2008-08-25 23:40:04 -

- Fitch Ratings has assigned an 'A' rating to the Yuma Union High School District No. 70 of Yuma County, Arizona's (the district) $9.3 million school improvement bonds, project of 2005, series C (2008). Additionally, Fitch affirms the 'A' rating to the district's $59.5 million outstanding school improvement bonds. The bonds are scheduled to sell on September 4, 2008 via

negotiation. The Rating Outlook is Stable.

The bonds are direct and general obligations of the district and are payable from an unlimited property tax levied on all taxable property within the district. Proceeds will be used to construct various district facilities and to pay issuance costs.

The 'A' rating reflects the district's modest debt burden, adequate financial reserves, solid tax base growth and uncertainty with regard to the state's funding of the Students FIRST capital program and unification initiative. Typical of Arizona school districts, the district's financial performance is characterized by small operating margins. In fiscal 2002, Arizona expanded its role in financing school facility needs through its Students FIRST capital program administered by the Arizona School Facilities Board (SFB). Through this program, the district constructed two new schools while maintaining a modest debt burden and above-average principal amortization; however, for fiscal 2009 the state has frozen spending for additional schools under this program and the future of this program remains to be determined. Ongoing residential development throughout the district is producing tax base and population gains, and the subsequent enrollment increases continue to drive facility expansion needs.

The district serves an estimated population of 190,600 encompassed within nearly 2,500 square miles in Yuma County. Located in the southwest corner of Arizona, the district borders Mexico to the south and California to the west containing the communities of Yuma (general obligation bonds rated 'A+' by Fitch Ratings), San Luis, and Somerton. Nearly one half of Yuma County's estimated 196,390 residents live in the City of Yuma. Enrollment has steadily grown by nearly 5% annually in the last five fiscal years, surpassing 10,000 students in fiscal 2007. The district serves students from ninth through twelfth grades in five high schools and one alternative learning center. Four elementary school districts serving students in grades kinder through eighth are contained within the district. Although these are distinct political subdivisions unrelated to the district, the state passed a unification initiative that will require the separate school districts to hold an election with the intent of unifying the five districts into one district serving grades K-12.

Tax base growth had been steady and moderate averaging nearly 6% annually each year from fiscal 2002-06. However, due mostly to reappraisal of existing property, secondary appraised valuation (SAV) growth accelerated in the last three years, rising between 22% to 31% each year from fiscal 2007 to 2009. The residential component of the tax base represents a higher proportion of the total tax base in fiscal 2009 at approximately 59% compared with 51% in fiscal 2004. After peaking in 2004, residential building activity in the county has trended down notably, although it has been offset by a substantial increase in commercial development. Primary employment sectors include agriculture, military, government, services, and manufacturing. Unemployment rates are high, due in part to seasonal employment related to the agricultural sector, and income levels are below average but growing faster than those of the state and nation.

Direct debt per capita and as a percentage of full cash value are low, and overall ratios are only moderately higher. Above-average principal repayment also is a positive credit factor. Given the healthy tax base growth, rapid amortization rate of the district's outstanding tax-supported debt, and substantial capital financing provided by the state, officials do not anticipate increasing the SAV tax rate with the current authorization. The SFB approved funding of roughly $50 million for the construction of two high schools -- the first of which opened in fiscal 2005, followed by the recent opening of the second school in fiscal 2007. As a supplement to the SFB-funded projects, district voters approved $70 million in class B bonds in November 2005 to construct performing arts, athletic, and vocational educational facilities, as well as for renovation and remodeling projects. These bonds are the final installment under this authorization, which is expected to finance facility needs through fiscal years 2010 or 2011.To accommodate ongoing growth, the SFB conceptually approved funding for construction of another high school to open in the fall of 2011, but the state recently froze spending under this program and the future funding of this program is currently uncertain. Fitch will monitor the state's actions with regard to school funding and its impact on the school district's financial performance.

After depletion of its fund balance in fiscal 2002 the district's financial profile improved notably in fiscal 2005 and 2006 with the implementation of cost containment and efficiency measures that enabled the district to post positive margins resulting in an unreserved general fund balance reserve of 4%, the maximum carry-forward amount allowable under the state's funding formula. However, subsequent state funding cuts combined with rising fuel and energy costs resulted in a $1.2 million shortfall in fiscal 2007 reducing the district's unreserved general fund balance reserves to only 1.4% of spending. For fiscal 2008, the district expects to end the year with approximately 1.4% carry forward. The fiscal 2009 budget was adopted with expected expenditure growth of about 6.9% and includes the operational expenses related to the phased opening of the newest high school including new positions. State funding for operations remains the dominant operating revenue source, averaging between 70% and 75% of total general fund revenues over the past five fiscal years. Annual enrollment growth is expected to continue in the 4%-5% range over the near term, and district officials anticipate growth to continue for the foreseeable future. Development projects reportedly are proliferating due to the increase in the service sector, expansion at local military bases, and the attractiveness of the area in terms of cost of living.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this

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