SAN FRANCISCO–(BUSINESS WIRE)–Fitch Ratings has affirmed the following Salt Lake City School District, Utah (the district) bond ratings:
–Issuer Default Rating (IDR) at ‘AAA’;
–$49.4 million general obligation (GO) bonds at ‘AAA’;
–$4.2 million lease revenue bonds (federally taxable – Qualified School Construction Bonds – issuer subsidy) series 2010, issued through the Salt Lake City School District Municipal Building Authority (the authority) at ‘AA+’.
The Rating Outlook is Stable.
The IDR, underlying GO bond ratings, and Rating Outlook reflect the district’s credit quality without consideration of the guaranty provided by the Utah School Bond Default Avoidance Program.
The GO bonds are general obligations of the district payable from an unlimited ad valorem property tax levied on all eligible taxable property within the district boundaries. The lease revenue bonds are payable from the district’s lease rental payments to the authority, subject to annual appropriation.
KEY RATING DRIVERS
The ‘AAA’ IDR and underlying rating on the outstanding GO bonds reflect the district’s solid financial operations, flexible labor environment, and low debt burden. The district’s superior inherent budget flexibility has resulted in exceptionally strong gap-closing capacity. The GO bonds are supported by a growing tax base and, during periods of taxable assessed valuation (AV) decline, protected by automatic tax levy adjustments. The ‘AA+’ lease revenue bond rating reflects appropriation risk.
Economic Resource Base
The district is essentially coterminous with Utah’s largest city, covering approximately 111 square miles and a population of almost 193,000. The district educates over 25,000 students at 39 schools.
Revenue Framework: ‘aaa’ factor assessment
Solid general fund revenue growth will likely continue above inflation but slightly lower than the nation. This reflects both largely stable student enrollment and increased state funding support. The district’s independent legal ability to raise revenues is high, which is unusual for a U.S. school district.
Expenditure Framework: ‘aa’ factor assessment
Spending growth will likely remain in line with, to marginally above, anticipated revenue growth. The district enjoys solid expenditure flexibility and a very productive labor environment.
Long-Term Liability Burden: ‘aaa’ factor assessment
The district’s combined debt and unfunded pension liability is low relative to its resource base. Direct debt amortizes very rapidly, and no new direct debt is planned.
Operating Performance: ‘aaa’ factor assessment
The district has exceptionally strong gap-closing capacity, which will ensure financial resilience during economic downturns.
Solid Financial Operations: Fitch expects the district will continue to exercise sound budget management. Continued balanced operations and sufficient reserve levels through the economic cycle would enable the district to maintain a ‘AAA’ IDR.
The district is located at the economic center of the large and resilient Wasatch Front economy that supports almost 1.2 million people. While the district’s wealth indicators are somewhat mixed, likely reflecting the demographics of the state’s most urbanized central city population, the unemployment rate is extremely low (2.9% in October 2016). The district’s tax base was hurt by the national housing downturn and experienced a 15% taxable assessed valuation (AV) decline. However, taxable AV has more the rebounded by 19% over fiscal years 2013-2016. The district anticipates ongoing taxable AV increases given ongoing development and existing properties’ strengthening valuations. The tax base remains diverse with the top 10 property taxpayers accounting for approximately 13% of fiscal 2016 taxable AV and representing a variety of employment sectors. The two largest employers, the Church of the Latter Day Saints and the utility PacifiCorp, are both permanent local fixtures.
The district’s funding comes from a combination of property taxes imposed by the school board, state-imposed personal income taxes and corporate franchise taxes, and federal sources. In fiscal 2016, local revenues accounted for almost 50% of general fund revenues and state sources almost 42%, with the balance coming from federal sources. The weighted pupil unit (WPU) is the statutory allocation methodology for equalized school funding across the state. It increased by 4% in fiscal 2016 and 3% in fiscal 2017.
Fitch expects that solid general fund revenue growth will likely continue in line with, or above, inflation. The district’s 10-year revenue growth has exceeded inflation because of largely stable student enrollment and improved state funding. The district expects student enrollment to remain stable in the future.
The district has a high independent legal ability to raise revenues. It could raise considerably more revenues per year, subject to the truth-in-taxation public hearing process, under its board and capital local tax levies. Such increases would not result in a reduction of state funding. The district could also reduce its capital levy and commensurately increase its operations and maintenance levy to direct more tax revenues to the general fund. As outstanding debt rolls off, the district intends to reduce its debt service levy and commensurately increase its capital levy in the future. Shifting the tax levy from debt to capital will help the district to cash fund upcoming capital projects.
The majority of spending is on instruction costs (approximately 67% of fiscal 2016 general fund spending) and facilities operating costs (approximately 11%). The district’s fiscal 2017 general fund budget absorbed almost $4 million in increased employee remuneration and benefit costs (approximately 2% of budgeted spending).
Based on the district’s patterns of revenue and spending, Fitch expects the district’s future general fund expenditures to be in line with, to marginally above, general fund revenue growth. The district’s carrying costs related to debt repayment and pension contributions are moderate relative to the district’s resource base, leaving solid expenditure flexibility.
If the district needed to reduce expenditures, district officials advise that they would first look at cutting the costs of supplies, equipment replacement, and non-contract employees. If necessary, they could also consider increasing class sizes and reducing the teacher distribution ratio. The district’s labor relations have traditionally been productive. Although the district’s teacher contracts are typically for five years, salaries and benefits are subject to annual negotiation.
Long-Term Liability Burden
The district’s overall debt and pension liability is low at approximately 5% of personal income and less than 2% of taxable AV. Only 22% of overall bonded indebtedness is direct debt, which almost completely amortizes within 10 years. The district has no plans to issue additional debt in the short to medium term.
The district participates in the state retirement pension system and makes its actuarially determined contributions. Using Fitch’s 7% discount rate, which is more conservative than the state retirement pension system’s 7.5% discount rate, the district’s pension liabilities are approximately 81% funded in fiscal 2016. The district’s employer contributions have now stabilized after some years of increases to offset recessionary investment losses. Other post-employment benefits are limited to employees retiring under an early retirement incentive program (fiscal 2016 liability of just over $3 million).
The district has exceptionally strong gap-closing capacity. Since fiscal 2009, the district has maintained surplus operations with the exception of two years of proportionately very small net operating deficits after transfers. Consequently, the district’s unrestricted general fund balance remains well in excess of Fitch’s ‘aaa’ reserve safety margin for the district of 4.9%. Given moderately low revenue volatility and superior inherent budget flexibility, the district should maintain a ‘aaa’ reserve safety margin even during any periods of economic stress.
The district ended fiscal 2016 with a net operating surplus of almost $4 million, increasing its unrestricted general fund balance to over $48 million (25% of spending). The district is budgeting a large net operating deficit after transfers in fiscal 2017 of almost $6 million, followed by significant deficits in each of the following three years, in large part because of state budgetary requirements. The district has to budget use of the unassigned general fund budget (over $11 million at fiscal 2016 year-end). Typically the district significantly outperforms its conservative budgets, and its general fund balances are expected to remain very strong.
In addition to strong general fund liquidity, the district could borrow up to $24 million from its internal service and non-major governmental funds. The district has been building up its capital fund balance to cash-fund construction of three elementary school renovation projections and a district office replacement project over the next five years.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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