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TMCNet:  Fitch Rates Denver School District No. 1, CO GOs 'AA+'; Outlook Stable

[March 11, 2014]

Fitch Rates Denver School District No. 1, CO GOs 'AA+'; Outlook Stable

AUSTIN, Texas --(Business Wire)--

Fitch Ratings assigns an 'AA+' rating to the following Denver School District No. 1, CO bonds:

--$21.4 million general obligation (GO) bonds, series 2014A;

The bonds are scheduled to price via negotiation during the week of March 17. Bond proceeds will be used for various school improvements.

In addition, Fitch affirms its rating on the following outstanding GO bonds and certificates of participation (COPs):

--$1.36 billion GO bonds at 'AA+';

--$1.03 billion COPs at 'AA'.

The Rating Outlook for the GO bonds and COPs is Stable.

SECURITY

The GO bonds are payable from an annual unlimited property tax levy. The COPs are secured by base rental payments made by the district to the Denver School Facilities Leasing Corporation for use of school facilities, subject to annual appropriation.

KEY RATING DRIVERS

LARGE, GROWING ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government. Solid job gains in recent years suggest local economic conditions are improving after the recessionary decline.

CONSERVATIVE BUDGETING; STABILIZED FINANCES: The district's financial performance has improved despite state aid cuts and assessed value (AV) declines, aided by the district's practice to budget contingency reserves and voters' consistent support for revenue enhancements.

GROWTH PRESSURES REMAIN: Enrollment growth pressures will persist, requiring continued attention to additional cost efficiencies amidst new school openings and expansions.

GROWING DEBT SHOULD REMAIN AFFORDABLE: Overall debt levels are moderate to high, due in part to the district's large voter-approved bond programs and its use of certificates of participation (COPs) to fund pensions. Fitch expects carrying costs for long term liabilities to remain affordable despite slow debt amortization.

APPROPRIATION RISK; SOUND LEGALS: The one notch rating distinction on the COPs reflects appropriation risk. Legal provisions for the COPs are sound and include a mortgage interest in essential assets of the district.

FAVORABLE OPEB FUNDING: The district's other post-employment benefit (OPEB) obligations have been funded on an actuarial basis since 2005, well ahead of most school districts and municipalities.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including conservative budgeting and maintenance of a solid financial cushion in light of growth related debt needs and rising carrying costs. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

FAVORABLE LONG-TERM ECONOMIC PROSPECTS

Coterminous with the city and county of Denver (unlimited tax GOs rated 'AAA' by Fitch), the district's economic diversity benefits from its role as the hub of a 10-county MSA and the capital of Colorado. After posting recessionary job losses in 2009-2010, the district has averaged 2.2% employment gains annually through 2013. Coupled with modest labor force gains, the unemployment rate has declined annually and averaged 7.1% in 2013, modestly above the state (6.8%) and below the nation (7.4%).

New construction activity is returning but remains moderate compared to pre-recession levels. Ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including the massive Denver Union Station project, should benefit the district's medium-term economic prospects. Homebuilding at the expansive Stapleton redevelopment area is fueling the majority of the district's recent enrollment growth.

ENROLLMENT PRESSURES EASED BY CHARTER SCHOOLS

Denver School District No. 1 is the fastest growing large district in Colorado. At a funded pupil count (FPC) of 80,526 in fiscal 2014, the district's FPC has grown by a compound annual average of 2.8% over the last five years. Charter school enrollment represents 15% of the total funded pupil count. Fitch does not consider this a financial pressure for the district based on the collaborative relationships that promote the use of shared campuses to facilitate enrollment growth, and the sharing of facility operating costs.

MILL LEVY OVERRIDES HELP MITIGATE RECENT TAX BASE DECLINES

Reappraisals on the district's diverse property base appear to be rebounding. The district's AV declined 8.6% in fiscal 2012 after growing by a robust comound annual average rate of almost 8% 2006-2011. AV declined only modestly in fiscal 2013 and then increased by 4.7% in fiscal 2014. District projections for 3.7% and 4% in the next two reappraisal years (2016 and 2018) appear reasonable given recent performance and investment activity.


The district's revenue base benefits from voter support for permanent fixed dollar mill levy overrides approved in 1988, 1998, 2003 and 2005. Voters went one step further in 2012 approving by a 68% margin a fixed millage override which will generate additional property tax revenue as AV grows. The district may consider asking for voter authorization in 2016 to permanently set existing overrides at their current mill rates, improving prospects for future revenue growth in an expanding AV environment.

HIGH COMMUNITY SUPPORT; ELEVATED OVERALL DEBT LEVELS

The current offering will exhaust the $466 million GO bond authorization approved by a high 64% of voters in November 2012 for district-wide improvements, renovations, new construction, and technology updates. The current overall debt burden is elevated at $7,285 per capita and 5.8% of full value, including $1.03 billion in outstanding COPs.

The district's GO principal pay-out rate is slightly below average with 47% maturing in 10 years. The pay-out rate for the COPs is very slow at 26% in 10 years, resulting in a combined pay-out rate of 37% in 10 years. In 2013, the district refunded all outstanding variable rate pension COPs with fixed rate COPs. Only a negligible amount (1.4% of total debt) of variable rate debt (currently in a fixed-rate mode) remains which the district plans to redeem within five years.

STABILIZED FINANCES; GROWTH PRESSURES REMAIN

The district's financial profile has improved post-recession, as shown by large operating surpluses in fiscal years 2010 and 2011 that were aided by substantial unused contingency appropriations. The district posted a planned drawdown of $14.8 million (2.3% of spending) in fiscal 2012, the result of additional targeted instructional spending and transfers to the capital reserve.

Fiscal 2013 posted a $10.7 million operating surplus, equal to 1.5% of spending (adjusted for the COPs refunding), aided by voters' approval of a permanent 4.86 mill levy O&M override that generated $49 million in new property tax revenues, equal to 6.9% of revenues. As a result, the unrestricted fund balance rose to a solid $88.1 million or 12.9% of spending. Including the restricted 3% emergency reserve, the total cushion increased to 15.5% of spending in fiscal 2013.

The fiscal 2014 budget was adopted with a draw-down of $19 million (2.6% of spending). Due to continued cost controls and greater than budgeted FPC, management now projects a smaller draw-down of $12 million - $15 million. Assuming the worst case scenario of a $15 million (2% of spending) operating deficit after transfers, the district's unrestricted fund balance would decline to a still adequate 9.8% of spending. Inclusive of the 3% emergency reserve, the total financial cushion rises to 12.6% of spending. Fitch notes that management typically outperforms its interim financial projections.

The district foresees continued operating pressure and projects additional, albeit declining, fund balance draw-downs through fiscal 2016. Potential mitigating factors include additional state aid that's being proposed in the governor's budget which could benefit the district's resources by as much as $20 million (roughly 3% of revenues) in fiscal 2015. Fitch assumes no increases in the district's state aid and expects management to minimize any structural imbalances through ongoing gains in cost efficiencies.

The district's adoption of a formal fund balance policy in fiscal 2012 is an indication of future goals. District management does not expect to reach its unassigned fund balance target of 15% of spending in the near term, but Fitch notes the effective financial cushion (which includes the restricted 3% emergency reserve) is currently at a solid level.

PENSION ADEQUATELY FUNDED / OPEB PROVIDED THROUGH TRUST

On Jan. 1, 2010, all employees of the district became members of the Public Employee Retirement Association (PERA) as a result of its merger with the Denver Public Schools Retirement System (DPSRS). PERA is a cost-sharing multiple employer defined benefit plan although the assets, liabilities and obligations of DPSRS remain separate and distinct from the other schools within PERA. As of Dec. 31, 2012, DPSRS' Fitch-adjusted funded ratio was adequate at 75.6%.

The district's OPEB benefits are also provided through PERA through a trust fund initially established by the district in 2005. As of July 1, 2012, the funded ratio for the OPEB trust is low at 16%, but Fitch views positively any level of OPEB pre-funding. Previously funded below the annual required contribution (ARC), the district funded 108% of the ARC in fiscal 2013. Total carrying costs for debt service, pension, and OPEB is moderate at 13% of fiscal 2013 governmental spending. Fitch expects carrying costs to rise, with additional debt and a below average amortization rate, but stay affordable relative to budget.

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 informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated 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=823336

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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