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MOODY'S ASSIGNS A1 UNDERLYING AND Aa1/NEGATIVE OUTLOOK ENHANCED RATING TO GALLUP-MCKINLEY COUNTY SCHOOL DISTRICT NO. 1'S $7.05 MILLION GENERAL OBLIGATION SCHOOL BUILDING BONDS, SERIES 2011A AND $10.81 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 20

16 Sep 2011

A1 UNDERLYING RATING AFFECTS $44.88 MILLION IN OUTSTANDING PARITY DEBT, INCLUSIVE OF CURRENT SALE

Primary & Secondary Education
NM

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation School Building Bonds, Series 2011A

A1

Aa1

  Sale Amount

$7,050,000

  Expected Sale Date

09/29/11

  Rating Description

General Obligation; NMSDEP

 

General Obligation Refunding Bonds, Series 2011B

A1

Aa1

  Sale Amount

$10,810,000

  Expected Sale Date

09/29/11

  Rating Description

General Obligation; NMSDEP

 

Opinion

NEW YORK, Sep 16, 2011 -- Moody's Investors Service has assigned a A1 and a Aa1/Negative Outlook enhanced rating to Gallup-McKinley County School District No. 1's (NM) upcoming sale of $7.05 million General Obligation School Building Bonds, Series 2011A and $10.81 Million General Obligation Refunding Bonds, series 2011B. The enhanced rating is based on the New Mexico School District Enhancement Program. Concurrently, Moody's has affirmed the A1 underlying rating on the districts $44.88 million in outstanding parity debt, inclusive of the current sale. Proceeds from the Series 2011A bonds will finance erecting, remodeling, improving, and furnishing school buildings, as well as purchasing classroom technology. Proceeds from Series 2011B will be used to refund the district's general obligation school building bonds Series 2001, Series 2002, Series 2006 and Series 2007. In conjunction with assignment of a negative outlook on the U.S. government, the outlook for the State of New Mexico has been revised to negative due to indirect links between the state and the federal government. The negative outlook is also applicable to the Aa1 enhanced rating. For further information on the negative outlook on the state, please see Moody's report dated August 04, 2011.

SUMMARY RATING RATIONALE--UNDERLYING

The bonds are secured by ad valorem taxes that are levied against all taxable property within the district without limitation as to the rate or amount. The A1 underlying rating reflects the sizeable tax base with significant concentration, satisfactory financial operations despite facing state funding challenges, and a moderate debt profile with a rapid payout.

STRENGTHS

*Sizeable tax base

* Satisfactory financial operations

CHALLENGES

*Ongoing operating pressures due to multiple cuts in state aid

* Weak socioeconomic profile

SUMMARY RATING RATIONAL- ENHANCED

Assignment of the Aa1/Negative Outlook enhanced rating for the proposed transaction is based upon our assessment of the Post March 30, 2007 New Mexico School District Enhancement (NMSDE) Program and a review of the district's proposed financing.

PROGRAMMATIC ENHANCED RATING RATIONALE

The NMSDE Post-March 30, 2007 program demonstrates generally average to strong state commitment and program history as defined by the first factor of the intercept methodology published February 2008. The funds available for intercept are the current fiscal year's undistributed state aid (state equalization guarantee distribution, or SEG) to a school district. State oversight of the program is strong as school district budgets must be reviewed and approved by the New Mexico Public Education Department (PED). Upon issuance of its general obligation bonds, a school district must file with the New Mexico Department of Finance and Administration (DFA) a copy of the bond resolution, offering documents, and paying agent agreements as well as contact information. The state's oversight is further reflected in the NMSDE Post-March 30, 2007 authorizing legislation requirement that, if a debt service payment is made on behalf of a school district, the DOE will initiate an audit of the school district and assist in implementing measures to ensure that future payments will be made on a timely basis. Per authorizing statute, the state covenants that it will not repeal, revoke or rescind the provisions of the intercept statute or modify or amend it so as to limit or impair the rights and remedies granted by the statute, though modifications to the amount and timing of state aid payments would be permitted. The expectation of continued state support is strong as the intercept program benefits school capital financings, an essential public purpose. Though the program has never been utilized, the state has demonstrated strong commitment to school capital financings and the intercept program's mechanics should result in full and timely payment of debt service, if the program were to be invoked.

The NMSDE Post-March 30, 2007 program demonstrates generally average to strong program mechanics, the second factor of the intercept methodology. Intercept mechanics are established in statute and in an administrative policy document outlining implementation of the program. The mechanics of the intercept program direct the paying agent to notify the DFA if payment of principal or interest on school district general obligation bonds has not been received on the business day immediately prior to the date on which the payment is due. Upon notification by the paying agent and confirmation that the payment has not been made to the paying agent one business day prior to the due date, the DFA must forward from available funds (as described above) the amount due to the paying agent. The state has a history of passing budgets on time. Moody's therefore concludes that late budget passage likely will not be a factor placing at risk the availability of funds under the intercept program. Based on the overall assessment of program mechanics described above, Moody's categorizes program mechanics as generally average to strong. However, the one business day notification requirement regarding a missed debt service payment is considered to be a weak factor.

FINANCING LEVEL ENHANCED RATING RATIONALE

While Moody's has assigned a programmatic rating of Aa1, with a negative outlook to the NMSDE Post-March 30, 2007 program, rating actions on specific credits that benefit from the intercept program depend on the evaluation of each according to the additional rating factors for individual intercept financings, including the sufficiency of interceptable revenues as determined by specific coverage tests, the timing of the state's fiscal year as it relates to scheduled debt service payment dates and transaction structure, which will consider the role of the independent fiduciary and reserve fund.

The financing level rating rationale is based on an additional two factors; revenue sufficiency and transaction structure. Just as with the two factors considered for the programmatic rating, analysts score subfactors as strong, average or weak. Financings that achieve strong or average scores on a majority of subfactors will usually achieve ratings that are equivalent to the program level rating, whereas financings with weaker scores will be rated one or more notches lower than the program level rating.

Based on SEG budgeted for state fiscal year 2012, interceptable revenues from the state for Gallup-McKinley County School District No. 1 provide a strong minimum of 7.29 times coverage of maximum periodic debt service. Further, state revenues provide a strong minimum 6.69 times maximum annual debt service coverage when coverage is calculated without the benefit of the state's final monthly state aid payment within a fiscal year. This calculation serves as a stress test to evaluate the sufficiency of interceptable aid even if the state were to delay the final state aid payment within a fiscal year. The stability of state aid is rated as weak given recent mid-year cuts in state aid to address fiscal stress at the state level. However, this weakness is somewhat mitigated by a continued level of ample debt service coverage as previously discussed. There is no reason to believe that the district's allocation of state equalization aid would decline based on enrollment projections. The fact that SEG can be accelerated to make debt service payments, if necessary, is considered a strong credit factor. The fact that principal is scheduled to be paid in August, one month into the state's fiscal year is considered to be weak. However, this weakness is offset by the state's favorable budget adoption history.

In terms of the transaction structure, the program requires the appointment of a third-party fiscal agent: Wells Fargo Bank for the current sale. The fiscal agent is required to notify the state if an intercept of SEG is required, a characteristic that is considered as average. While there is no debt service reserve fund, such a fund is not typically utilized to support intercept financings supporting school districts.

Since the financing factors for the proposed transaction are generally considered strong or average, Moody's has assigned an enhanced rating to the forthcoming transaction that is equivalent to the programmatic rating of Aa1 with a negative outlook.

DETAILED CREDIT DISCUSSION

SATISFACTORY FINANCIAL OPERATIONS YIELD ADEQUATE FINANCIAL RESERVES

Despite mid-year and overall reductions in state funding to the district, prudent fiscal management has yielded a positive trend in financial operations. The district posted two consecutive operating surpluses fiscal years 2009 and 2010 resulting in a $10.5 million General Fund balance at FYE 2010 (11.5% of General Fund revenues). District officials anticipate an additional operating surplus FYE 2011, inclusive of the approximate $188 reduction in program unit value and transfers out. The district anticipates a balanced budget FY 2012 , inclusive of prior year's projected cash balance and additional reductions in program unit value from the State. District officials anticipate positive variance through conservative budgeting and potential health care savings. Moody's notes that deviation from prudent fiscal management and a failure to maintain adequate financial reserves could negatively impact credit quality.

LARGE AND CONCENTRATED TAX BASE WITH MODEST GROWTH ANTICIPATED

Located in western New Mexico approximately 15 miles east of the Arizona border, the district encompasses nearly 5,000 square miles. The district is adjacent to the Navajo Nation and the Zuni Pueblo. Primarily serving the City of Gallup and rural areas within McKinley County, annual tax base growth has fluctuated but has averaged 3.8% annually over the last five years. The full valuation decreased 1.6% to $2.2 billion derived from an assessed valuation of $726 million in fiscal year 2011. Officials report the decline in taxable value was primarily attributable to a decline in non-residential property valuation. Management anticipates an increase in assessed valuation of 2.6% to $745 million FY 2012, based on preliminary appraisal values with increased non-residential value, reported as growth in the mining sector. The district has significant concentration in its tax base, with top ten taxpayers contributing 36% of total assessed valuation FY 2011. The top taxpayer, Lee Ranch Coal Company (Peabody Energy Corporation senior unsecured Ba1), contributed approximately 9.8% to FY 2011 taxable value. Assessed value for Lee Ranch Coal Company increased 1.46 times from FY 2010. The second largest taxpayer, Tri-State Generation (Tri- State Generation and Transmission senior secured Baa1), represents 8.3% of the tax base and provides power to participating coops throughout the State. The June 2011 unemployment in the district, represented by McKinley county, has decreased to 9.7%, which remains well above the state unemployment rate of 7.8% and the national rate of 9.3% for the same time period. The fiscal 2010 school year began with a loss of 7.64% of students. Officials report modest 40th day enrollment increases for FY 2011 and project a 1.3% decline in the 40th day count for FY 2010. Moody's believes that the loss of student growth and concentrated tax base are of concern but that the considerable footprint of the district, the presence of the Navajo Nation and Zuni Pueblo help to mitigate the potential for materially damaging levels of student or tax base erosion.

MODERATE DEBT PROFILE

Inclusive of the current sale, the district's debt burdens are moderate at 2.0% direct and 3.1% overall, both expressed as a percentage of projected fiscal 2011 full value. The district's bonding capacity is capped at 6% of the assessed valuation (or 2% of the full value). As a result, the district has routinely retired debt in an expeditious fashion, with 79.6% retired in ten years. The district has no remaining authorized but unissued debt, however, a subsequent bond election is planned for 2013. The debt portfolio has no exposure to variable rate debt or interest rate swaps. Despite plans for additional borrowing, Moody's anticipates the district's debt profile will remain manageable given the favorable rate of principal retirement.

WHAT COULD CHANGE THE RATING-UP:

*Significant growth of the tax base

*Continued trend of favorable financial operations yielding bolstered reserves

WHAT COULD CHANGE THE RATING-DOWN:

*Trend of structural imbalance resulting in depletion of financial reserves

*Substantial contraction of tax base

KEY STATISTICS

2010-2011 Enrollment: 2,238 students

FY 2011 Full Value: $2.2 billion

FY 2011 Full Value per Capita: $34,615

Direct Debt Burden: 2.0%

Overall Debt Burden: 3.1%

Payout of Principal (10 years): 79.6%

FY 2010 General Fund Balance: $10.5 million (11.5% of General Fund revenues)

Post-sale Parity Debt Outstanding: $44.88 million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Keaton Hoppe
Analyst
Public Finance Group
Moody's Investors Service

Gera M. McGuire
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 UNDERLYING AND Aa1/NEGATIVE OUTLOOK ENHANCED RATING TO GALLUP-MCKINLEY COUNTY SCHOOL DISTRICT NO. 1'S $7.05 MILLION GENERAL OBLIGATION SCHOOL BUILDING BONDS, SERIES 2011A AND $10.81 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 20
No Related Data.
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