OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the following outstanding bonds of Apache Junction Unified School District No. 43, AZ's (the district) unlimited tax bonds (ULT):

-- \\$12.5 million series 2007 refunding bonds;
-- \\$19.2 million series 2005A, 2006B and 2007C (Project of 2004) school improvement bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are general obligations of the district payable from a direct annual ad valorem tax levied on all taxable property within the district without limit as to rate or amount.

KEY RATING DRIVERS

CONSTRAINED BUDGETARY FLEXIBILITY: Reserves remain adequate despite significant budget cuts to counteract the expiration of a budget override and reduced state funding. Management has achieved structural balance yet remains with less budgetary flexibility.

TAX BASE STABILIZATION: Fiscal 2016 marks the first year of growth after significant contraction in secondary assessed valuation (SAV) since 2009. Post-recession recovery was especially challenging given the district's location on the outskirts of Phoenix.

MODEST LONG-TERM LIABILITIES: Total district debt levels are moderate and amortization is rapid. Pension and other post-employment benefits (OPEB) costs do not pressure the credit.

RATING SENSITIVITIES

OPERATING STABILITY: The rating is sensitive to the district's continued capacity to maintain an adequate financial cushion and fiscal balance given recent aggressive spending cuts and resultant diminished flexibility to address future challenges.

CREDIT PROFILE
The district encompasses an area of 271 square miles in the north central portion of Pinal County (the county) and is one of 19 public school districts in the county. Most district residents live within the city of Apache Junction (the city, 2014 population 38,131), located about 35 miles from downtown Phoenix.

REDUCED STATE AID
School district funding is based on a state equalization formula that sets the annual expenditure budget for each district on a per pupil basis, ensuring each student in the state receives the same amount of resources. State aid has fallen recently due to a reduction in the base amount of funding per pupil as well as 25% loss in average daily membership (ADM) within the district since 2006.

The decline in state aid has gradually shifted the burden of school district funding to taxpayers via tax rate increases, compounded by SAV losses. Property taxes now provide the largest portion of operating revenues for the district at 52.2% in fiscal 2014, with state sources providing the second largest portion at 44.1% that same year.

STRUCTURAL BALANCE ACHIEVED; PRESSURE REMAINS
Typical of most Arizona school districts the district has implemented cuts and utilized reserves in response to the state aid reductions and ADM losses. Fiscal 2014 was the first year since 2009 with positive operating results, adding almost \\$1 million (or 4% of spending) to fund balance. The unrestricted fund balance for fiscal 2014 totaled \\$3.6 million or a satisfactory 15% of spending. Preliminary figures for the year ending June 30, 2015 are unavailable, but management does not predict a draw on fund balance.

Management has faced stricter spending limits since the expiration of a budget override in 2011. For fiscal 2016 that meant cutting \\$2.7 million from the prior year's budget to stay within the state's budget control limits. Expenditures were successfully reduced through fairly aggressive measures including the closure of an elementary school and changing the school week from five days to four, resulting in less flexibility to make additional cuts should the district experience further losses in ADM.

The district has plans for a \\$3.5 million override election this November to hire more teachers, extend tutoring services and reduce pay-to-play student fees for athletic and extracurricular programs. The last override election that passed was in 2003, with renewals defeated in 2007, 2009, 2010, and 2014. The latest election was defeated by a 14-point margin, and in the case of another failure this fall it is unlikely the district will receive additional state funding under the current school funding formula.

MODEST ECONOMIC IMPROVEMENT
SAV lags market values by two years and shows growth in fiscal 2016 after cumulative contraction of 40% from fiscals 2010-2014. Continued growth in property values, albeit modest, is possible given proposed residential development within district boundaries, as well as the demonstrated recovery of market values in the greater Phoenix MSA.

The city's unemployment levels, although improved, are still high at 9.2% in July 2015 compared to the county (6.9%) and state (6.8%), evidence of the lagged recovery in the district. Wealth and income figures in the district also trend lower than the nation, and by some metrics still lacks signs of post-recession recovery.

MODERATE DEBT AND LONG-TERM LIABILITIES
Debt levels are moderate at 3% of market value and amortization is rapid with 100% retired in 10 years. Future capital needs will include building repairs, buses, and other deferred maintenance. Officials report needs are not critical at this time and do not have plans to issue additional debt in the near term.

The district participates in a state-sponsored, cost-sharing, multiple-employer pension program. The state program's funding level at fiscal 2014 year-end was satisfactory at 76.3% but weaker at 68.7% based on Fitch's more conservative 7% investment rate. The district also participates in the state-sponsored health benefit and disability program and regularly makes 100% of its required contribution. The total carrying cost of debt, pension and OPEB expenses in fiscal 2014 was a moderate 23% of government spending.