OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to Maricopa County Community College District, Arizona's general obligation (GO) bonds as follows:

--$191.1 million GO refunding bonds, series 2016.

The bonds are scheduled to sell the week of August 1 via negotiation. Proceeds will be used to refund certain outstanding maturities for debt service savings and to pay related costs of issuance.

In addition, Fitch affirms the district's Issuer Default Rating (IDR) at 'AAA' and the 'AAA' rating on approximately $534 million (pre-refunding) in outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.

KEY RATING DRIVERS

The 'AAA' rating reflects the district's significant, independent ability to raise revenues, solid budgetary flexibility, ample reserve cushion, and limited historical revenue volatility, which provides the district with a high level of operating flexibility and anticipated financial resilience throughout the economic cycle. Fitch expects the long-term liability burden will remain low as population growth pressures should be offset by continued economic and income gains.

Economic Resource Base

Most of the district's revenues, in the form of enrollment and property taxes, are derived locally. Maricopa County, encompassing Phoenix and the surrounding suburbs, drives many of the state's economic and population trends. Its sizeable population base has grown rapidly since 2000. The district is one of the largest providers of higher education in the United States, offering coursework at multiple facilities throughout the county and serving roughly 215,300 students as of fiscal 2015.

Further gains in population, jobs, and income levels appear reasonable to Fitch, and these should drive added economic expansion and assessed value (AV) growth. However, this remains balanced against expectations for continued, moderate enrollment loss given its typical counter-cyclicality to local economic conditions.

Revenue Framework: 'aaa' factor assessment

Fitch believes the district's revenue growth prospects are strong and should equal or exceed U. S. GDP, similar to historical performance. The superior ability of the district to raise property tax and tuition/fee revenues in the event of normal, cyclical decline also supports the 'aaa' assessment.

Expenditure Framework: 'aa' factor assessment

Enrollment is a key driver of both revenue and expenditure trends, which should keep the pace of spending generally aligned to or in excess of revenues over time. Sound expenditure flexibility is a result of moderate carrying costs and the district's ability to adjust its labor costs, if needed.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low, comprised largely of overlapping debt. Fitch expects it will remain consistent with an 'aaa' assessment, as future growth in long-term liabilities should be offset by corresponding economic and population expansion.

Operating Performance: 'aaa' factor assessment

Underpinning the district's high level of operating flexibility are ample revenue-raising ability, solid budgetary control, and limited historical revenue volatility. Use of this flexibility has allowed the district to preserve a strong reserve cushion. Fitch believes the district's operating cushion would remain in line with an 'aaa' financial resilience assessment in a moderate economic decline.

RATING SENSITIVITIES

Financial Flexibility: Deterioration of the district's operating flexibility would likely lead to negative rating action.

CREDIT PROFILE

Much of the recent employment growth in the county's large and fairly diverse economy has been led by the education/health care, professional/business, and leisure/hospitality service sectors. The county is also poised to realize further growth in the near term from a number of high-profile business expansions either underway or anticipated (Apple, State Farm, Northern Trust, Microsoft).

The property tax base is diverse and predominately residential. AV trends that lag market values by roughly two years reflect a pace of generally healthy gains since fiscal 2015. Fitch believes continuation of this positive AV trend is likely given an active housing market, reappraisal gains, and further residential, retail and commercial development underway or planned. Nonetheless, while near-term tax base growth remains strong, an analysis of home price and economic trends over time leads Fitch to believe Phoenix-area home prices may be above long-term, sustainable levels (for more information, see Fitch's "U. S. RMBS Sustainable Home Price Report," dated May 2016).

Revenue Framework

Fitch expects strong revenue gains, similar to historical performance and at or above U. S. GDP, supported by a continuation of population and job gains that should drive added economic expansion and AV growth. Natural revenue growth is also a function of enrollment increases and additional enrollment-related revenues.

Tuition/fee revenue accounts for about 20% of the district's total revenue, and Fitch judges the district's independent ability to raise its tuition and fee charges as ample. Property taxes provide nearly 60% of total revenues. In contrast to tuition and fees, the district's operating property tax levy is capped by the amount of the local government's unused, 'banked' annual operating levy capacity that exists (a 2% increase to the levy is permitted annually). This totaled about $33 million in banked operating levy capacity for the district as of fiscal 2017, which does not expire.

Third-party funding support stems from the long-standing commitment of the U. S. government to fund higher education. Nonetheless, this revenue stream remains susceptible to changes in enrollment trends, education policy and eligibility requirements, and recessionary funding pressures. The district no longer receives meaningful financial support from the state.

Expenditure Framework

Instruction is the primary purpose of the institution and a key operating expense, consuming about one-third of total spending in fiscal 2015. Evolving enrollment trends should affect those associated revenues and expenditures in a relatively similar manner. In addition, further revenue gains from an expanding tax base and moderate increases in the cost of services provided that are periodically reflected in tuition/fee increases should lead the pace of spending growth to be more or less aligned with revenues over time.

The district maintains sound flexibility to adjust instruction (its largest operating expense) to evolving enrollment trends. Management retains full legal control over employee headcount and compensation despite meet-and-confer discussions held with various employee groups annually, as the process does not dictate staffing, multi-year contracts, or wage/benefit enrichment. This expenditure flexibility is tempered by the district's need to maintain a competitive salary structure in the Phoenix MSA employment base to recruit and retain a sufficient number of highly educated professionals.

The district demonstrated its ability to respond rapidly to revenue decline with the implementation of various salary and staffing cost efficiencies to maintain structural balance following a loss (4% of total revenues or about $38 million) of state funding in fiscal 2012.

Fixed carrying costs (the combination of total annual debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits [OPEB]) consumed a moderate 14% of total operating/non-operating expenses in fiscal 2015, driven largely by the rapid amortization of the district's direct debt. Fitch believes carrying costs should remain moderate and in line with an 'aa' assessment even if possible future increases to retiree costs occur, as the district can choose to balance any increase with a slowed pace of debt repayment.

Long-Term Liability Burden

Including this issuance, the long-term liability burden is low at about 5% of 2014 MSA personal income, derived largely from overlapping debt in a growing county. Fitch expects the burden to remain consistent with an 'aaa' assessment despite pressure from ongoing population gains, as growth in long-term liabilities should be offset by continued economic expansion that drives additional income and population gains, in line with historical trends.

The district participates in the Arizona State Retirement System (ASRS), a cost-sharing, multiple-employer (CSME) plan. The district is one of the larger participating employers. Under GASB 68, the district reports its share of the ASRS net pension liability (NPL) at $567.2 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment rate assumption (approximately 62.6% based on a more conservative 7% investment rate assumption). Adjusted for a 7% investment rate assumption, NPL remains small at less than 1% of personal income.

Participants' required pension contributions are based on a statutory formula that consistently falls short of the actuarially-determined amount. Fitch therefore expects there will be modest growth in the NPL even if investment returns meet assumed rates, although not outside of expectations for the 'aaa' assessment given how small the pension liability is relative to overall debt. OPEB is provided through a state-run, post-employment benefit healthcare plan, which is funded from annually required payments made by the district to ASRS. The district's obligation remains small at less than 1% of personal income.

Operating Performance

The financial resilience assessment reflects Fitch's expectation that the district will maintain sufficient reserves and a high level of financial flexibility throughout the economic cycle. This assessment is informed by the district's recent history of unrestricted cash/investments, which Fitch uses as a proxy for unrestricted general fund balance.

The district has steadily increased its annual pay-go capital spending as economic conditions and AV trends improve. Fiscal 2016 operations are projected to once again end with a surplus, improving on budget due to under-spending of budgeted amounts. Unrestricted cash/investments totaled $535 million or 61.5% of total operating/non-operating expenses at fiscal 2015 year-end, which is consistent with the district's practice to maintain a strong fiscal cushion, well in excess of its internal minimum reserve threshold of 8% or roughly $53 million of general operating revenues.