Fitch Rates Douglas Co. School Dist RE1, CO's GOs 'AA+'; Outlook Stable

Fitch Rates Douglas Co. School Dist RE1, CO's GOs 'AA+'; Outlook Stable | Bild: © dpa

--$51.12 million general obligation (GO) refunding bonds, series 2012

The bonds are secured further by the Colorado School Credit Enhancement Program, which is rated 'AA' by Fitch.

In addition, Fitch affirms the following rating:

--$457.4 million in outstanding unlimited tax bonds at 'AA+'.

The Rating Outlook is Stable.

The bonds are scheduled for a negotiated sale on Feb. 15, 2012. Proceeds from the refunding bonds will be used to refund portions of the District's outstanding debt for interest savings.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge of the District.

KEY RATING DRIVERS

STRONG MANAGEMENT TEAM: A new management team has displayed a comprehensive, conservative budgeting approach designed to reduce the District's reliance on periodic voter-approved levy overrides historically obtained to address growth-related financial pressures.

ROBUST TAX BASE: Serving a population of 290,000, the District's tax base is large and diverse. Income levels remain well above average and local unemployment levels compare favorably to state and national averages.

MANAGEABLE ENROLLMENT PRESSURES: Voters' recent rejection of a large bond authorization has not hampered the District's ability to serve its growing enrollment base given a new strategic alliance with charter schools and capacity available throughout existing District schools.

ADEQUATE FINANCIAL RESERVES: The District's financial cushion has improved in each of the last two fiscal years but still remains modest in size relative to the District's considerable operations.

WHAT COULD TRIGGER A RATING ACTION

REDUCTION IN FINANCIAL FLEXIBILITY: Failure to maintain structural balance and available reserves at or above current levels, given the uncertainty of future voter-approved overrides, enrollment trends, and potential state-aid cutbacks, could cause negative rating action.

CREDIT PROFILE

LARGE RECOVERING ECONOMY

Located between Denver and Colorado Springs, the District covers a large and wealthy area that until recently had strong residential, retail, and office development. Mainly coterminous with Douglas County, the District serves a growing population of 290,000 and an enrollment of 63,000. The District continues to benefit from easy access to both the Denver and Colorado Springs labor markets as well as strong academic performance.

Building activity dropped off notably in 2009 and as a result, the District experienced an assessed value (AV) decline of 8.2% in the 2011 appraisal cycle. However, mid-year building permit values in the county indicate 50% growth over prior year results. Fitch views with caution management's expectation for tax base expansion over the near term but notes that downside risk is low at least until the next revaluation occurs in 2013. Enrollment growth has moderated to an average annual rate of 3.7%, easing debt needs.

FISCAL PRESSURES PROVE MANAGEABLE

The District's financial profile is healthy as a result of prudent changes to financial management. Over the last few years, conservative revenue projections and spending cuts have helped the District increase reserves and reduce its dependence on ballot initiatives for budget balance. While voter support for incremental tax increases was historically strong, with four successful referenda since 1989, it appears to be cooling with failed referenda in both 2008 and 2011. As a result of this modified approach, Fitch expects the District to generally sustain the higher level of balance sheet cushion reflected in fiscals 2010 and 2011 than reported in the years prior.

SPENDING CUTS AND CONSERVATIVE BUDGETING RESULT IN SURPLUS

In fiscal 2010, management imposed District-wide budgeting reforms and cut almost $33 million in expenses and planned increases, a meaningful 7% of the year's $453 million in general fund spending. Due to an operating surplus, the District buoyed up general fund reserves to a strong $46 million, or 10.6% of spending.

The District continued austerity measures in fiscal 2011 in light of significant state funding cuts amounting to $26 million; a reduction of per pupil funding of $250 per student. Despite the loss in revenues and the continued enrollment growth, the District recorded a surplus of $20 million achieved primarily through controlling utility expenditures, Federal IDEA American Recovery and Reinvestment Act funds as well as moving from a traditional medical benefit offering to a Health Savings Account plan. The unassigned general fund balance for fiscal 2011 was a healthy $26.8 million or 6.2% of spending.

Approximately three years ago, the Board of Education instituted a policy change which allowed schools and departments to carry over any discretionary monies that were not spent during a given fiscal period. Of the $66 million in general fund reserves at the close of fiscal 2011, approximately $22 million has been appropriated to the 2012 budget as 'carry forward' funds for use by individual schools and departments. These funds may be spent at the local administrator's discretion to mitigate any budget reductions. Management now estimates that at least 80% of these funds will be available to provide additional financial flexibility over the near term which Fitch views positively.

CONTINUED PRESSURE IN FISCAL 2012 AND 2013

Due to the loss of revenue associated with the decline in assessed values and the ongoing state education funding cuts, the fiscal 2012 adopted budget shows a large $11.7 million fund balance drawdown. As a result of these funding pressures, the District's total general fund reserves are projected to decline to about $56.7 million by conservative mid-year estimates, $20.1 million (4.4%) of which is unassigned. Although preliminary estimates for the fiscal 2013 budget show another large budget gap of $18 to $24 million, depending on state legislative action, the District plans to bridge any budget gaps with spending cuts without further use of fund balance.

ADEQUATE FUND BALANCE POLICY

The District operates under a recently revised fund balance policy, increasing the required reserve amount to 7% of revenue from 5%, but allowing the 3% TABOR reserve to be provided through a letter of credit (LOC). The remaining reserves required under the policy consist of 3% cash reserve and a 1% contingency appropriation.

Fitch does not consider the LOC as a sufficient replacement for a balance sheet reserve, and views the policy change, in effect requiring a 4% reserve, a satisfactory but weakened level. Fitch notes that the LOC substitution is explicitly allowed under Colorado law and is done in response to the narrow circumstances under which the District could use the TABOR reserve.

MANAGEABLE DEBT PROFILE

The District's overall debt levels are approaching high, but are balanced by the area's high wealth. Debt amortization is above average, with 63% of principal retiring in 10 years. In November 2011, in addition to rejecting the mill levy override, voters also turned down a $200 million bond authorization designed to add new classrooms, reinvest in existing facilities and provide technology improvements. As a result, the District is reassessing its capital needs and is contemplating its next bond election.

In the meantime, the District can accommodate enrollment growth by turning to four-track year-round schedules at up to 38 schools and also through a strategic alliance with new charter schools within the District. The current offering will refund outstanding debt and generate estimated net present value savings of $1.6 million, equal to 3.1% of refunded bonds.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 Global Insight, Zillow.com, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, and the Trustee.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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