OREANDA-NEWS. August 18, 2015.  Fitch Ratings has assigned an 'AA-' rating to the Pendergast Elementary School District No. 92 of Maricopa County (Pendergast ESD), Arizona's \\$8.51 million school improvement bonds, project of 2012, series D (2015).

The bonds are scheduled for a negotiated sale the week of Aug. 24. Proceeds will finance various school improvements in the district.

In addition, Fitch affirms the following ratings at 'AA-':

--\\$3.3 million school improvement bonds, project of 2012, series A (2013);
--\\$11.5 million school improvement bonds, project of 2012, series B (2013);
--\\$6.9 million school improvement bonds, project of 2012, series C (2014).

The Rating Outlook is Stable.

SECURITY
The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the district.

KEY RATING DRIVERS

BUDGETARY BALANCE; SOUND FINANCES: Fitch expects the district's reserves to remain stable, approximating the modest statutory carryover limit. Budgetary balance would be dependent on the district's implementation of service reductions if voters do not continue to approve taxes to partially offset the impact of state funding declines.

LOCAL ECONOMIC GROWTH: A trend of tax base growth reflects economic expansion and recovery of the residential market after a multiple-year slide in values. Fitch continues to view the long-term economic prospects of the Phoenix metro area favorably.

STATE FUNDING RELIANCE: The district relies heavily on state funding for the majority of its operating needs, despite the upturn in the tax base, and remains vulnerable to delayed distribution of state payments. Fitch will continue to monitor the impact of state funding uncertainties and state funding delays on district finances.

MODERATE DEBT BURDEN: Fitch anticipates the district's debt burden will remain manageable as rapid principal amortization outstrips immediate new issuance plans. Carrying costs, including debt service, pension and other post-employment benefits (OPEB) are moderate.

RATING SENSITIVITIES

TAX BASE REVERSAL: Unanticipated tax base declines would further constrain the district's borrowing capacity.

FINANCIAL WEAKNESS: Weakening of reserves below the modest statutory limits could put further pressure on liquidity and may cause a downgrade.

CREDIT PROFILE
Pendergast ESD is located in the west valley of Maricopa County. The district comprises 20 square miles that include portions of the cities of Phoenix, Glendale, and Avondale.

COST SAVINGS, RATE HIKES & OVERRIDES MITIGATE LOSS OF STATE FUNDING

The district's financial operations have been challenged by declining state funding levels and delays in state aid payments, similar to other Arizona districts, over the past several years. State funding, which made up 70% of the district's fiscal 2014 operating revenues, remains down \\$10.8 million (23%) from the recent peak in fiscal 2008, reflecting ongoing pressure on the state's budget. Management implemented various cost-saving measures including staff reductions, increased class sizes, consolidations, and reorganizations, to address state funding uncertainty.

Property taxes contribute roughly 22% to the district's operations. An increase in tax rates partially offset the approximate 50% loss of tax base over the past five years but still left the 2015 levy 30% below the 2010 peak. Voters approved a special 15% maintenance and operation (M&O) expenditure operating override beginning in fiscal 2011. Combined, these actions have enabled the district to maintain fairly modest reserves typical of Arizona school districts.

The M&O override has a seven-year duration, five years at the full 15% funding, the sixth year at 2/3rd of 15% funding and the final year at 1/3 of the 15% funding. The district plans to seek reauthorization in November 2015. If not approved, the district would have to reduce its M&O budget by a district estimated \\$2.1 million (less than an estimated 4% of the budget) in fiscal 2017, \\$4.3 million in fiscal 2018 and \\$6.5 million in subsequent school years.

Fiscal 2014 unrestricted reserves of \\$1.9 million (3.7% of spending) are less than half of those in fiscal 2011, reflecting the phase out of state programs reflected in reserves over the past several years. Fitch expects fiscal 2015 and near-term reserves to remain modest, approximating the statutory carryover equal to 4% of the district's revenue control limit (roughly equivalent to the fiscal 2013 level of unrestricted general fund balance). The fiscal 2016 balanced budget benefits from stabilized enrollment, ongoing cost controls, and a modest increase in state funding.

SHORT-TERM BORROWING TO CONTINUE

The district borrows short-term tax anticipation notes (TANs) to manage cash flow shortfalls related to timing of both property taxes and state funding. Beginning in fiscal 2012, the district also began using a line of credit (LOC) with Maricopa County to manage the timing mismatch between state funding and expenditures; this cash flow need had previously been managed through an off-balance sheet warrant system with the County. TAN and LOC balances are paid off annually in July.

An increased trend of reported short-term borrowings over the past several years reflects the balance sheet recognition of the district's LOC, as well as ongoing state funding delays. The district reports fiscal year-end 2015 short-term borrowings of \\$21 million (TANs of \\$12.5 million and an LOC of \\$8.5 million), which represent a sizable 40% of the district's general fund spending. The district anticipates short-term liquidity borrowing needs to moderate somewhat as timeliness of state funding improves with a recovering economy.

MODERATE DEBT BURDEN

The district's debt burden is moderate at 2.5% of market value. Amortization is quite rapid with 100% of principal retired within five years after this issue. This issue represents the final portion of the district's \\$31.2 million GO authorization approved by voters in November 2012 to fund facility improvements and technology upgrades. The fiscal 2015 issuance does not increase the current tax rate given rapid amortization of existing debt. The district anticipates seeking up to \\$35 million of new authorization in 2016 to cover the next 10 years of capital needs.

The district participates in a state sponsored, cost-sharing multiple-employer pension program. The state establishes actuarially determined annual contribution levels. The state program's funding level at fiscal 2014 year-end was 75.4% and an estimated 68% based on Fitch's more conservative 7% investment rate.

The district provides post-employment healthcare benefits to retirees, and the participation and financial contributions are relatively small. Fiscal 2014 carrying costs for debt service, pension and OPEB were a low 11% of governmental fund spending. Fitch expects carrying costs to place a manageable burden on the budget going forward.

STRENGTHENING PHOENIX-AREA ECONOMY

By most indications, the Phoenix area economic recovery is well underway. Area cities are generally realizing their third year of local sales tax and employment base growth. Phoenix area unemployment rates in the range of 4.7% to 4.9% (March 2015) are favorable to the U.S. rate of 5.6% for the same period. The district's median household income falls moderately above and per capita money income moderately below state and national averages.

The district's fiscal 2015 full cash market value realized strong 12.2% growth in fiscal 2015 and an astounding 34.6% growth in fiscal 2016 due largely to valuation gains on existing properties. Pursuant to proposition 117 (effective in fiscal 2016), the primary tax base - net assessed limited property value - is used to set the interest and sinking fund (I&S) tax rate as well as the M&O tax rate. Previously, the I&S tax rate was established with regard to the higher secondary assessed valuation.

Proposition 117 limits the net assessed limited property value growth to 5% per annum on existing properties; the 5% cap does not apply to new construction. However, the I&S tax rate can be increased to accommodate the change in valuation base and Fitch does not anticipate the new statute will constrain the district's ability to pay debt service.

The district's fiscal 2016 net assessed value realized a 5.2% gain. Ad valorem valuation reflects a two-year reporting lag. Officials report the resumption of home construction, reasonably supporting the expectation for further near-term tax base growth. The top 10 taxpayers, comprising a moderate 15% of net assessed limited, include real estate development, sports and tourism, retail and utility interests.