Fitch Rates Apache Junction USD, Arizona's School Building Bonds 'A+'.

AUSTIN, Texas -- Fitch Ratings assigns an initial 'A+' rating to the Apache Junction Unified School District No. 43 of Pinal County, AZ's (the district) $8.25 million school improvement bonds, project of 2004, series C (2007) (the bonds). Fitch also assigns a rating of 'A+' to the district's $58.6 million of outstanding school improvement bonds. The Rating Outlook is Stable.

The bonds are scheduled to sell the week of March 12 through negotiation to Peacock, Hislop, Staley & Given, Inc. They are general obligations of the district payable from a continuing, direct, annual unlimited ad valorem tax levied against all taxable property located within the district. Bond proceeds will be used to finance school improvements and renovations and to pay issuance costs.

The 'A+' rating and Stable Rating Outlook reflect the district's solid and expanding tax base, conservative fiscal management as evidenced by its healthy financial profile, and moderate debt load with slightly above-average amortization. Also incorporated into the rating are recent fluctuating enrollment levels that have resulted in financial pressures over the last few years and the prospect of continued development that is expected as a result of recent and pending state land auctions. Development will apply capital and operating pressures associated with expected rapid student enrollment growth; however, the corresponding tax base expansion will somewhat mitigate this risk.

The district is located in the north central portion of Pinal County, Arizona, and approximately 35 miles east of the Phoenix metropolitan area. District boundaries encompass an area of 217 square miles including the city of Apache Junction and large unincorporated developments surrounding the city serving an estimated population of 85,000. Transportation improvements - especially the completion of the Superstition Freeway that connects US-60 to I-10 - combined with availability of affordable housing led to significant population growth, most notably between 1990 and 2000. Population growth has since moderated, as reflected in the district's enrollment levels, which have been relatively flat in the last five years averaging a modest increase of 1% annually. District facilities include five elementary schools, two middle schools, one high school and an alternative learning center. District enrollment is 5,710 students in fiscal 2007.

Only about one third of the district is currently developed. Approximately 72% of the district's tax base is residential and 14% commercial. Undeveloped property includes about 7,000 acres of land owned by the Arizona State Land Department. The land department recently auctioned a 1,011 acre parcel of land to a developer. As the winning bidder, the developer is required to complete a master plan for the entire 7,000 acres. The developer must work with the City of Apache Junction, Pinal County and the Arizona State Land Department to develop a comprehensive plan that includes infrastructure financing, developing land uses, water sources, wastewater treatment and other elements of a master-planned community. The planning process is estimated to take 18-24 months. Development of this land is anticipated to have a significant impact on the district. However, enrollment growth estimates are pending the completion of the master plan.

This issue represents the third installment of $49.9 million in class B bonds approved by voters in November 2004. Direct debt is low at $787 per capita and moderate at 2.1% of full cash value. Despite the back-loaded structure of this issuance, debt is amortized at a slightly above-average pace of 61% principal retirement in ten years.

The district's financial profile is healthy, recording operating surpluses in four of the last five fiscal years. In fiscal 2006 the district recorded an unreserved, undesignated general fund balance of $5 million, or 17.3% of expenditures, transfers out and other uses. These results were achieved with a modest operating surplus of $244,000 and a prior period adjustment of unrestricted fund balance from non-major governmental funds of $1.5 million. Arizona school districts budget on an essentially break-even basis and typically retain small operating reserves. For fiscal 2007, operating expenditures are expected to increase 8.5% from the prior year's actual level, due in part to 3% enrollment growth. State aid will remain the dominant revenue source.

The area economy historically was based on recreation, tourism and retirement activities, but has emerged as a bedroom community for the Phoenix metropolitan area. Unemployment rates for the City of Apache Junction are consistently lower than the levels recorded at the state and national levels; however, the county unemployment rates are typically higher than that of both the state and nation. County wealth levels as measured by median household and per capita buying income are lower than that of the state and national levels.

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