Fitch Rates Pendergast ESD No. 92, Arizona's School Bonds 'A+'.

AUSTIN, Texas -- Fitch assigns an 'A+' rating to the Pendergast Elementary School District No. 92 of Maricopa County, Arizona's (the district) $11 million school improvement bonds, Project of 2006, Series C (2008). Additionally, Fitch affirms the 'A+' rating for the district's approximately $18 million in general obligation bonds outstanding. The bonds are scheduled to price on Sept. 17th via negotiation with RBC Capital Markets. The Rating Outlook is Stable.

The bonds are direct obligations of the district, payable from and secured by an unlimited ad valorem tax levied against all taxable property within the district. Proceeds will be used to construct and renovate an intermediate school building and pay costs of issuance.

The 'A+' rating is based on the district's stable financial results, modest debt position, rapid principal amortization, and expanding tax base. The district's financial performance has been typical of Arizona school districts, characterized by small operating margins. The state's expanded role in financing minimum school facility needs is an additional stabilizing factor and has helped strengthen the district's debt position. Fitch believes the ongoing residential construction slowdown in the Phoenix area is a concern, as the district expects 15%-20% declines in district home values in fiscal 2009. In addition, the district is currently at its statutory debt limit, which restricts GO bond issuance after 1998 in excess of (i) 5% of its secondary assessed valuation, or (ii) $1,500 per student.

The current offering is the third installment of a $50.7 million authorization, approved by 60% of the voters in November 2006 as a supplement to the SFB-funded projects to construct new schools and improve existing facilities. The district does not anticipate any significant SAV tax rate impact from the current authorization, given the average annual rate of tax base growth. This issuance will be used primarily for renovations to the Westwind Intermediate School. A $15 million capital override proposal put to voters failed last year, and district will not seek a capital override from voters again until November 2009. In November 2008, voters will be asked to authorize a K-3 override which allows the District to exceed its statutory limit to fund programs that impact kindergarten through third grades by amounts not to exceed five percent of the prescribed budget limit. District officials report remaining on track with their five-year capital improvement plan despite these override failure.

Located in the west valley of Maricopa County, the district comprises a portion of Phoenix and the cities of Glendale and Avondale and encompasses approximately 20 square miles. The district is predominately residential, and commercial and retail development is accelerating in the district, aided by the opening of the National Football League Arizona Cardinals' football stadium and recent population growth. Additional retail and commercial projects are in various stages of planning and construction.

The district also benefits from the area's diverse economy as primarily a bedroom community for the greater Phoenix metropolitan area. Maricopa County is the center of economic activity in Arizona, containing over 64% of the state's labor force in 2007, and wealth levels for the area typically exceed state levels. Student enrollment has moderated from previous rates of rapid growth, with the annual rate of growth averaging 2.7% over the past five fiscal years, well below the nearly 8% average annual gains from fiscal 2000-2004. Total enrollment for fiscal 2008 is 10,340 students, reflecting a slight jump in enrollment from the prior year. Strong growth of roughly 20% annually over the past five years in secondary assessed valuations (SAV) continues to outpace student enrollment gains.

Debt levels are modest and the district's debt burden is expected to remain low, given the substantial capital financing provided by the state's School Facilities Board (SFB) under the Students First statute. Rapid principal repayment remains a credit strength, with all district debt retired by 2012, which in turn somewhat mitigates concern over the district approaching its statutory Class B GO bond limitation.

State aid for operations continues as the dominant operating revenue source. The district's financial performance has been aided by an operating budget override most recently approved by district voters three years ago. The override, which has a seven-year duration and expires in 2012, allows operating outlays to exceed statutory limits by 10% each year. The district reported net income in fiscal 2007 of $1.2 million, and unreserved financial reserves increased to $2.5 million, or 5% of spending in fiscal 2007. District administrators expect total general fund balances to be $3 million, or 4% of spending in fiscal 2008.

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').

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