[February 28, 2014]

Fitch Rates Nebo School District, Utah's GOs 'AAA' Enhanced/'AA' Underlying

Fitch Ratings has assigned an 'AAA' rating to the following Nebo School District, Utah (the district) bonds:

--$15 million general obligation (GO) bonds, series 2014B.

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 (rated 'AAA' by Fitch).

In addition, Fitch 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.

The bonds are expected to sell via competitive sale on March 12, 2014. The proceeds will fund school building construction. The 2014B bonds mature serially, July 1, 2014-2028, and are subject to optional and mandatory sinking fund redemption prior to maturity.

Fitch also affirms the following ratings on all of the district's GO bond debt ($229.2 million outstanding par):

--'AA' underlying rating.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax pledge. 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

SIGNIFICANT RATING ENHANCEMENT: The Utah School Bond Default Avoidance Program provides valuable credit enhancement to the district's GO bonds as it is based on the state's full faith and credit guarantee.

BALANCED FINANCIAL OPERATIONS FORECAST: Despite some structural imbalance in fiscal years 2010-2014, general fund balances and liquidity remain solid. The district expects to resume structurally balanced operations in fiscal 2015.

AFFORDABLE DEBT PROFILE: The district benefits from a moderately low debt burden, rapid amortization, absorbable future debt issuance plans, a closed OPEB system, and manageable overall carrying costs, although pension costs are likely to rise.

SUPPORTIVE ECONOMY AND TAX BASE: Although its economy is somewhat limited, the district enjoys population growth, regional employment growth, largely above-average socio-economic characteristics, and a stabilizing tax base with good residential and commercial development potential.

COHESIVE MANAGEMENT AND ADMINISTRATION: The district's largely conservative financial management approach is directed by a financially astute school board, managed by tenured administrators, and supported by a collegial labor environment.

RATING SENSITIVITIES:

STABLE CREDIT CHARACTERISTICS: The underlying rating is sensitive to shifts in fundamental credit characteristics, particularly related to the general fund's structural balance going forward. The enhanced rating would shift in line with any change to state bond ratings. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The 1,300 square mile district is located in the southern half of Utah County, approximately 53 miles south of Salt Lake City. A population of approximately 125,000 is scattered across 18 different communities, the largest being Spanish Fork, Springville, and Payson. The district educates approximately 31,250 students at 40 schools.

SOLID FINANCES

The district has maintained high general fund balances and good liquidity during the recent recession. Fiscal 2013 ended with an unrestricted general fund balance of $29.4 million or 17.2% of spending, up from $28 million or 16.9% of spending a year prior.

The district's strong general fund position is in spite of some structural imbalance since fiscal 2010. That year, the district's $2.4 million imbalance was caused by insufficient expenditure reduction in response to revenue declines and had to be partially solved by using reserves. Further structural imbalances of $4 million and $3 million in fiscal years 2011 and 2012 respectively were more than offset by the state-permitted use of capital funding fr operations.

When this state-permitted funding flexibility ceased being available, the district reduced its structural deficit to $700,000 in fiscal 2013. At the time of Fitch's review last year, the district had expected to eliminate it altogether in fiscal 2014. Now, the district is anticipating a net operating deficit after transfers of approximately $2.7 million which would draw the total general fund balance down to a still strong $27.2 million (14.9% of spending). The district expects to hold its total general fund balance at that level in fiscal 2015.

The reasons for this projected fiscal 2014 draw down largely are due to costs associated with a new school facility opening. At the 2004 and 2009 bond elections, voters authorized permanent operations and maintenance levy leeway increases designed to cover additional maintenance and operating costs. The projected fiscal 2014 net operating deficit after transfers draws down on some of those accumulated levy leeway dollars. Further drawdowns are expected in the medium term as fixtures, furniture, and equipment are needed for future new school facilities.

The district continues to benefit from growing student enrollment which increased 25.6% between fiscal years 2005-2014. Student enrollment is projected to continue growing 1.3%-2.6% per year through fiscal 2024.

Although the district's TAV declined during the recession, Utah property tax rates automatically adjust to compensate. Therefore, the district largely is insulated from property tax revenue declines but typically will not benefit from future TAV growth except from new development.

AFFORDABLE DEBT PROFILE

Despite annual bond issuances, the district's overall debt burden is a moderately low $1,952 per capita or 2.8% of market valuation. Principal debt amortization is a rapid 75% in 10 years. Given student enrollment growth projections, the district expects to continue issuing a moderate amount of GO debt annually. There is no exposure to capital appreciation bonds, variable rate debt, or swaps.

Each year, the district makes its full actuarially required contributions (ARC) to the well-funded state retirement system and benefits from a closed other post-employment benefits (OPEB) plan. While pension contributions are projected to increase, OPEB liabilities will decrease in the medium to long-term. In the meantime, the district has assigned $7 million of its fiscal 2013 general fund balance for OPEB obligations in case its annual pay-as-you-go approach needs additional support.

In fiscal 2013, debt service, pension ARC, and OPEB pay-as-you-go payments cumulatively represented a manageable 19% of total governmental fund spending.

SUPPORTIVE ECONOMY AND TAX BASE

The district continues to experience steady population growth and benefits from largely above-average socioeconomic characteristics, with the exception of below average per capita money income. This is likely attributable to larger family sizes. The regional economy contains significant employers in the education, health care, and government sectors, as well as retail and manufacturing. In fiscal 2013, employment growth exceeded labor force growth contributing to a very low county unemployment rate of 3.4% in November 2013.

The district's TAV declined 11% in fiscal years 2010-2013 after a 10.2% increase in fiscal 2009. However, the district is expecting an approximately 2% increase in fiscal 2014, indicating the tax base has now stabilized. The district is conservatively projecting 2% annual increases thereafter. Residential construction continued throughout the recession, albeit at a much slower pace, and there is some big box store development.

COHESIVE MANAGEMENT AND ADMINISTRATION

The district is directed by a school board that includes financial professionals, managed by experienced administrators, and supported by labor associations which receive regular budget briefings from the superintendent. The district consistently budgets conservatively and holds regular financial management discussions between the school board and administrators. Labor agreements are flexible, with clauses permitting changes if necessary and no headcount specifications.

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 (News - Alert) Global Insight, and 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:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822136

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