Fitch Rates Washington County School District, UT GOs ‘AAA’; Outlook Stable

SAN FRANCISCO–(BUSINESS WIRE)–Fitch Ratings assigns an ‘AAA’ rating to the following Washington County

School District, Utah (the district) general obligation (GO) bonds:

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–$39.1 million GO school building and refunding bonds (Utah School Bond

Guaranty Program), series 2013.

The ‘AAA’ rating is based on the state’s full faith and credit guarantee

provided as credit enhancement to the district’s GO bonds under the Utah

School Bond Default Avoidance Program, which is rated ‘AAA’ with a

Stable Outlook by Fitch.

Fitch also assigns an underlying rating of ‘AA’ to the bonds, reflecting

the district’s credit quality without consideration of the guarantee

provided by the Utah School Bond Default Avoidance Program.

In addition, Fitch affirms the underlying rating on the district’s

$167.7 million in outstanding GO school building bonds at ‘AA’. The

Rating Outlook associated with the underlying rating is revised to

Negative from Stable.

The series 2013 bonds will sell via competitive sale on Nov. 12, 2013.

Proceeds will be used to build and refurbish school facilities and to

refund outstanding GO bonds, series 2004, 2004A, and 2005 for present

value savings.

SECURITY

The bonds are payable by an unlimited property tax to be levied, without

limitation as to rate or amount, on all taxable properties within the

district. Debt repayment also is guaranteed by the full faith and credit

and unlimited ad valorem taxing power of the state of Utah under the

provision of the Utah School Bond Default Avoidance Program.

KEY RATING DRIVERS

LOWER UNRESTRICTED GENERAL FUND BALANCE: The Negative Outlook reflects

the risk that the district’s unrestricted general fund balance could

settle at a level inconsistent with an ‘AA’ rating.

STILL SOUND FINANCIAL OPERATIONS: Recent drawdowns of the district’s

general fund balance were larger than Fitch expected. Nevertheless, the

district maintains strong liquidity and good financial flexibility on

both the revenue and expenditure sides.

ECONOMY CONTINUING TO STRENGTHEN: The local economy is geographically

isolated, remains somewhat dependent on economically volatile

industries, and was very hard hit by the recent recession. Economic

conditions are improving, however, as the employment base expands, the

unemployment rate drops significantly, and the population grows.

TAX BASE STABILIZING: The district’s tax base is well diversified, but

was severely affected by the housing-led recession, dropping a

cumulative 23% between fiscal years 2009-2012. It is beginning to

rebound due to both new development and existing properties’ rising

values.

SOUND DEBT PROFILE: The district’s debt levels are low, principal

amortization is extremely rapid, carrying costs are moderate, and

further bond issuances (subject to voter approval in November) would not

greatly alter the current debt profile.

RATING SENSITIVITIES

Prolonged maintenance of the district’s unrestricted general fund

balance at a level inconsistent with an ‘AA’ rating could result in a

downgrade. The district retains a number of revenue and expenditure

flexibility options which could facilitate renewed unrestricted general

fund strength and lead to restoration of a Stable Outlook.

CREDIT PROFILE

The district is coterminous with Washington County, operating 43 schools

and several alternative programs which serve a population of

approximately 142,000 in southwestern Utah. While the district is

geographically isolated, it is also well situated along major

transportation routes. The district economy remains somewhat reliant on

industries that are vulnerable to economic volatility such as tourism

and transportation and distribution. The district experienced extremely

rapid growth until the housing-led recession severely pressured the

local economy. The outsized local construction industry was particularly

hard-hit. Wealth indicators are largely below average, partially

reflecting larger family sizes and the substantial retiree population.

ECONOMY CONTINUING TO STRENGTHEN

The county is showing good signs of recovery after a difficult

recessionary period in which the county’s employment base shrank

significantly, unemployment rose to a 2010 high of 10.4%, and taxable

assessed value (TAV) declined 23% between fiscal years 2009-2012. In

July 2013, the unemployment rate was down to 5.4% as both employment

opportunities and the labor force rebounded. Population continues to

grow as a result of both the local birth rate and in-migration (the

district is projecting an additional 6,000 students by 2020). TAV

regained 2.9% in fiscal 2013 and 4% in fiscal 2014 from both new

construction and existing properties’ improved values. In March 2013, a

large distribution center for Family Dollar Stores opened, reaffirming

the county’s strategic location for long-haul transportation and

distribution.

GENERAL FUND UNDERPERFORMED EXPECTATIONS

The district recorded a general fund drawdown of $1.1 million in fiscal

2012, contrary to Fitch’s expectation of a small operating surplus. The

negative variance was attributed to financial management system

incompatibilities related to payroll data; the school board has approved

the acquisition of a new payroll system to prevent this problem in the

future.

The district projects that the general fund will end fiscal 2013 with a

$4.3 million net operating deficit, rather than the previously projected

$500,000-$700,000 drawdown. This was caused by increased wage and

benefit costs, an employee bonus, and the loss of $2 million in revenues

due to lower than expected student enrollment. For fiscal 2014, the

district is projecting a further general fund drawdown of approximately

$2 million caused by rising employee benefit costs and another one-time

employee bonus.

While these drawdowns are greater than expected, the district’s

unrestricted general fund balance is projected to end fiscal 2013 at

$15.2 million or a still adequate 9.1% of spending. However, this is

currently expected to be eroded by up to a further $2 million in fiscal

2014 which would drop the unrestricted general fund balance to

approximately 7.9% of spending. The district’s multiyear projections

indicate the unrestricted general fund balance could stay at this lower

level.

The multiyear projections assume that the approximately $2 million

structural imbalance caused by employee salary and benefit cost

pressures will be addressed on the revenue side by a combination of

growing student enrollment, state revenue increases, and higher local

property tax revenue collections. Further assistance could be provided

by utility and employee benefit expenditure controls and the district’s

elimination of its OPEB liability. Fitch considers the assumptions

underlying the multiyear projections to be largely reasonable but notes

that it will be policy decision on the part of the school board as to

how increased resources are actually used (e.g. restoring the

unrestricted general fund balance versus meeting expenditure increase

demands).

DISTRICT RETAINS GOOD FINANCIAL FLEXIBILITY

The district retains a number of options with regard to future revenue

and expenditure flexibility, despite the pressures on its general fund.

The district could borrow from its $2.3 million student activity fund

and transfer up to $9 million from its capital projects fund over two

years, if necessary. It could raise up to $42.7 million more per year,

subject to the advisory truth-in-taxation public hearing process, under

its voted, board, and capital local tax levies. The district could also

reduce its capital outlay levy and commensurately increase its

operations and maintenance levy to direct more tax revenues to the

general fund.

A material degree of expenditure flexibility exists as far as class

sizes, number of teaching days, and health insurance benefit costs. The

district is also focusing on reducing its utility costs.

SOUND DEBT PROFILE

The district’s debt profile is good. Overall debt levels are low at

$1,795 per capita and moderate at 2.5% of TAV. Debt amortization is

extremely rapid, with 94% of principal maturing within 10 years. The

series 2013 bond issuance exhausts the district’s current bond

authorization. The district will be seeking voter authorization for a

further $185 million in GO bonds in November. If approved by voters,

additional debt issuances would be staggered over 2014-2019, not adding

greatly to the overall debt burden as old debt rolls off. The new bonds

would primarily fund school facility needs related to projected student

enrollment growth.

The district participates in two, adequately funded, state-wide

cost-sharing pension plans. Cumulative carrying costs for debt service,

annually required pension contributions, and OPEB prefunding costs were

a moderate 19.7% in fiscal 2012. After five years of increases, pension

contributions will remain elevated going forward, but the district’s

OPEB plan has been discontinued and its small remaining liability of

$148,472 will be fully amortized by August 2014.

Additional information is available at ‘www.fitchratings.com‘.

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,

S&P/Case-Shiller Home Price Index, IHS Global Insight, National

Association of Realtors.

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=805637

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