 2000; however several multi-family housing projects and a commuter line, which is in the preliminary stages of construction, may spur an influx of younger residents.
Enrollment totaled 10,161 in 2015, an increase of about 0.6% from the prior year. The district expects flat to marginal increases in student counts over the near term. The district opened a STEM school (science, technology, engineering and math) in August 2013 which currently enrolls 300 students from outside the district.
Taxable assessed value (TAV) has been somewhat volatile recently. After increasing by 3% and 1.6% in fiscal 2013 and fiscal 2014 respectively, values decreased by 1.7% in fiscal 2015. Preliminary fiscal 2016 AV shows growth of 1.1% due to new construction. Fitch expects AV growth to continue at a modest rate given new commercial and residential developments. The district's top 10 taxpayers comprise a high 18% of TAV, with Qwest Corporation, the largest taxpayer, comprising 7% of TAV. Other major taxpayers include telecommunications, aerospace and utilities.
Wealth indicators for the district are below average, with median household income 82% and 90% of state and national levels, respectively. Area unemployment rates are historically lower than the state and nation, reflecting some inherent stability within the local economic base, which includes the Children's Hospital and the University of Colorado Hospital as two of the district's largest employers.
MANAGEABLE DEBT PROFILE
The district's overall debt burden is low on a per capita basis ($1,264) and midrange on a market value basis (2.2%). Fiscal 2014 debt service constitutes a manageable 7.8% of governmental spending, and amortization is above-average with 65% of principle retiring within 10 years. The district has no plans to issue debt in the near future.
UNDERFUNDED PENSIONS PROJECTED TO IMPROVE
The district provides pension and OPEB benefits to its employees through its participation in the School Division Trust Fund (SDTF), administered by the Public Employees Retirement Association of Colorado (PERA). In fiscal 2014, the district's combined contributions to PERA's pension and OPEB funds of $9.5 million equaled a moderate 9% of governmental spending; however, the district's contributions are below the actuarially calculated level. As of Dec. 31, 2013, the SDTF plan funded ratio was a low 60.3%, or 57.2% based on a Fitch estimated 7% rate of return. The district is expecting modest increases to pension contributions through 2018 as a result of legislature requirements. Carrying costs (consisting of debt service, pension ARC and OPEB payments) are reasonable at 17% of governmental fund spending in fiscal 2014.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990361
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990361
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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