Albuquerque Muni. SD 12 (Bernalillo Cnty), NM

Transcription

1 CREDIT OPINION New Issue Albuquerque Muni. SD 12 (Bernalillo Cnty), NM New Issue: Moody's Assigns Aa1 UND/Aa2 ENH to Albuquerque MSD 12, NM's GO Rfdg Debt; Negative Outlook Remains Summary Rating Rationale Contacts Heather Correia Analyst Alexandra S. Parker MD-Public Finance John Nichols AVP-Analyst CLIENT SERVICES Americas Asia Pacific Japan EMEA Moody's Investors Service has assigned a Aa1 to Albuquerque Municipal School District 12 (Bernalillo County), NM's 49.1 million in General Obligation Refunding Bonds, Series 2017A. We have maintained the Aa1 on outstanding parity obligations. The outlook remains negative. Moody's has also assigned a Aa2 enhanced rating to the General Obligation Refunding Bonds, Series 2017A based on the New Mexico School District Enhancement Program (NMSDEP) - Post March 30, The Aa1 rating reflects the district s sizeable tax base that serves as the state s largest economic center; stable, albeit narrow, financial position with a sizeable surplus reported in fiscal 2016, which was offset with state cuts in fiscal 2017; and, manageable debt profile with average principal payout. The rating further incorporates the district s elevated pension burden and declining enrollment, reflective of reduced birth rates and charter school competition. The Aa2 enhanced rating on the Series 2017A General Obligation Refunding Bonds is based on our assessment of the NMSDEP - Post March 30, 2007 and a review of the district's proposed financing. For additional information on the program, please see Moody's report dated May 4, Credit Strengths District serves a regionally-important economy; consistent tax base expansion Manageable debt profile with above average principal amortization Credit Challenges Historically narrow financial reserves; sizeable deficit reported in fiscal 2017 to offset state-aid cuts Modest declines in enrollment; charter school competition Elevated pension liability

2 Rating Outlook The negative outlook reflects the district s narrow financial position, which may be compromised with continued funding declines from the State. Sustained use of reserves may warrant downward rating action. Factors that Could Lead to an Upgrade (or removal of the negative outlook) Significant increases in reserves Material tax base expansion and diversification coupled with improved socioeconomic profile Factors that Could Lead to a Downgrade Structural imbalance resulting in deterioration of reserve levels Significant contraction of the tax base Enrollment loss without corresponding expenditure management Key Indicators Exhibit 1 Albuquerque Muni. SD 12 (Bernalillo Cnty), NM Economy/Tax Base Total Full Value (000) 44,154,945 43,981,893 44,315,913 45,331,701 46,170,072 Full Value Per Capita Median Family Income (% of US Median) 66,242 65,477 66, % 94.0% 94.0% 66, % 68, % Finances Operating Revenue (000) 658, , , , ,392 Fund Balance as a % of Revenues 13.8% 14.0% 15.8% 16.9% 17.5% Cash Balance as a % of Revenues 18.8% 19.1% 19.9% 23.1% 22.3% Debt/Pensions Net Direct Debt (000) 507, , , ,675 Net Direct Debt / Operating Revenues (x) 0.8x 0.7x 0.7x 0.8x 553, x Net Direct Debt / Full Value (%) 1.1% 1.1% 1.1% 1.2% 1.2% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 3.1x 3.4x 3.5x 3.2x 3.2x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 4.6% 5.2% 5.5% 5.1% 5.2% Operating Funds include General Fund and Operating Fund Source: District Audits; Moody's Investors Service Detailed Rating Considerations - Enhanced Moody's has assigned an enhanced rating of Aa2 to the Series 2017A General Obligation Refunding Bonds, equivalent to the NMSEP Post-March 30, 2007 programmatic rating. Ratings on individual intercept financings depend on the programmatic rating as well as our evaluation of the sufficiency of interceptable revenues, the timing of the state's fiscal year relative to scheduled debt service payment dates and the transaction structure. Based on the district's state equalization guarantee (SEG) funds for fiscal year 2016, interceptable state-aid provides an ample minimum of 7.39 times coverage of maximum periodic debt service. Further, state revenues provide an adequate minimum 6.78 times maximum periodic debt service coverage when coverage is stressed by deducting the state's final monthly state aid payment within a fiscal year. State-aid funding levels for New Mexico school districts have been stable in recent years, but have been subject to midyear cuts, as observed most recently in fiscal This weakness, however, is mitigated by ample debt service coverage even if This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 aid is curtailed over the course of the year. Principal payments are scheduled for August, early in the State's fiscal year providing for an average interval to mitigate the risk of late budgets. The program requires the appointment of a third-party fiscal agent, who is required to notify the state if an intercept of SEG is required. The Bank of Albuquerque is the fiscal agent for the current sale. Detailed Rating Considerations - Underlying Economy and Tax Base: District Serves Economic Engine of New Mexico The district's tax base will likely continue to modestly expand over the mid-term driven by appreciation of existing properties and steady development across all sectors. Albuquerque, and by extension, the district's, economy is anchored by the University of New Mexico (UNM) flagship campus and a number of defense-related operations, such as Kirtland Air Force Base and Sandia National Labs. The tax base is sizeable, with the fiscal 2017 assessed value (AV) expanding by 3.1% to 15.8 billion, derived from a full value of 47.6 billion. The trend continues into fiscal 2018, with preliminary values of 16.2 billion, derived from a full value of 48.6 billion. Officials report residential development remains steady, with the number of new listings increasing by 3% from June 2016 to June Additionally, retail and commercial development is ongoing, with new restaurants, call centers and manufacturing operations coming online or expanding. Over the next several years, officials anticipate annual AV growth of 2% to 3%. Income indices are average, with median family income reported at 91.3% of US (2015 American Community Survey). Concentration in top ten taxpayers is negligible at 2.7% of fiscal 2017 AV. County unemployment levels are slightly elevated at 6.0% compared to the nation's 4.5% as of June Albuquerque Public Schools (APS) is the 34th largest district in the nation. District enrollment has declined in the past five years, falling from 89,602 in fiscal 2013 to 84,685 in fiscal During the same timeframe, charter school enrollment has climbed from 12,527 to 16,845. To mitigate charter school competition, APS has invested in schools of choice, which offer courses in STEM and projectbased learning; rolled out several pre-k offerings; and partnered with UNM and Central New Mexico Community College (Aa1) to offer college credit. The district's efforts have proved successful, at least in fiscal 2017, with 85,905 enrolled in traditional district schools and 14,656 enrolled in charter schools. Moving forward, barring presence of charter schools, APS is anticipating annual enrollment declines through fiscal Officials explain that birth rates typically determine class sizes; the region's birth rates were down in 2012 through 2015, with an uptick in As such, management expects a low of 84,542 before increasing to 85,000 by fiscal Future reviews will focus on the district's ability to attract and retain students, and to manage fluctuations in enrollment without utilizing reserves. Financial Operations and Reserves: Narrow Financial Position; Deficit Reported for Fiscal 2017 After the State-imposed mid-year cuts, which resulted in a material deficit for APS, the district s financial position will likely stabilize over the mid-term given management s demonstrated ability to produce annual surpluses. APS ended fiscal 2016 with a sizeable surplus of 8.8 million, increasing General Fund balance to 58.8 million, or 8.7% of revenues. Since fiscal 2011, the district has reported consistent surpluses, increasing General Fund balance by 31.3 million in aggregate. Similarly, Operating Fund Balance, including the General Fund and Debt Service Fund, has increased 48.6 million in the same time frame to a fiscal 2016 balance of million, or 17.8% of operating revenues. While these trends are positive, the district's reserve position remains very narrow compared to Aa1-peers. When preparing the fiscal 2017 budget, officials anticipated reductions in state aid, and set aside 7.6 million to mitigate any funding declines. Management's concerns were realized, and the State implementing a 1.5% mid-year cut, followed by a cash balance sweep. Specific to APS, total funding loss amounted to 25 million, and while the vast majority was offset with expenditure reductions, the remaining 10.6 million was absorbed with fund balance. As such, unaudited results indicate General Fund balance declined to 47.3 million, or 7.6% of revenues. The fiscal 2018 budget is conservative, and reflects a 6 million deficit. Management is prepared to use reserves in event of additional state aid cuts; however, the State has not indicated that they plan to reduce K-12 funding. Future reviews will focus on the district's ability to return to balanced operations and maintain, if not increase, reserve levels. LIQUIDITY The district's General Fund cash position improved in fiscal 2016 to 94.2 million, or 14.0% of revenues, compared to prior year's 93.1 million, or 14.3% of revenues. Operating cash reserves, including the General Fund and Debt Service Fund, was million, or 3

4 22.3% of operating revenues. Moody's notes the Operating Fund balance is inflated with a year's worth of debt service, which will be expended in August. Debt and Pensions: Debt Burden Remains Manageable; Pension Burden is Very Elevated The district's debt burden is manageable, and will remain stable over the near-term as APS rapidly amortizes debt while layering in new issuances. Inclusive of the new issuance, the district's debt burden is 1.2% of fiscal 2018 full value. Included in the million outstanding is 19.4 million in Education Technology Notes, which are secured by an unlimited ad valorem pledge, but do not qualify for the enhanced rating. The district has 125 million in authorized bonds, which they plan to issue in DEBT STRUCTURE All the district's debt is fixed rate, and is fully amortized by Principal amortization is average with 80% retired in ten years. DEBT-RELATED DERIVATIVES The district has no derivatives, swaps or variable-rate debt. PENSIONS AND OPEB The district has an above-average employee pension burden, based on unfunded liabilities for its share of the Educational Retirement Board (ERB), a cost sharing plan administered by the state. Moody's fiscal 2016 adjusted net pension liability (ANPL) for the district, under our methodology for adjusting reported pension data, is 2.6 billion, or an elevated 3.43 times operating revenues. The threeyear average of the district's ANPL to operating revenues is 3.19 times, while the three-year average of ANPL to full value is high at 5.16%. The district's ANPL has fluctuated over the last several years. In fiscal 2016, pension contributions of 72.4 million were below Moody s tread water value of 96.2 million, a credit negative. The tread water indicator measures the annual contributions required to prevent the reported net pension liability from increasing, under reported assumptions. The district s fixed costs, including debt service, pensions contributions and OPEB contributions, totaled a somewhat elevated 21.1% of operating revenues, further limiting the district's financial flexibility. The New Mexico pension plan funding structure experienced several changes with the signing of SB 115, including the reduction of a cost-of-living adjustment (COLA) and increases in employee contributions. The legislation will maintain the funding changes until the plan has reached 100% funding, which is estimated to be achieved in We believe the funding changes adopted in SB 115 will limit budgetary pressure on the district related to future pension costs. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the district s reported liability information, but to improve comparability with other rated entities. For more information on Moody's insights on employee pensions and the related credit impact on companies, government, and other entities across the globe, please visit Moody's on Pensions at Management and Governance New Mexico School Districts have an Institutional Framework score of A, which is moderate compared to the nation. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. The sector's major revenue source, state aid or SEG, is subject to a cap, which cannot be overriden (in that, the State determines annual appropriations based primarily on student enrollment). Reliance on state funding limits revenue-raising ability; school districts do not collect property taxes for operation. Unpredictable revenue fluctuations tend to be moderate, or between 5-10% annually. Across the sector, fixed and mandated costs are generally less than 25% of expenditures. However, New Mexico has public sector unions, which can limit the ability to cut expenditures. Unpredictable expenditure fluctuations tend to be moderate, between 5-10% annually. Management reports the district has a formal cash balance policy to maintain a minimum of 5% and a maximum of 10% of budgeted operating expenditures in reserve. With the departure of the prior superintendent in Fall 2015, the Board tapped a 40-year veteran of APS to serve as interim. She was hired as the Superintendent in April 2016, and is focused on stabilizing the district in light of historic management turnover. 4

5 Legal Security The bonds are general obligations of the district and paid from ad valorem taxes that are levied against all taxable property within the district without limitation as to rate or amount. Use of Proceeds Proceeds from the Series 2017A bonds will refund the Series 2009A for present value savings of approximately 2.9 million to 3 million. Obligor Profile The district serves the city of Albuquerque and surrounding area, covering approximately 1,200 square miles. Based on enrollment, the district is the largest in the state, serving around 85,000 students, and is the 34th largest in the nation. APS operates 89 elementary schools, 27 middle schools, 13 high schools, two K-8 schools and 11 schools of choice. Methodology The principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July Please see the Rating Methodologies page on for a copy of these methodologies. Ratings Exhibit 2 Albuquerque Muni. SD 12 (Bernalillo Cnty), NM Issue Rating General Obligation Refunding Bonds, Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description General Obligation Refunding Bonds, Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description Aa1 Underlying LT 49,100,000 08/29/2017 General Obligation Aa2 Enhanced LT 49,100,000 08/29/2017 General Obligation Source: Moody's Investors Service 5

6 2017 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY S PUBLICATIONS MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from 1,500 to approximately 2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER

7 CLIENT SERVICES 7 Americas Asia Pacific Japan EMEA