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Fitch Affirms Granite School District, UT's GOs at 'AAA'; Outlook Stable
[May 18, 2015]

Fitch Affirms Granite School District, UT's GOs at 'AAA'; Outlook Stable


Fitch Ratings has affirmed the following Granite School District, Utah (the district) general obligation (GO) school building bond ratings:

--$189.7 million series 2010, 2011, 2012, and 2013 at 'AAA'.

This 'AAA' underlying rating reflects the district's credit quality without consideration of the 'AAA'-rated guaranty on the GO bonds provided by the Utah School Bond Default Avoidance Program.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax.

KEY RATING DRIVERS

STRONG AND STABLE SCHOOL DISTRICT: The district benefits from a strong and stable administration, generally conservative financial management, a preference for pay-as-you-go capital financing, good management/labor relations, and positive community support.

FAVORABLE LOCATION: The district is centrally located within the Salt Lake metropolitan statistical area (MSA) which is Utah's economic hub and, therefore, is well placed to benefit from Utah's economic expansion and diversification. The recovering tax base and extremely low unemployment rate offset somewhat below-average socioeconomic characteristics.

STRONG GENERAL FUND BALANCES AND LIQUIDITY: The district continues to maintain strong general fund balances and reserves despite net operating deficits after transfers in fiscals 2012-2015. The district does not anticipate such deficits persisting into fiscal 2016 and beyond, particularly given improved state funding for education and the district's cessation of pilot-project funding.

MANAGEABLE DEBT PROFILE: The district's debt burden is very low and its own retirement plan and post-employment health benefit obligations are fully funded, as are its annually required contributions to the less well-funded state pension system.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and maintenance of structural balance. The Stable Outlook reflects Fitch's expectation that such shifts in financial management practices are unlikely and that the current net operating deficits after transfers will not persist into fiscal 2016 or beyond. Fitch views positively the district Board of Education's renewed focus on ensuring structural balance going forward.

CREDIT PROFILE

The district covers 257 square miles in the northern half of Salt Lake County. It is Utah's third largest school district based on student population (approximately 67,700) and operates 87 elementary, junior high, and high schools, as well as several special schools and educational centers. The district has issued four series of bonds under a $256 million authorization approved by approximately 58% of voters in November 2009 for new school construction and renovation of existing properties. The district has no current plans to issue the final $25 million under that authorization.

STRONG, STABLE, WELL-LOCATED SCHOOL DISTRICT

The district has a well-established, financially conservative management team which has cultivated strong working relationships with its elected Board of Education, its labor bargaining units, and communities within the district boundaries.

The district is centrally located within the Salt Lake MSA, which is Utah's economic hub. The MSA is currently benefitting from a very low unemployment rate of 3.7% (February 2015), in line with the state (3.9%). However, when compared to the nation, the district's socio-economic characteristics and educational attainment levels tend to be below average, likely reflecting the state's mostly urbanized population. One exception is median household income which is slightly better than the national average.

After a period of strong assessed value (AV) growth in the district, there was a cumulative 20.1% AV decline in fiscals 2010-2013. However, in line with state law, the district's property tax rate adjusted automatically to offset such declines and maintain property tax revenues at prior year levels. Positively, te district experienced a 1.6% AV increase in fiscal 2014 and is projecting a 4.2% increase in fiscal 2015, with further increases projected from fiscal 2016 onwards.



FINANCIAL OPERATIONS REMAIN STRONG DESPITE RECENT OPERATING DEFICITS

The district maintained strong general fund balances throughout the recent recession and continues to do so, ending fiscal 2014 with a solid unrestricted general fund balance of $89 million (20.2% of spending). This unrestricted general fund balance included $40 million committed for full funding of employee retirement plan obligations plus $1.4 million assigned to employee benefit stabilization.


Nevertheless, the fiscal 2014 unrestricted general fund balance was approximately $14.7 million less than the fiscal 2011 unrestricted general fund balance of $103.7 million (26% of spending) due to three years of net operating deficits after transfers. Over a third of this cumulative deficit was the result of planned general fund balance drawdowns to fund one-time priority educational initiatives supported by the administration. More than a third of the cumulative deficit was caused by unexpected state funding adjustments implemented late in fiscals 2012 and 2013. The remainder was caused by structural imbalance, most notably in fiscal 2014 due to personnel cost increases.

A fourth year of net operating deficit after transfers is projected for fiscal 2015. The projected deficit of $3.6 million is being caused by the state's decision to reallocate some property tax guarantee revenues. However, Fitch notes that the district's superintendent and the Board of Education have ceased funding one-time priority educational initiatives in fiscal 2015. Instead, they have absorbed successful pilot programs into the district's baseline budget and discontinued unsuccessful ones.

The district expects to return to balanced general fund operations in fiscal 2016 based on the state legislature's decisions to raise per pupil funding and property tax rates for education funding. The district expects these additional revenues to offset any expenditure cost increases that year. Going forward, the district also has general fund tax-levy headroom which would provide significant revenue flexibility (it could generate up to $15 million more annually if needed). Additionally, the district has some expenditure flexibility related to its current staffing levels and programs, strong general fund liquidity, and the ability to borrow from its capital projects and self-insurance funds in a general fund emergency.

MANAGEABLE DEBT PROFILE

The district maintains a conservative approach to debt, relying largely on pay-as-you-go funding of its capital needs. However, in 2009 it received voter authorization for up to $256 million in GO bond debt in order to fund expensive individual capital projects which could not be easily absorbed on a pay-as-you-go basis over a short period of time. To date the district has issued all but $25 million of that authorization with no current plans to issue the remainder.

Overall net debt remains low at $744 per capita, or 0.9% of AV. Debt amortization is average at approximately 53% in 10 years.

The district makes 100% of its annually required contributions to the Utah retirement systems as well as making a variety of early retirement stipend, district retirement stipend, and long-term disability award payments (a cumulative $50.8 million in fiscal 2014). A portion of the district's committed general fund balance covers those stipends' and awards' full $40 million actuarial accrued liability. Further, the district sets aside a $1.4 million stabilization amount to cover liabilities arising from any pension system actuarial assumption changes or miscalculations.

In fiscal 2014, the district's total carrying costs for debt service, actuarially required pension contributions, and other post-employment benefits were a manageable 13.1% of total governmental spending.

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 (News - Alert) Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--.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=984862

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.


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