Fitch Ratings assigns an 'AAA' rating to the following Maricopa County Community College District, Arizona's (the district) general obligation (GO) bonds:
--$150 million, series 2011D.
The bonds are expected to sell via negotiation the week of May 9, 2011.
In addition, Fitch takes the following actions:
--$588 million in outstanding GO bonds affirmed at 'AAA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district's financial position remains strong, aided by diversified revenue sources, ample tuition rate flexibility, and additional property tax levy capacity.
--Conservative fiscal management and extensive planning efforts are reflected in controlled expenditure growth which has offset much of the effect of the state's multi-year budget cuts resulting in solid operating margins and reserve levels.
--The district has a large enrollment base; growth trends remain strong due in part to weaker economic conditions and expanded programs/facilities.
--Encompassing all of the Phoenix metro area, the district's tax base is sizeable and diverse despite two years of steep assessed valuation (AV) declines from substantial declines in home values and minimal new construction.
--The district's debt profile is positive; principal payout of tax-supported debt is rapid and debt levels and the impact to the tax rate are relatively modest. Despite the loss of capital funding from the state, the district has been able to fund its capital needs through the GO bond authorization while maintaining low debt levels.
--The area economy, which has traditionally been a positive credit consideration, continues to demonstrate weaknesses characterized by high unemployment and above average home foreclosures and delinquency trends.
KEY RATING DRIVER:
--Given ongoing operating pressures associated with strong enrollment growth, the continuance of solid reserves will be integral to maintaining credit quality.
SECURITY:
General obligations of the district secured by an unlimited ad valorem tax levied against all taxable property within the district.
CREDIT SUMMARY:
The district is one of the largest providers of higher education in the United States despite drawing the majority of its students from a limited geographical area. Operating 10 colleges and two skill centers throughout the county, the district enrolled nearly 266,000 students in 2010, approximately 70% of whom attend on a part-time basis. Maricopa County is the nation's fourth most populous county, representing about 60% of the state's population and encompassing the greater metropolitan Phoenix area. Population growth rates exceed those of the nation. Overall economic conditions have weakened since the area has been affected more substantially than other parts of the nation by declines in the housing market. However, the unemployment rate, although elevated, was modestly below the state and national averages in February 2011 at 8.7%.
Like many community colleges, recent enrollment growth has been rapid in large part due to currently weaker economic conditions. Affordable tuition rates that are relatively low as compared to the state's universities are also attractive in recruiting students. Full-time student equivalents (FTSEs) for fiscal 2010 totaled just over 78,000, increasing 12% from a year prior. Enrollment growth remains strong in fiscal 2011 at about 7%; comparable growth is anticipated by management over the next few years.
A credit positive for the district includes its diverse revenue sources, which provide it with significant financial stability and flexibility. Property taxes are the district's largest revenue source, equaling roughly half of fiscal 2010 revenues, followed by tuition and fees at almost 20%. Maricopa County historically experienced very strong tax base growth which has now weakened along with prices and new home building in the area. While the county's tax base remained large at actual/full valuation of $381 billion in fiscal 2011, this represented a steep 15% decline, which was followed by another sharp decline of approximately 20% for fiscal 2012, bringing the district's secondary assessed valuation (SAV) closer to pre-2008 levels. Nonetheless, given the district's historically strong financial position, management chose not to levy its maximum allowable property tax levy in fiscal years 2010 and 2011, providing available revenue-generating capacity in fiscal years 2012 and 2013.
The district's financial position remains strong, assisted by extensive, multi-year planning efforts and conservative fiscal management. For fiscal 2010, the district had a slightly reduced but still strong operating margin of 9.2% before capital contributions, despite the year's reduced state appropriation. Since state funding accounts for just 5% of the district's annual revenues, its vulnerability to impacts from state budget stress is limited. Furthermore, additional state funding cuts were forestalled with a statewide sales tax referendum approved by voters in May 2010. District management has proactively implemented modest, multi-year budget cuts to offset most of the revenue declines from fiscal 2009-fiscal 2011 that have primarily served to enhance district efficiencies. The district currently estimates that it will increase net assets (albeit at a lower than usual level of $56 million) by the end of the fiscal year and add modestly to operating reserves. This would bring the general fund balance up to nearly $152 million or approximately 23% of general fund spending, in excess of the district's stated policy of 8% of general fund revenues.
The district's working $673 million general fund operating budget for fiscal 2012 is structurally balanced, although still under development. The budget incorporates the reduction of state funding by $38 million to a very low $7 million. Further spending cuts as well as required increases to spending (such as a mandated increase in the district's contribution rate to its pension system) are under consideration by management in order to make up for the loss of state funding along with additional revenue enhancements. Potential large sources of additional revenue include a board-approved tuition increase for the first time in three years, projected to generate approximately $13 million. The district is also contemplating using about one-fourth of its deferred property tax levy capacity, generating an additional $4 million. Finally, the district may use nearly $10 million in one-time stimulus funds.
This issuance is the fourth series of a large $951 million bond authorization approved by voters in 2004. Despite implementation of this large capital program, debt levels and the impact to the tax rate are relatively modest, given the district's still sizeable tax base. Rapid amortization of the district's GO debt at 74% in 10 years is a credit positive. The state has indefinitely suspended its annual capital appropriation (last received by the district in the amount of $11.2 million in fiscal 2008) in order to meet its own financial challenges. However, officials have repurposed a limited amount of general fund reserves at the college level for capital spending and in conjunction with the current bond program, the district's capital needs reportedly will be met over the near term, despite enrollment growth pressures. The bond authorization was planned to meet the district's capital needs for roughly 10 years; based on expected cash flow needs, the next issuance from the remaining $150 million will occur in the next two to three years. The district's pension plan, as well as death, disability and health insurance benefits, is through the Arizona State Retirement System (ASRS or the system); the district is the sixth largest participating employer in ASRS. The actuarial funded position for the ASRS system as of June 30, 2010 improved slightly from the prior year and remained solid at 80.5%. The district has made 100% of its annual required contribution (ARC) for fiscal years 2008-2010.
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, University Financial Associates, LoanPerformance, Inc, and IHS Global Insight.
Applicable criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010);
--'College and University Rating Criteria' (Dec. 29, 2009).
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
College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170
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