OREANDA-NEWS. Fitch Ratings affirms the 'AAA' rating on the following Arizona School Facilities Board bonds:

--\$24.42 million state school improvement revenue refunding bonds, series 2005;
--\$315.37 million taxable state school improvement revenue refunding bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from and have a first lien on the 0.6% voter-authorized addition to the state-wide transaction privilege and use (sales) tax.

KEY RATING DRIVERS

BROAD BASED REVENUE STREAM: The broad-based sales tax securing the bonds was voter-approved and can only be used for education-related purposes, with debt service representing a closed first lien on the tax proceeds.

AMPLE DEBT SERVICE COVERAGE: Debt service coverage is very strong and has rebounded from recession-related declines. Revenues have resumed growth with economic recovery; although they are still below the pre-recession peak.

NO FURTHER LEVERAGING: No additional borrowing is permitted under the indenture. The state has issued the full \$800 million authorized.

LIMITS ON CHANGES TO TAX BASE: Although the state retains the ability to make changes to the tax base, the state constitution restricts the ability of the legislature to amend voter-approved measures and limits the ability to divert funds allocated to a specific voted measure.

RATING SENSITIVITIES

The rating is sensitive to changes in the revenues stream that negatively affect expectations for debt service coverage.

CREDIT PROFILE

The 'AAA' rating reflects the ample coverage provided by the voter-approved, broad-based sales tax, dedicated to education purposes. The bonds have a closed first lien on the revenues derived from a 0.6% tax levied from 2001 through 2021 on certain categories of business activities already subject to the transaction privilege (sales) tax.

BROAD BASED REVENUE STREAM
The sales tax is the single largest source of state revenues and is levied across a broad range of state economic activity. The 0.6% allocation to this program is levied on a slightly smaller base than the general sales tax, excluding in particular the hotel/motel sector. After several years of strong growth that reflected the strong Arizona economy at the beginning of the last decade, pledged revenues dropped 3.1% in fiscal 2008, 13.5% in fiscal 2009, and another 9.8% in fiscal 2010. Growth has resumed with recovery in the economy with pledged revenues increasing 2% in FY 2011, 5.5% in fiscal 2012, 4.7% in fiscal 2013 and 6% in fiscal 2014. Debt service coverage remains strong, with maximum annual debt service of \$64 million covered 9.4 times (x) by fiscal 2014 collections.

NO ADDITIONAL LEVERAGING PERMITTED
The bonds are special obligations of the Board, which was created in 1998 to provide a capital financing system for schools in response to a state Supreme Court finding that the state's prior financing system was unconstitutional. The school improvement bonds were intended to correct existing school facility deficiencies, and the debt authorization has been fully issued.