[July 14, 2014]

Fitch Affirms Cave Creek USD No. 93 (AZ) GOs at 'AA'; Outlook Stable

Fitch Ratings takes the following rating action on the Cave Creek Unified School District (USD) No. 93, Arizona (the district) bonds:

--$13.8 million school improvement bonds affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligation (GO) bonds of the district, secured by an unlimited ad valorem tax pledge.

KEY RATING DRIVERS

TAX BASE RECOVERY: The recessionary decline in the area's construction and housing markets led to a sharp drop in the tax base post-recession, reflecting a two-year lag in actual economic performance. Consistent with management's prior expectation, recovery will occur in fiscal 2015.

FINANCIALLY SOUND; CHALLENGES REMAIN: The expiration of two tax overrides and losses in secondary assessed value (SAV) have pressured the district's financial operations in recent years, causing the district to implement cost saving measures. The successful transition of four of the district's five elementary schools into charter status provides additional revenues that also help to mitigate these losses.

WEALTHY, TAX AVERSE DISTRICT: Measures of income and wealth trend higher than county, state and national averages. However, these favorable metrics are offset to a large degree as the district's population has rejected budget override proposals in recent years to maintain lower tax levies.

LOW DEBT BURDEN: The district is an infrequent borrower with a low debt burden. Pension costs are affordable and well-funded.

RATING SENSITIVITIES

SOUND FINANCES: The rating is sensitive to the maintenance of sound finances, and weakening of reserves below the modest amounts Arizona school districts are typically permitted to maintain would not be consistent with the current rating level.

CREDIT PROFILE

RESIDENTIAL PHOENIX-METROPOLITAN DISTRICT

The district is in northeastern Maricopa County, serving the cities of Carefree, Cave Creek and Scottsdale (rated 'AAA' by Fitch with a Stable Outlook) and within close proximity to Phoenix, the largest population center in the state. Population in the district increased almost 60% between 2000 and the 2010 census to more than 56,000 and continues to grow at a more modest rate. Enrollment declined incrementally from 2010-2013, yet current projections predict a bottoming out has occurred and the district will experience flat or modest growth in enrollment going forward.

The recession and subsequent collapse of the regional housing market impacted the largely residential district with a cumulative decline in SAV of 45% from its peak in 2010. Recovery in SAV will occur in fiscal 2015 with an uptick of 6.7%. The district is wealthy as measured by a market value per capita of $277,000 (fiscal 2015) and above average measures of income.

ADDITIONAL REVENUE FROM CHARTER SCHOOL STATUS

The citizenry has displayed an aversion to increasing local taxes in support of education, as most recently evidenced in November 2011 with rejection (by 55%) of the district's request for an override levy, and after several consecutive years of failures. As a result of the failed override elections, the district's tax revenues were reduced by $1 million per year beginning in fiscal 2013, with a total cumulative $3 million loss by fiscal 2015.

To manage the lost revenue from the expiration of the overrides, the district converted four elementary schools into charter schoos, of which the full benefit was realized beginning fiscal 2014. The state of Arizona excludes local tax levies in the equalization formula applied to charter schools, thus providing the district with a funding source previously not available to district schools. Due to the change to charter school status, the district collected an additional $560 in revenue on a per pupil basis in fiscal 2014, partially offsetting the expiration of the budget overrides that together provided the district with $675 per student. Subsequent to the school conversations the state legislature passed a law restricting such actions, but this will not impact the district whose conversions were already complete by the time the legislation was passed.

The district's fiscal 2013 revenue remained fairly flat after declining 5.1% and 13.0% in fiscal years 2011 and 2012, respectively, primarily due to lower property tax revenues. To address the shortfalls management has reduced expenditures through staffing cuts, energy savings, and contract management savings, among other measures. Management estimated a $2.2 million unrestricted general fund balance at 2014 fiscal year-end, or 7% of the expenditure budget, based on about a $1 million draw on reserves and marking the fourth consecutive year of fund balance draws. Further deterioration of the district's financial profile would be inconsistent with the rating category, yet Fitch's expectation is that some of the budgetary pressures will be released in fiscal 2015. The recently adopted expenditure budget is flat for fiscal 2015, and while districts in the state do not prepare revenue budgets, revenues are likely to increase due to the increase in SAV for the current fiscal year.

LOW DEBT BURDEN

The district's annual debt service accounts for 6% of general fund expenditures. Debt per capita is moderate at $2,543 and a low 0.95% of market value. Amortization is rapid with 86% retired in 10 years. Management plans to go to voters with a bond election in Nov. 2014 to re-purpose $10 million in already issued bonds (funds were never used), and for an additional $30 million in new money issuance. Funds will be used for a variety of projects, including facility renovation, roof replacement, HVAC, enhanced security, new bus fleet, and minor new construction at existing sites. In the case that the bond election passes, the debt profile of the district will not be significantly altered.

The district participates in a state-sponsored, cost-sharing, multiple-employer pension program. The state program's funding level at fiscal 2013 year-end was satisfactory at 75.8% but weaker at 67.8% based on a more conservative 7% investment rate. The state establishes statutorily required contribution levels, and the district's contributions equal the required amounts at a moderate 5.2% of general fund spending in fiscal 2013. District costs related to other post-employment benefits are manageable and limited to a subsidy for health insurance.

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 the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported 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=839437

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