OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Deer Valley Unified School District No. 97 of Maricopa County, Arizona (the district) general obligation (GO) debt:

--$30 million school improvement bonds, project of 2013 series B (2016);
--$19.2 million refunding bonds series 2016.

The bonds are scheduled for a negotiated sale the week of February 8. Proceeds of the series B bonds will fund school improvements. Proceeds of the refunding bonds will be used to refund certain outstanding debt for interest savings.

In addition, Fitch affirms its 'AA-'rating on the district's $189.4 million (pre-refunding basis) in outstanding GO debt.

The Rating Outlook is Stable.

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

M&O OVERRIDE APPROVAL: District voters in November 2015 approved a maintenance and operation (M&O) override that should enable management to address the current structural budgetary gap. The 15% override will be effective in fiscal 2017.

POTENTIAL LITIGATION SETTLEMENT: A May 2016 state-wide referendum will be presented to voters to take money from the state land trust to fund K-12 education. The referendum represents a negotiated settlement between the state and school districts for the state's failure to provide prior years' inflation adjustments as a component of school funding support.

RECOVERING LOCAL ECONOMY: The district's fiscal 2016 tax base (representing a two-year lag) reflects the second consecutive year of strong growth after five years of precipitous declines associated with the recession and housing collapse. Wealth and employment metrics compare favorably to regional and state averages.

MANAGEABLE DEBT AND PENSION PROFILE: Fitch expects the district's overall debt and carrying costs (including retiree benefits) to remain moderate based on a rapid amortization which offsets planned new debt issuance.

RATING SENSITIVITIES
WEAKENED FINANCIAL POSITION: Deterioration in the district's financial position, as evidenced by an inability to regain balanced operations, would put pressure on the current rating.

CREDIT PROFILE
Deer Valley Unified School District is geographically one of the largest in the state. It encompasses nearly 370 square miles with a population of approximately 250,000 residents. The district is part of the larger Phoenix-Mesa-Glendale metropolitan statistical area (MSA) economy and employment base. Interstate 17 bisects the district from north to south.

PASSAGE OF OVERRIDE IMPROVES BUDGET PICTURE

Officials expect the 15% maintenance and operations override approved by voters in November 2015 to restore balanced operations. The override, which is projected to generate approximately $24.75 million annually, will be used for salaries, staffing, instruction, extracurricular activities and specialized programs--including funding of the district's recent reinstatement of a full-day kindergarten program.

State funding cuts and modest enrollment declines have pressured the district's finances over the past six years. Prior voter-approved budget overrides and strong cost controls allowed the district to maintain a narrowing but still adequate financial position to date. The November 2015 override renews the November 2010 override of 10% and provides an additional 5% override (approximate $8.25 million) effective in fiscal 2017.

The district kept expenditures flat over the past seven years by eliminating salary increases and reducing programs, including eliminating full-day kindergarten in 2008. However, these measures were not sufficient to avoid budgetary imbalance--as evidenced by a series of net operating deficits and reduced reserves. A fiscal 2015 deficit after transfers of $6.7 million was the fourth consecutive net loss and resulted in an unrestricted fund balance of $7.4 million or a marginally adequate 3.8% of spending.

The district realized an uptick in fiscal 2015 enrollment, which it attributes to the reinstatement of the full-day kindergarten program. Officials estimate that increased enrollment from the program's reinstatement will pay for program costs within four years (by fiscal 2018). Meanwhile, the district reports that costs of kindergarten staffing ($2.4 million in fiscal 2015), when combined with annual soft capital costs, could result in a fiscal 2016 loss and reserve draw of about $3 million.

If voters approve the state-wide referendum in May 2016, it would provide the district with an estimated $6 million and allow management to replenish reserves. Fitch believes the district retains sufficient spending flexibility should voters turn down the referendum and another settlement funding source need to be identified. Implementation of the 15% override in fiscal 2017 should further bolster district finances.

SHORT-TERM BORROWING EXPECTED TO CONTINUE

The district historically has issued tax anticipation notes (TANs) in advance of property tax collections, and additionally relies on a line of credit with Maricopa County to mitigate the impact of timing differences of expenditures and the receipt of state aid and property tax revenues. TANs of $25 million at fiscal 2015 year-end (13% of fiscal 2015 expenditures) were supplemented by a $19.3 million fiscal year-end line of credit (23% of expenditures in total short-term borrowing). TANs are repaid from general fund property tax revenue; the credit lines are repaid upon receipt of state aid payments. Management anticipates short-term borrowings to continue at similar levels over the near term.

MANAGEABLE DEBT

The district received authorization by a solid 58% of voters to issue $158 million of GO bonds in November 2013. Technology, modernization and new facility projects are included in the authorization, which the district expects to issue over the next four to six years. Proceeds of this second offering will be used for technology, security and school improvements. Fitch anticipates the district's debt burden to remain moderate, similar to its current 2.2% of fiscal 2016 market value, based on a very rapid 10-year amortization rate of 90%.

The district participates in a state-sponsored, cost-sharing multiple-employer pension program, Arizona State Retirement System (ASRS) for which the state establishes annual required contribution levels. The Arizona legislature annually establishes the ASRS contribution rate, generally equivalent to the legislatively determined actuarial rate (although by statute the legislature can establish a contribution rate that differs from the actuarially determined rate).

Under GASB 68, the district reports a fiscal 2015 ASRS net pension liability (NPL) of $224.1 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 62.6% based on a lower 7% investment rate assumption). The NPL of the plan represents a modest 1.7% of fiscal 2015 market value. Carrying costs (including debt service, pension and OPEB contributions through ASRS) are manageable at 16.2% of fiscal 2015 governmental spending.

RECOVERING LOCAL ECONOMY

The metropolitan statistical area's diverse economy and employment base remains the hub of the state's economy, despite having realized significant weakening from the recent recession and housing market collapse. The 4.4% fiscal 2016 tax base growth (to $2.21 billion) reflects both valuation gains and new construction activity. The district's tax base is diverse and without taxpayer concentration.

The district's economic metrics are favorable relative to regional and state norms; e.g. median household income levels are 148% of the state average. Maricopa County's unemployment rate of 4.9% as of November 2015 was below the state-wide rate of 5.8% for the same period.