|[June 10, 2014]
Fitch Affirms Clark County School District, NV's LTGOs at 'A'; Outlook Revised to Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has affirmed the 'A' rating on the following Clark County
School District, NV (the district) obligations:
--$2.4 billion outstanding LTGO bonds;
--$635.2 million outstanding LTGO bonds (additional secured by pledged
--$46.4 million outstanding LTGO medium-term bonds.
The Rating Outlook is revised to Stable from Negative.
The bonds are direct and general obligations of the district. The full
faith and credit of the district is pledged for the payment of principal
and interest, subject to state constitutional and statutory limitations
on the aggregate amount of ad valorem taxes.
Approximately $635.2 million of the district's GO bonds are additionally
secured by and payable from a portion of the county-wide room and real
estate transfer taxes.
KEY RATING DRIVERS
BALANCE RESTORED, RISKS REMAIN: The revision of the Outlook to Stable
reflects recent improvements in district revenues and operating balance,
a reversal from their downward trajectory over the past several years.
Affirmation of the below-average 'A' rating on the LTGOs signals
continued challenges despite recent gains.
LIMITED FINANCIAL FLEXIBILITY: The district has committed to increase
reserve levels over the next several years but balances appear likely to
remain somewhat weak, extending the district's vulnerability to revenue
shortfalls. Funding increases are subject to legislative discretion and
continued improvement in the state and local economy, as the district
has no options for increasing revenues unilaterally. Employee contracts
are settled through the end of fiscal 2014, but unanticipated growth in
labor costs could challenge the district's recently restored operating
STABILIZING ECONOMY: Tourism and sales taxes have experienced several
consecutive years of growth and employment levels now exceed
pre-recession peaks. Home values remain depressed but have recently seen
CAPITAL PRESSURES CONTINUE: The district faces ongoing enrollment growth
but has limited opportunities for funding capital needs for expansion or
renovation following voters' rejection of a proposed tax rate increase
ELEVATED FIXED-COST BURDEN: Overlapping debt levels are moderately high
and district carrying costs for debt service and retiree benefits are
elevated, in part due to rapid amortization of outstanding debt. Pension
funding is weak.
ECONOMIC SOFTENING: A downturn in the historically volatile local
economy would likely further reduce already weakened revenues and
increase negative rating pressure.
CONTINUED FINANCIAL IMPROVEMENT: Continued stabilization of the
district's finances and strengthening of reserves would increase upwards
rating pressure, particularly if accompanied by resolution of the
district's current challenges in addressing capital needs.
Clark County School District serves approximately 314,000 students,
nearly three-quarters of Nevada's public school population. The
district's boundaries are coterminous with those of the county, which
covers approximately 8,012 square miles in the southern portion of the
state. Population centers within the district include the cities of Las
Vegas, North Las Vegas, Henderson, Boulder City, and Mesquite, as well
as unincorporated areas of the county.
IMPROVING FINANCIAL CONDITION
The revision of the Outlook to Stable from Negative reflects improvement
in the district's financial position and prospects. The district
achieved a small operating surplus in 2013 after four years of deficits,
and appears likely to record a second year of surplus results in 2014.
Unrestricted fund balances saw their second consecutive year of growth
in 2013, although they remain somewhat weak at 4.1% of general fund
spending. Fitch expects unrestricted balances to continue to grow based
on the district's commitment to increase unassigned general fund
balances by 0.25% (approximately $5 million) per year over the next
several years. Recent budgets have restored some teaching positions lost
during the downturn and have avoided new expenditure reductions.
The recent turnaround in the district's finances has been primarily due
to improvd per pupil funding and rising enrollment, as well as sales
tax recovery. General fund revenues increased a modest 1.3% in 2013 and
management projects a 5.4% increase in general fund and special revenues
for 2014. Expenditures have also begun to increase, although at a slower
pace than revenues, due to enrollment growth and the partial restoration
of positions lost during the downturn.
Labor costs comprise the district's largest category of expense and have
proven challenging to control in recent years. Contracts are currently
settled through the remainder of the fiscal year but are open for 2015.
Management anticipates less contentious negotiations than in past years,
however, the district's recently restored operating balance could be
challenged again depending on the terms of future agreements
CONTINUED RECOVERY IN TOURISM AND GAMING
The Las Vegas metropolitan area has experienced sustained job gains and
improvement in the tourism and gaming sectors. Employment levels have
climbed steadily since the beginning of 2011 and recently surpassed
pre-recession peaks. Clark County's 7.4% unemployment rate in April 2014
remained well above the national average of 5.9%, but has steadily
improved over the last several years.
Employment growth has been supported by the ongoing recovery of the
local tourism sector. Gaming revenues, hotel occupancy, and taxable
sales continued to see gains in 2013, resulting in growing revenues for
all levels of government, despite a 2.8% decline in visitor volumes.
Tourism and gaming remain vulnerable to reductions in consumer spending,
but continued growth in the region's dominant industry is encouraging
for the district's economy and finances.
The district's housing market was among the nation's hardest hit by the
recent recession but has seen steady price gains since early 2012. April
2014 home values for the Las Vegas metropolitan area reported by
Zillow.com were 22% above prior year levels, while reduced foreclosures
point towards a normalization of the local market for residential
housing. With home values still at half of pre-recession peaks the
district's housing recovery has far to go, but further gains appear
likely given continued above-average population and employment growth in
combination with low inventory levels. Assessed values for 2015 are
projected to increase by 14%.
LIMITED FINANCIAL FLEXIBILITY
The district's weak reserve levels and limited ability to increase
revenues leave it vulnerable to economic downturns, a key credit concern
given the volatile nature of the tourism and gaming sectors. Sales and
gaming-related taxes account for a high share of district funding and
have proven sensitive to declines in consumer spending.
Property taxes generally provide a more stable source of revenues, but
experienced unprecedented declines during the recent downturn, with
district property tax revenues falling by one-third between 2009 and
2013. The district property tax levy for operations is at the maximum
statutory rate and cannot be raised further. As a result, property tax
revenue growth is dependent on recovery of the underlying tax base.
SCHOOL CAPACITY A KEY CHALLENGE
Local voters turned down a 2012 school levy for capital purposes by
large margins, leaving the district with very limited options for
addressing ongoing enrollment growth. Management has estimated the
district's capital requirements at roughly $5 billion for new schools
and modernization/renovation of existing schools. By comparison, the
district expects to collect about $93 million in revenues restricted to
capital in 2014, most of which is earmarked for debt service on prior
In the absence of new capital funding the district has resorted to
year-round scheduling, rezoning school boundaries, and increased use of
portable facilities. Ongoing enrollment growth, however, is equivalent
to approximately four to five new elementary schools per year, creating
a rising backlog of capital needs. Management has no options for
addressing such needs short of a new ballot measure.
MIXED LONG-TERM OBLIGATIONS
Debt ratios are moderate, but debt service accounts for a high 17% of
governmental fund expenditures due to the rapid amortization of
principal. Annual property tax collections for debt service have been
insufficient to fully fund debt service in recent years, requiring the
district to draw down statutory GO debt service reserves. In addition to
such drawdowns the district has recently restructured several series of
outstanding GO bonds to avoid tax rate increases. Fitch views these
efforts as credit neutral given the continued rapid amortization of the
district's outstanding debt.
The district participates in the state's pension system, which is funded
at a reported 69.3% or a Fitch-estimated 62.5% using a 7% rate of
return. Costs are likely to rise in the coming years with increasing
contribution rates to address underfunding. The district's other
post-employment benefit (OPEB) liability stems from a now closed system,
resulting in a modest annual obligation and total liability of $162
million (0.1% of market value) as of July 1, 2012. Carrying costs for
debt service and retiree benefits accounted for a high 29% of
governmental expenditures in 2013.
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, IHS (News - Alert) Global Insight, and Zillow.com.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
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