|[March 11, 2014]
Fitch Rates Denver School District No. 1, CO GOs 'AA+'; Outlook Stable
AUSTIN, Texas --(Business Wire)--
Fitch Ratings assigns an 'AA+' rating to the following Denver School
District No. 1, CO bonds:
--$21.4 million general obligation (GO) bonds, series 2014A;
The bonds are scheduled to price via negotiation during the week of
March 17. Bond proceeds will be used for various school improvements.
In addition, Fitch affirms its rating on the following outstanding GO
bonds and certificates of participation (COPs):
--$1.36 billion GO bonds at 'AA+';
--$1.03 billion COPs at 'AA'.
The Rating Outlook for the GO bonds and COPs is Stable.
The GO bonds are payable from an annual unlimited property tax levy. The
COPs are secured by 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. Solid job gains
in recent years suggest local economic conditions are improving after
the recessionary decline.
CONSERVATIVE BUDGETING; STABILIZED FINANCES: The district's financial
performance has improved despite state aid cuts and assessed value (AV)
declines, aided by the district's practice to budget contingency
reserves and voters' consistent support for revenue enhancements.
GROWTH PRESSURES REMAIN: Enrollment growth pressures will persist,
requiring continued attention to additional cost efficiencies amidst new
school openings and expansions.
GROWING DEBT SHOULD REMAIN AFFORDABLE: Overall debt levels are moderate
to high, due in part to the district's large voter-approved bond
programs and its use of certificates of participation (COPs) to fund
pensions. Fitch expects carrying costs for long term liabilities to
remain affordable despite 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
FAVORABLE OPEB FUNDING: The district's other post-employment benefit
(OPEB) obligations have been funded on an actuarial basis since 2005,
well ahead of most school districts and municipalities.
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental
credit characteristics including conservative budgeting and maintenance
of a solid financial cushion in light of growth related debt needs and
rising carrying costs. The Stable Outlook reflects Fitch's expectation
that such shifts are unlikely.
FAVORABLE LONG-TERM ECONOMIC PROSPECTS
Coterminous with the city and county of Denver (unlimited tax GOs rated
'AAA' by Fitch), the district's economic diversity benefits from its
role as the hub of a 10-county MSA and the capital of Colorado. After
posting recessionary job losses in 2009-2010, the district has averaged
2.2% employment gains annually through 2013. Coupled with modest labor
force gains, the unemployment rate has declined annually and averaged
7.1% in 2013, modestly above the state (6.8%) and below the nation
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 80,526 in fiscal 2014, the
district's FPC has grown by a compound annual average of 2.8% over the
last five years. Charter school enrollment represents 15% 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 AV declined 8.6% in fiscal 2012 after growing
by a robust comound annual average rate of almost 8% 2006-2011. AV
declined only modestly in fiscal 2013 and then increased by 4.7% in
fiscal 2014. 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 will generate additional property tax revenue as
AV grows. The district may consider asking for voter authorization in
2016 to permanently set existing overrides at their current mill rates,
improving prospects for future revenue growth in an expanding AV
HIGH COMMUNITY SUPPORT; ELEVATED OVERALL DEBT LEVELS
The current offering will exhaust 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 $7,285 per capita and 5.8% of
full value, including $1.03 billion in outstanding COPs.
The district's GO principal pay-out rate is slightly below 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 financial profile has improved post-recession, as shown
by large operating surpluses in fiscal years 2010 and 2011 that were
aided by substantial unused contingency appropriations. The district
posted a planned drawdown of $14.8 million (2.3% of spending) in fiscal
2012, the result of additional targeted instructional spending and
transfers to the capital reserve.
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). Due to continued cost controls and greater than budgeted
FPC, management now projects a smaller draw-down of $12 million - $15
million. Assuming the worst case scenario of a $15 million (2% of
spending) operating deficit after transfers, the district's unrestricted
fund balance would decline to a still adequate 9.8% of spending.
Inclusive of the 3% emergency reserve, the total financial cushion rises
to 12.6% of spending. Fitch notes that management typically outperforms
its interim financial projections.
The district foresees continued operating pressure and projects
additional, albeit declining, fund balance draw-downs through fiscal
2016. Potential mitigating factors include additional state aid that's
being proposed in the governor's budget which could benefit the
district's resources by as much as $20 million (roughly 3% of revenues)
in fiscal 2015. Fitch assumes no increases in the district's state aid
and expects management to minimize any structural imbalances through
ongoing gains in cost efficiencies.
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 a solid level.
PENSION ADEQUATELY FUNDED / OPEB PROVIDED THROUGH 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. As of Dec. 31, 2012, DPSRS'
Fitch-adjusted funded ratio was adequate at 75.6%.
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 13% 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
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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