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Fitch Rates Denver School District No. 1, CO GOs 'AA+'; Outlook StableAUSTIN, Texas --(Business Wire)-- Fitch Ratings assigns an 'AA+' rating to the following Denver School District No. 1, CO bonds: --$149.2 million general obligation (GO) refunding bonds, series 2014B. The bonds are scheduled to price via negotiation as early as the week of Nov. 3. Bond proceeds will be used to refund outstanding debt for interest cost savings. In addition, Fitch affirms the following outstanding GO bonds and certificates of participation (COPs): --$1.41 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 carry a pledge of the district's unlimited property tax levy. The COPs are payable from 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. Steady annual gains in jobs, personal income, and home values point to stable economic conditions. GROWTH PRESSURES REMAIN: Unrestored state aid cuts continue to pressure the district's budget although revenue enhancements are expected to help keep operating reserves adequate. Expenditure flexibility is a key consideration. Enrollment growth pressures are easing slightly but persist, requiring continued attention to additional cost efficiencies amidst new school openings and expansions. GROWING DEBT SHOULD REMAIN AFFORDABLE: Overall debt levels are high, due in part to the district's large voter-approved bond programs and its use of COPs to fund pensions. Fitch expects carrying costs for long-term liabilities to remain affordable on the budget, partly due to 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 OPEB obligations have been funded on an actuarial basis since 2005, well ahead of most school districts and municipalities. RATING SENSITIVITIES ADEQUATE CUSHION: Fitch expects reserves to reach a lower but steady state over the near term as the district completes its planned build-up and spend-down to fund short-term costs. The rating is sensitive to maintenance of a solid financial cushion in light of unrestored state aid cuts, growth related debt needs and rising carrying costs. CREDIT PROFILE FAVORABLE LONG-TERM ECONOMIC PROSPECTS The district is coterminous with the city and county of Denver (unlimited tax GOs rated 'AAA' by Fitch), a diverse economic hub of a 10-county MSA and the capital of Colorado. After posting recessionary job losses in 2009-2010, the district has averaged 2.3% employment gains annually through 2013. Coupled with modest labor force gains, the unemployment rate has declined annually and averaged 5.1% in August 2014, modestly above the state (4.8%) and below the nation (6.3%). 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 82,450 in fiscal 2015, the district's FPC has grown by a compound annual average of 2.7% over the last five years. Charter school enrollment represents nearly 20% 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 assessed value (AV) declined 8.6% in fiscal 2012 after growing by a robust compound annual average rate of almost 8% 2006-2011. AV declined only modestly in fiscal 2013 and then increased by 4.7% and 1.5% in fiscal 2014 and 2015, respetively. 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 has both upside and downside revenue potential as AV fluctuates. HIGH COMMUNITY SUPPORT; ELEVATED OVERALL DEBT LEVELS The district has exhausted 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 $7,173 per capita and 5.7% of full value, including $1.03 billion in outstanding COPs. The district's GO principal pay-out rate is about 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 general fund, which comprises an operating fund, a preschool fund, various O&M levy override funds, and a general projects fund, accumulated solid balances post-recession through prudent budgeting despite state aid cuts and AV declines. The accumulation of such reserves is intended to fund short-term costs for both operations and one-time expenditures for curriculum adoption and assumes state aid cuts will not be restored. Fitch expects reserves to reach a lower but steady state by fiscal 2016. Upon the spend-down of accumulated reserves, the maintenance of a solid financial cushion will be key as the district faces growth-related debt needs and rising carrying costs. 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) and reflects the board's multi-year plan to use accumulated reserves as an alternative to changing class sizes via layoffs and furloughs. As a result of continued cost controls and greater than budgeted FPC, management now projects a modestly smaller draw-down of $18 million despite a budget amendment for $2 million for curriculum adoption in anticipation of new common core standards. The resulting fund balance cushion, including the 3% emergency reserve, is estimated at approximately $91 million or a still adequate 11.9% of spending. The district foresees continued operating pressure and projects additional, albeit declining, fund balance draw-downs through fiscal 2016 due to state aid appropriations that remain below formula. State aid for the district is $94 million (a large 12% of fiscal 2015 general fund spending) below the amount prescribed by the funding formula. The adopted fiscal 2015 budget includes a draw-down of $16 million (2% of spending), half of which is due to $8 million in one-time expenditures for curriculum adoption. In this worst-case scenario, the projected reduced financial cushion totals a still adequate 9.6% of spending but is likely to be higher due to $19 million in appropriated site-based reserves (20%-30% of which are typically not expended). Fitch notes that management typically outperforms its financial projections. Management further projects a smaller $8 million use of fund balance in fiscal 2016 attributed entirely to curriculum adoption. 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 an adequate level. PENSION ADEQUATELY FUNDED / OPEB PROVIDED VIA (News - Alert) 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. The district has $939 million in outstanding COPs that were issued to fund its unfunded actuarially accrued liability (UAAL). As of Dec. 31, 2013, DPSRS' funded ratio totaled 81.2% with a UAAL equal to $710 million (a modest 0.9% of market value). The Fitch-adjusted funded ratio, based on a 7% rate of return, totaled a still adequate 77%. 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 14.6% 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 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=912114 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. |
