Fitch Ratings assigns an 'AA' rating to the following bonds of Paradise Valley Unified School District No. 69 of Maricopa County, Arizona (the district):

--$36.7 million school improvement bonds, project of 2015, series A (2016).

The bonds are scheduled for a negotiated sale the week of Feb. 8. Proceeds will be used to finance district facility improvements, vehicle purchases, and technology upgrades.

In addition, Fitch affirms its 'AA' rating on the district's approximately $288.6 million in outstanding unlimited tax (ULT) debt.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: The district's sound financial position is characterized by solid operating reserves, stable per pupil state funding levels, and renewal of existing operating property tax overrides.

SOCIOECONOMIC INDICATORS ABOVE AVERAGE: A large and stable enrollment base, above-average wealth characteristics, and the high educational attainment of residents underpin the district's strong demographic profile.

ECONOMIC IMPROVEMENT CONTINUES: Strengthening home values, declining unemployment, and modest levels of new development in the Phoenix metropolitan statistical area (MSA) since the recession point to further moderate economic improvement.

TAX BASE GROWTH PROSPECTS: Ongoing and planned construction support management projections of moderate near-term tax base growth. Taxpayer concentration is low.

DEBT PROFILE FAVORABLE: Overall debt levels remain moderate and borrowing plans appear manageable. The rapid pace of amortization largely drives the district's moderate carrying costs.

RATING SENSITIVITIES

WEAKENED FINANCIAL POSITION: An inability to cut operating costs to address structural imbalance would pressure the rating downward. The Stable Rating Outlook reflects Fitch's view that this is unlikely.

CREDIT PROFILE

Located in the northeast portion of the Phoenix MSA, including a portion of Scottsdale (GO bonds rated 'AAA', Stable Outlook), this relatively mature district has one of the largest enrollments in Arizona. Income/wealth metrics and educational attainment levels are well above average. Currently estimated at 31,330, average daily membership has remained fairly stable in recent years, with some long-term prospects for additional enrollment growth in the northern portion of the district. Roughly one-third of the district is currently state-owned land, which is yet to be developed but planned largely for residential use once it is sold by the state.

STEADILY IMPROVING REGIONAL ECONOMY

The Phoenix MSA continues its recovery from the severe effects of the recession and local housing market collapse. Housing data reflect home values that have steadily climbed since the trough of the recession.

Management reports some new construction underway in the district from a mix of new retail/commercial and multi-family projects. In addition, a portion of the aforementioned state land is scheduled for auction in spring 2016 for residential development. Fitch considers management projections for annual tax base growth of 3%-4% over the near term to be reasonable, given ongoing construction activity. The district's tax base is largely residential.

The MSA recorded solid gains in both employment and labor force in 2014. Unemployment declined slightly to 5% in November 2015 from 5.6% the year prior, and remains below the state's rate (5.8%).

FINANCIAL STABILITY MAINTAINED

District funding is subject to the state's equalization formula for schools, which provides some revenue stability on a per pupil basis but fairly modest local revenue-raising discretion and financial flexibility. Property tax revenues can be bolstered by temporary, voter-approved operating and capital overrides that are historically renewed every seven years. The district renewed its existing operating overrides in 2013, generating about $21 million (11% of general fund revenues) in additional property tax revenue. Voter support for overrides in the next renewal point would continue this level of flexibility.

Steady, modest improvement in the state's general revenues has resulted in fairly stable per pupil state aid to the district in recent years. Fitch believes current economic trends bode well for further, modest state revenue gains and a continuation of generally stable school district funding. The district typically issues tax anticipation notes equal to approximately 25% of annual receipts at the start of its fiscal year to assist with its seasonal cash flow needs. Conservative budgeting and spending practices in addition to management's proactive, multi-year planning efforts have historically enabled the district to outperform preliminary financial projections.

Expenditures grew by approximately 1.6% in fiscal 2015 due largely to an increase in contracted services for the year. Property tax revenues declined slightly under the state's school funding formula, requiring a $2.9 million use of general fund balance (1.5% of spending). However, unrestricted fund balance remained sound at $29.4 million at year-end (15.3% of spending).

Management anticipates higher property tax revenues in fiscal 2016 following an increase in the operating tax rate, and expenditures are budgeted at a similar level as fiscal 2015 for a projected modest deficit. Voter approval of a statewide May 2016 ballot measure would increase school funding over the next decade, including an estimated additional $7 million in annual revenue to the district. If this measure fails, management plans to cut costs beginning in fiscal 2017 to achieve budget balance. Fitch expects that projections of annual operating shortfalls over the fiscal 2017-2020 forecast period will be mitigated by management's strong financial practices, including generally conservative budget assumptions.

MODERATE DEBT BURDEN

Including this issuance, overall debt ratios remain moderate at approximately $3,200 per capita and 2.4% of market value. Principal amortization is rapid with about 70% of tax-supported debt retiring in 10 years.

This offering is the first of four annual installments planned from a $228 million dollar authorization approved by voters in November 2015. The project includes facility repairs and replacements as well as purchases of furniture, equipment, technology, and school buses. Debt levels are expected to remain moderate with planned issuance, as $136 million of existing bonds are scheduled to mature in the same period.

Other capital needs are limited given currently stable enrollment trends. The district is well placed to meet these minor needs assuming voter renewal in 2018 of the district's annual capital override that generates about $6 million in property tax revenue for critical 'soft capital' needs such as textbooks and technology.

The district participates in the Arizona State Retirement System (ASRS) a cost-sharing, multiple-employer plan. Under GASB 68, the district reports its share of the ASRS net pension liability (NPL) at $227 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).

Recent contributions for other post-employment liabilities (OPEB) have overfunded the annual pay-as-you-go cost by 40%-60%. The NPL represents less than 1% of the district's fiscal 2015 market value. Carrying costs for debt service, pensions, and OPEB are sizable at 20.7% of fiscal 2015 governmental fund spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Lumesis and Creditscope.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998671

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998671

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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