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.
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
LOW DEBT BURDEN: The district is an infrequent borrower with a low debt
burden. Pension costs are affordable and well-funded.
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.
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
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
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
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
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 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).
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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