Fitch Ratings has assigned an 'AAA' rating to the following Nebo School
District, Utah (the district) bonds:
--$15 million general obligation (GO) bonds, series 2014B.
The 'AAA' rating is based on the state's full faith and credit guarantee
provided as credit enhancement to the district's GO bonds under the Utah
School Bond Default Avoidance Program (rated 'AAA' by Fitch).
In addition, Fitch assigns an underlying rating of 'AA' to the bonds,
reflecting the district's credit quality without consideration of the
guarantee provided by the Utah School Bond Default Avoidance Program.
The bonds are expected to sell via competitive sale on March 12, 2014.
The proceeds will fund school building construction. The 2014B bonds
mature serially, July 1, 2014-2028, and are subject to optional and
mandatory sinking fund redemption prior to maturity.
Fitch also affirms the following ratings on all of the district's GO
bond debt ($229.2 million outstanding par):
--'AA' underlying rating.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem property tax pledge.
Debt repayment also is guaranteed by the full faith and credit and
unlimited ad valorem taxing power of the state of Utah under the
provision of the Utah School Bond Default Avoidance Program.
KEY RATING DRIVERS
SIGNIFICANT RATING ENHANCEMENT: The Utah School Bond Default Avoidance
Program provides valuable credit enhancement to the district's GO bonds
as it is based on the state's full faith and credit guarantee.
BALANCED FINANCIAL OPERATIONS FORECAST: Despite some structural
imbalance in fiscal years 2010-2014, general fund balances and liquidity
remain solid. The district expects to resume structurally balanced
operations in fiscal 2015.
AFFORDABLE DEBT PROFILE: The district benefits from a moderately low
debt burden, rapid amortization, absorbable future debt issuance plans,
a closed OPEB system, and manageable overall carrying costs, although
pension costs are likely to rise.
SUPPORTIVE ECONOMY AND TAX BASE: Although its economy is somewhat
limited, the district enjoys population growth, regional employment
growth, largely above-average socio-economic characteristics, and a
stabilizing tax base with good residential and commercial development
COHESIVE MANAGEMENT AND ADMINISTRATION: The district's largely
conservative financial management approach is directed by a financially
astute school board, managed by tenured administrators, and supported by
a collegial labor environment.
STABLE CREDIT CHARACTERISTICS: The underlying rating is sensitive to
shifts in fundamental credit characteristics, particularly related to
the general fund's structural balance going forward. The enhanced rating
would shift in line with any change to state bond ratings. The Stable
Outlook reflects Fitch's expectation that such shifts are unlikely.
The 1,300 square mile district is located in the southern half of Utah
County, approximately 53 miles south of Salt Lake City. A population of
approximately 125,000 is scattered across 18 different communities, the
largest being Spanish Fork, Springville, and Payson. The district
educates approximately 31,250 students at 40 schools.
The district has maintained high general fund balances and good
liquidity during the recent recession. Fiscal 2013 ended with an
unrestricted general fund balance of $29.4 million or 17.2% of spending,
up from $28 million or 16.9% of spending a year prior.
The district's strong general fund position is in spite of some
structural imbalance since fiscal 2010. That year, the district's $2.4
million imbalance was caused by insufficient expenditure reduction in
response to revenue declines and had to be partially solved by using
reserves. Further structural imbalances of $4 million and $3 million in
fiscal years 2011 and 2012 respectively were more than offset by the
state-permitted use of capital funding fr operations.
When this state-permitted funding flexibility ceased being available,
the district reduced its structural deficit to $700,000 in fiscal 2013.
At the time of Fitch's review last year, the district had expected to
eliminate it altogether in fiscal 2014. Now, the district is
anticipating a net operating deficit after transfers of approximately
$2.7 million which would draw the total general fund balance down to a
still strong $27.2 million (14.9% of spending). The district expects to
hold its total general fund balance at that level in fiscal 2015.
The reasons for this projected fiscal 2014 draw down largely are due to
costs associated with a new school facility opening. At the 2004 and
2009 bond elections, voters authorized permanent operations and
maintenance levy leeway increases designed to cover additional
maintenance and operating costs. The projected fiscal 2014 net operating
deficit after transfers draws down on some of those accumulated levy
leeway dollars. Further drawdowns are expected in the medium term as
fixtures, furniture, and equipment are needed for future new school
The district continues to benefit from growing student enrollment which
increased 25.6% between fiscal years 2005-2014. Student enrollment is
projected to continue growing 1.3%-2.6% per year through fiscal 2024.
Although the district's TAV declined during the recession, Utah property
tax rates automatically adjust to compensate. Therefore, the district
largely is insulated from property tax revenue declines but typically
will not benefit from future TAV growth except from new development.
AFFORDABLE DEBT PROFILE
Despite annual bond issuances, the district's overall debt burden is a
moderately low $1,952 per capita or 2.8% of market valuation. Principal
debt amortization is a rapid 75% in 10 years. Given student enrollment
growth projections, the district expects to continue issuing a moderate
amount of GO debt annually. There is no exposure to capital appreciation
bonds, variable rate debt, or swaps.
Each year, the district makes its full actuarially required
contributions (ARC) to the well-funded state retirement system and
benefits from a closed other post-employment benefits (OPEB) plan. While
pension contributions are projected to increase, OPEB liabilities will
decrease in the medium to long-term. In the meantime, the district has
assigned $7 million of its fiscal 2013 general fund balance for OPEB
obligations in case its annual pay-as-you-go approach needs additional
In fiscal 2013, debt service, pension ARC, and OPEB pay-as-you-go
payments cumulatively represented a manageable 19% of total governmental
SUPPORTIVE ECONOMY AND TAX BASE
The district continues to experience steady population growth and
benefits from largely above-average socioeconomic characteristics, with
the exception of below average per capita money income. This is likely
attributable to larger family sizes. The regional economy contains
significant employers in the education, health care, and government
sectors, as well as retail and manufacturing. In fiscal 2013, employment
growth exceeded labor force growth contributing to a very low county
unemployment rate of 3.4% in November 2013.
The district's TAV declined 11% in fiscal years 2010-2013 after a 10.2%
increase in fiscal 2009. However, the district is expecting an
approximately 2% increase in fiscal 2014, indicating the tax base has
now stabilized. The district is conservatively projecting 2% annual
increases thereafter. Residential construction continued throughout the
recession, albeit at a much slower pace, and there is some big box store
COHESIVE MANAGEMENT AND ADMINISTRATION
The district is directed by a school board that includes financial
professionals, managed by experienced administrators, and supported by
labor associations which receive regular budget briefings from the
superintendent. The district consistently budgets conservatively and
holds regular financial management discussions between the school board
and administrators. Labor agreements are flexible, with clauses
permitting changes if necessary and no headcount specifications.
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 Global Insight, and 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).
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
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