Fitch Ratings affirms Nadaburg Unified School District No. 81 of Maricopa County, Arizona's (the district) general obligation (GO) debt as follows:
--Approximately $1.4 million in outstanding school improvement bonds, series 2006A affirmed at 'BBB-'.
The Rating Outlook is Negative.
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
CONTINUED WEAK PERFORMANCE EXPECTED: The Rating Outlook remains Negative as Fitch believes that limited operating flexibility and inherent financial and economic volatility will continue to characterize the district's credit profile over the near term. Management projects a small, positive cash balance at fiscal 2012 year-end while maintaining a modest reserve cushion. Nonetheless, overall financial performance is and will likely remain weak.
MODEST FINANCIAL STABILIZATION: The district's financial profile improved very modestly, assisted by improved state aid and property tax revenue performance and liquidity. The district generated a healthy operating surplus in fiscal 2011, bolstered by one-time, federal EduJobs funding as well as cost savings from various spending cuts implemented.
SLOW ECONOMIC RECOVERY ANTICIPATED: Local economic conditions were significantly weakened by the above-average impact from the collapse of the housing market. Given its location, the area's return to solid growth patterns is not anticipated until late in the state's economic recovery.
MULTI-YEAR TAX BASE DECLINES: The district's tax base is limited, highly concentrated, and largely comprised of vacant/agricultural land tracts. Previously explosive tax base growth during the housing market boom reversed beginning in fiscal 2010. Secondary assessed values (SAV) declined a cumulative 120% in the last four fiscal years (fiscal 2010-2013), down to 2007 levels.
ONGOING ENROLLMENT DECLINE: Additional, modest enrollment losses were recognized in fiscal 2012. Management is optimistic that a modest enrollment gain (up to 3%) in fiscal 2013 is achievable with successful implementation of the district's planned marketing efforts.
LOW DEBT BURDEN: Debt levels are modest and principal amortization is rapid. Given recent enrollment declines, near-term capital needs are manageable and further plans for a high school facility are on hold according to district officials.
WHAT COULD TRIGGER RATING ACTION
FINANCIAL DETERIORATION: The district maintains very modest financial flexibility given existing fund balance. Management's inability to right-size operations in the current revenue environment and maintain adequate reserve levels on an audited basis relative to the rating category likely would lead to further negative rating action.
CREDIT PROFILE
LIMITED LOCAL ECONOMY REMAINS PRESSURED
Serving approximately 8,100 residents, this small district is located approximately 45 miles northwest of downtown Phoenix in Maricopa County, overlapping the city of Surprise. Socio-economic indicators are generally below average. Given the significantly weakened local housing market and some loss of students to local charter schools, previously rapid annual enrollment growth trends have reversed; management reports a cumulative loss of roughly 13% of its K-8 student enrollment base in the last three years (fiscals 2010-2012). Although voters approved the creation of a unified school district (USD) from the previous elementary school district in fiscal 2008, Nadaburg USD does not currently have a high school, paying high school tuition costs to neighboring districts. Plans for constructing the district's first high school have been pushed back until 2019 due to the state's budget issues that have delayed the substantial capital financing previously planned for this facility.
Historically anchored by agriculture and ranching, the local economy and tax base remain limited and weak, given the recent collapse of the rapid housing market growth that led to large tax base and population gains in the district throughout the early part of the decade. Over half of the district's tax base is comprised of vacant/agricultural land tracts despite experiencing very large SAV gains during the housing market boom. County unemployment levels are down on a year-over-year basis but remain elevated by longer-term historical standards at 7.4% in March 2012. Fitch believes local economic conditions will continue to be challenged over the near term due primarily to the significant impact of the housing market downturn in Maricopa County and particularly in the district, which was greater than in other parts of the nation.
TAX BASE EXPERIENCING SIGNIFICANT DECLINES
Consistent with many other Arizona local governments, the district experienced its first secondary assessed valuation (SAV) decline of recent years in fiscal 2010, roughly lagging market values by two years. Following the very high and rapid run-up in assessed valuation in previous fiscal years, annual SAV declines have been significant as well, peaking at a high 45% SAV decline in fiscal 2012. For fiscal 2013, SAV dropped another 13% largely due to declines in vacant/agricultural land properties that together with prior years' declines brought SAV to roughly $56 million or close to 2007 levels. Taxpayer concentration has increased to very high levels due to ongoing tax base declines. Current projections are for additional, moderating SAV declines through fiscal 2015 that lag the Phoenix MSA by roughly a year given the district's less developed tax base and more distant location.
SOME STABILITY EVIDENT IN STILL WEAK FINANCIAL PROFILE
Deterioration of the district's financial operations over fiscals 2008-2010 was one of the primary contributors to the downgrade from 'A' to a low 'BBB-'rating at Fitch's last review. The negative $1.6 million total general fund balance at fiscal 2010 year-end (or a negative 21% of spending) that had deepened since fiscal 2008 was due to several factors including rising property tax delinquencies, enrollment declines, overpayment of state aid to the district, and the state's fiscal imbalance that caused the reduction and delay of state aid payments in that time period. Liquidity needs were met through increased short-term borrowing.
The district modestly improved its financial position in fiscal 2011 despite a roughly 2% enrollment decline. Operations generated a $1.9 million surplus due in part to reduced operational spending; the receipt of $300,000 in one-time, federal EduJobs funding also offset a portion of the year's general fund spending. The district significantly increased its property tax levy in fiscal 2011 in order to offset uncollected property tax revenue from prior years and fund the required repayment of state aid. The district's two main sources of revenues (property taxes and state aid) also evidenced signs of modest improvement with some strengthening of current and total property tax collections for the year as well as full payment of state aid within the encumbrance period according to management. In addition, the district's $1.5 million line of credit for cash flow purposes was reportedly used less frequently and in reduced amounts; $304,000 in general fund cash/investments was recorded in fiscal 2011, which while representing less than one month of operations, was up from $0 in fiscal 2010.
Audited fiscal 2011 year-end results show a $1 million unrestricted general fund balance (14.5% of spending) that incorporates various positive fund balances outside of the general fund (totaling about $885,000) 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 a less negative $766,000.
For fiscal 2012, the $7.1 million operating budget included a roughly 6% cut in spending with reductions to areas largely outside of direct instruction and some use of the prior year's fund balance (about $400,000). The year-end state aid payment of approximately $1.3 million will reportedly be rolled over (comparable to fiscal 2011) with roughly 2/3 to be paid late August 2012, just prior to the end of the fiscal 2012 encumbrance period. Currently, management anticipates a year-end cash balance of no less than $250,000 or a low 3.5% of spending and tapping roughly 1/3 of unrestricted general fund reserves in support of the year's operations.
Over the near term, Fitch anticipates continued revenue pressure on the district given expectations of a slow economic recovery, the lag in the effect of any housing recover on property tax revenue, declining enrollment, the end of federal stimulus funds, and the upcoming loss of an operating tax override. While Arizona school district spending is primarily controlled through their expenditure budget, districts can seek voter approval for extra local funding through capital and operating overrides; the district maintained one of three such possible overrides and the 10% maintenance and operations (M&O) override in place provided additional property tax revenue in the amount of approximately $445,000 (roughly 6% of general fund revenue) in fiscal 2012. Such levies require voter renewals every seven years and district voters strongly rejected the extension of the levy in November 2011. Reportedly, the district's already elevated tax rate in conjunction with a large portion of residents that do not have students contributed to voting results.
Since the full value of the 10% M&O override tapers without renewal, accompanying budgetary cuts will be necessary in fiscal 2013 and 2014 in addition to those compensating for declining enrollment. Fitch also considers some use of fund balance in these fiscal years likely. Current budget plans for fiscal 2013 conservatively anticipate another modest enrollment decline, some salary savings from furlough hours, and a roughly 4.5% decline in total operating revenues that may be bolstered with the use of about $330,000 in fund balance. Deeper staffing cuts have been identified and prioritized that could provide an additional $200,000 in salary savings if necessary. Nonetheless, included in current budget plans is a modest increase to state funding due to plans to extend the district's school year 20 days. Management projects the net effect will largely offset the year's 10% phased-in M&O revenue loss as well as allow for further instructional time that should improve below-average student testing performance.
LONG-TERM LIABILITIES MODEST
Direct debt levels are low and benefit from previous state funding for new school facilities in prior growth years; overall debt levels equal less than 1% of market value in fiscal 2013 or about $325 on a per capita basis. Comparable to many Arizona school districts, principal amortization of the district's tax-supported debt is very rapid with 100% repaid in 10 years. Maximum annual debt service (MADS) remains relatively level at $197,000 (about 3% of fiscal 2012 general fund spending) through payoff in 2021. 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), equivalent to approximately $357,000 in fiscal 2011 or a modest 5% of general operations.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow Inc, LoanPerformance, Inc, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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