Fitch Rates Deer Valley USD No. 97, AZ GOs 'AA-'; Outlook Stable

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

--$34.6 million school improvement bonds, Project of 2008, series E (2014).

The bonds are scheduled for a negotiated sale the week of Jan. 27th. Proceeds will be used for various campus improvements and to pay related costs of issuance.

In addition, Fitch affirms its 'AA-'rating on the district's $180.8 million 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

SOUND FINANCES; CHALLENGES REMAIN: The district's financial position is sound, although near term finances will be pressured by enrollment declines and increased operating expenditures associated with resumption of a full day kindergarten program.

RECOVERING LOCAL ECONOMY: The district's fiscal 2015 tax base (reflecting a two-year lag) reflects strong growth after five years of precipitous declines associated with the recession and housing collapse. Wealth and employment metrics trend favorable to state and U.S. averages.

MANAGEABLE DEBT PROFILE: Fitch expects the district's overall debt and carrying costs to remain moderate based on a manageable capital program and rapid amortization.

RATING SENSITIVITIES

POTENTIAL FOR WEAKENED FINANCIALS: Notably reduced financial flexibility as evidenced by further material diminishment in reserves would pressure 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 246,875 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.

SOUND FINANCES DESPITE RECESSIONARY PRESSURES; CHALLENGES REMAIN

Arizona reduced school district funding due to recessionary budget pressures over the past five years. The impact of lower funding levels on Deer Valley's balance sheet was exacerbated by rules which limit school districts' ability to build substantive general fund reserves. Despite these challenges, voter-approved budget overrides and strong cost controls have allowed the district to maintain an adequate financial position. Relatively flat expenditures over the past five years reflect foregone salary increases and a variety of program reductions, including the elimination of full-day kindergarten in 2008.

Fiscal 2013 unrestricted reserves of $14.6 million represent an adequate 7.7% of expenditures and transfers out. Despite the state's resumption of annual inflation adjustments in its allocations to school districts in fiscal 2014, the district's finances will be pressured due to its 1.3% fiscal 2013 enrollment loss and plans to fund $3.5 million in capital expenditures with general fund monies. Management projects fiscal 2014 unrestricted reserves at $11 million (6% of expenditures and transfers out).

Officials plan to reinstate a full day kindergarten program in fiscal 2015 to recapture enrollment lost over the past five years. The district has not yet identified the funding source for resuming the program and anticipates it will take four to five years to break even. Fiscal 2015 finances will also be pressured by another year of district projected enrollment declines. The district's financial cushion appears adequate in the near term; however, ongoing reserve draws would diminish the district's financial flexibility and put pressure on the current rating.

SHORT-TERM BORROWING EXPECTED TO CONTINUE

The district has historically issued tax anticipation notes (TANs) in advance of property tax collections, and additionally relies on a line of credit (LOC) with Maricopa County to mitigate the impact of timing differences of expenditures and the receipt of state aid and property tax revenues. TANs of $30 million in fiscal 2013 (15% of fiscal 2013 total budgeted revenue) were supplemented by LOCs of $23.5 million (28% of revenue in short term borrowing in total). TANs are repaid from general fund property tax revenue; the LOCs are repaid upon receipt of state payments. Management anticipates short term borrowings to continue at similar levels in the near term.

MANAGEABLE DEBT

The district's overall debt is moderate at 3.2% of market value. Proceeds of this final 2008 authorization will be used to remodel schools and build a new elementary school within an area of the district realizing enrollment growth.

The district received authorization to issue $158 million of GOs in November 2013 by a solid 58% of voters. Officials expect to issue against this authorization over the next five to seven years. Technology, modernization and new facility projects are included in the authorization. Fitch anticipates the district's debt to remain manageable given current debt levels and a very rapid 10-year amortization rate of 95%.

The district participates in a state sponsored, cost-sharing multiple-employer pension program. The state established annual required contribution levels. The state program's funding level at fiscal 2012 year-end was satisfactory at 75.8% but below average at an estimated 68.1% based on Fitch's more conservative 7% investment rate assumption. Management anticipates local contributions leveling off over the near term after a succession of modest increases recently, which Fitch considers reasonable based on improving funding and performance trends. The district provides post-employment healthcare benefits to retirees through the state program, and the financial contributions are relatively small. The district's carrying costs (including debt service, pension and OPEB contributions) are manageable at 18.6% of 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 housing market collapse that was one of the most severe in the nation. The district projects strong fiscal 2015 tax base growth, reflecting fiscal 2013 valuation gains and new construction activity. This strengthening trend is prevalent throughout Maricopa County. The district's tax base is diverse and without taxpayer concentration.

The district's economic metrics are favorable to regional, state and national norms. Income levels run 140% the U.S. average, based on median household income. Maricopa County's unemployment rate of 6.6% as of October 2013 is favorable to that of Arizona (8%) and the U.S. (7%).

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=815173

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