[January 29, 2015]

Fitch Rates Paradise Valley USD No. 69, AZ's ULTs 'AA'; Outlook Stable

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

--$49 million school improvement bonds, project of 2011, series E (2015);

--$21.3 million refunding bonds, series 2015.

The bonds are scheduled for a negotiated sale the week of February 2nd. Proceeds will be used for various campus improvements, refund certain outstanding maturities, and to pay related costs of issuance.

In addition, Fitch affirms its 'AA' rating on the district's approximately $281.6 million (pre-refunding) 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 financial position remains sound, characterized by solid operating reserves. Stable per pupil state funding levels and renewal of existing operating property tax overrides supports Fitch's expectation of continued financial stability over the near term.

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, moderately paced economic improvement. Fitch believes the long-term prospects of the Phoenix MSA remain favorable.

SAV ENDS SLIDE: Secondary assessed valuation (SAV) as a lagging market indicator turned positive in fiscal 2015 after a multiple-year slide in values. Taxpayer concentration is moderate.

DEBT PROFILE & OTHER LONG-TERM LIABILITIES FAVORABLE: Overall debt levels remain moderate and future capital needs appear manageable. The rapid pace of amortization largely drives the district's moderately high carrying costs.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including material deterioration of the district's solid reserves and strong financial management practices. The district's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability.

CREDIT PROFILE

Located in the northeast portion of the Phoenix MSA, including a portion of Scottsdale (GO bonds rated 'AAA', Stable Outlook by Fitch), this relatively mature district has one of the largest in enrollments in Arizona. Income/wealth metrics and educational attainment levels are well above average; median household income in the district exceeds that of the state and nation by about 20%. Currently estimated at 31,230, average daily membership has remained fairly stable in recent years. Long-term prospects for additional enrollment growth exist in the more affluent, northern portion of the district. Roughly one-third of the district is currently state-owned land, which is largely yet to be developed but planned largely for residential use once it is sold by the state.

STEADILY IMPROVING REGIONAL ECONOMY

The Phoenix MSA continued its recovery from the severe effects of the recession and housing market collapse. Housing data reflects 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 was recently sold for residential development, although this is not projected to result in new homes until fiscal 2017. The MSA recorded solid gains in both employment and labor force in 2014 for the first time post-recession. Unemployment declined slightly to 5.9% in November 2014 from 6.2% the year prior, which was below the state (6.8%) and slightly above the U.S. (5.5%) averages for the same month.

MODERATE, POSITIVE SAV GROWTH IN FISCAL 2015

The district's tax base is largely residential and taxpayer concentration is moderate with the top 10 comprising about 8% of fiscal 2015 SAV. Rising home values as well as ongoing residential and attendant retail/commercial expansion contributed to avery rapid run-up in assessed valuation through 2010, which peaked at $4.8 billion. Collapsing home prices and other recessionary pressures led to a sizeable 42% loss in district SAV over fiscals 2011-2014, a drop that was comparable to other Phoenix area municipalities.

Fiscal 2015 SAV totaled nearly $3 billion, which was up 7.5% from the prior year and slightly stronger than management's prior projection. Management's initial estimates of a 3% gain for fiscal 2016 SAV appears reasonable given new construction underway and the implementation of Proposition 117. The proposition was approved by Arizona voters in November 2012 as a constitutional amendment to minimize some volatility in valuations by limiting annual increases in locally assessed existing property values to 5%, beginning with 2014 real property valuations. Fitch will continue to monitor the evolving impact of Proposition 117 as it reflects a significant change to the property assessment process.

STABLE FINANCES, RESERVES MAINTAINED

District funding is subject to the state's school funding equalization formula, which Fitch notes provides some revenue stability on a per pupil basis, but fairly modest local revenue-raising discretion and financial flexibility. The property tax revenue stream can be bolstered by temporary, voter-approved operating and capital property tax overrides that must be renewed every seven years to provide extra local funding.

Property taxes provide the largest portion of the district's operating revenues (61% in fiscal 2014) while state funding contributes a lower 35%. Historically, the district has maintained all available overrides, which favorably continues to provide the district with added financial flexibility. The district recently renewed its existing operating overrides at full value, which generates about $21 million in additional property tax revenue.

Steady, modest improvement in general revenues since the low point of the state's fiscal crisis has resulted in fairly stable per pupil state aid to the district, albeit at a somewhat reduced level post-recession. Fitch believes current economic trends bode well for further, modest state revenue gains and should result in a continuation of generally stable levels of education funding. The district typically issues tax anticipation notes 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.

The district added a net $1.8 million to reserves in fiscal 2014, bringing the unrestricted general fund balance up slightly to $32.3 million or a solid 17% of spending at year-end. Operating performance was boosted in part by increased state funding for district-sponsored charter schools. Eleven elementary schools in the district were converted to charter status beginning in fiscal 2014 and received additional funding as a result. However, recent legislation disallows district-sponsored charter schools and funding for these campuses will return to regular levels in fiscal 2016.

Modest operational expenditure savings by fiscal 2015 year-end (about 2% of budgeted spending) projected by management should result in a break-even to modestly positive performance and little change in reserves. Fitch believes management's pattern of outperforming budget and other strong financial practices supports this projection, and that actual performance over the fiscal 2016-2019 forecast period likely will exceed current projections of modest annual operating shortfalls.

DEBT BURDEN & OTHER LONG-TERM LIABILITIES MODERATE

The district's debt position is sound. Including this issuance, debt ratios remain moderate with overall debt approximately $3,200 on a per capita basis and 3.4% of market value. Principal amortization is rapid with about 76% of tax-supported debt retired within 10 years.

Capital needs are manageable given currently stable enrollment trends. The district is also well placed to meet its minor capital needs given voter renewal 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 new money portion of this bond issuance is the last piece of a $203 million bond authorization approved by nearly 60% of the voters in November 2011. Management is presently considering its various capital needs for existing schools that may be addressed in a near-term GO bond election.

The district's pension plan, as well as death, disability and health insurance benefits, is through the Arizona State Retirement System (ASRS; a cost-sharing, multiple-employer plan). District contributions equal 100% of the required amounts, which was $15.9 million in fiscal 2014 or about 4.4% of governmental spending. The actuarially funded position for ASRS as of June 30, 2013 was satisfactory at 75.9% using the state's 8% assumed rate of return. However, estimated funding of the state administered program falls to a below average 68% when a more conservative 7% investment return is assumed.

The district also offers post-employment healthcare benefits to retirees. The $17.5 million unfunded accrued actuarial liability at July 1, 2012 was down from the prior year's actuarial valuation due largely to a freezing of the district's reimbursement levels and increasing some employee contributions. The district funds OPEB on a pay-go basis, although the most recent annual contributions (fiscals 2013-2014) have modestly addressed the outstanding liability by overfunding the annual cost by 40%-50%. In addition, the district separately maintains $4.3 million outside of the general fund dedicated for this obligation. Carrying costs for the district (debt service, pension, OPEB) that are driven largely by the rapid pace of amortization were moderate at 20.3% of fiscal 2014 governmental spending.

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

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, and IHS (News - Alert) Global Insight.

Applicable Criteria and Related Research:

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978870

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