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MOODY'S ASSIGNS Aa3 UNDERLYING AND Aa1 ENHANCED RATING TO AZTEC M.S.D.'S (NM) G.O. REFUNDING BONDS, SERIES 2010B; ENHANCED RATING BASED ON NMSDEP

29 Sep 2010

RATING AFFECTS $49 MILLION IN OUTSTANDING PARITY DEBT

Primary & Secondary Education
NM

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Refunding Bonds, Series 2010B

Aa3

Aa1

  Sale Amount

$23,715,000

  Expected Sale Date

10/04/10

  Rating Description

General Obligatoin; NMSDEP

 

Opinion

NEW YORK, Sep 29, 2010 -- Moody's Investors Service has assigned a Aa3 underlying and Aa1 enhanced rating to Aztec Municipal School District No. 2's (NM) $23,715,000 General Obligation Refunding Bonds, Series 2010B. At the same time, Moody's has affirmed the Aa3 rating on the district's $49 million in general obligation debt outstanding.

RATING RATIONALE

The rating considers the district's sizeable but fluctuating tax base given the nature of the natural gas-dependent economy; narrow but adequate cash position and a manageable debt burden within the constraints of New Mexico law. The bonds are general obligations of the district payable from general (ad valorem) taxes that may be levied against all taxable property within the district without limitation as to rate or amount.

Assignment of the Aa1 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 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 Department of Education (DOE). 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 RATING RATIONALE

While Moody's has assigned a programmatic rating of Aa1, with a stable 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 state receipts for fiscal year 2009, interceptable revenues from the state for this district provide a strong minimum of 3.5 times coverage of maximum periodic debt service (maximum periodic debt service payment is due in August 2015). Further, state revenues provide a strong minimum 3.2 times 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 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 mitigated 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; Bank of Albuquerque 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 are 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 stable outlook.

OIL AND GAS VALUES RESULT IN CYCLICAL AD VALOREM VALUES; STEEP DECLINE IN FISCAL 2011

The district is located in San Juan County in the relatively rural northwestern Four Corners area of New Mexico. The San Juan Basin is an active natural gas formation. As such, the tax base is largely dependent on gas-related values and related industries. Residential values within the district comprise just 14% of the base. In addition to gas production, agriculture, tourism and mining also play key rolls in the local economy. The fiscal 2010 assessed value was $1.4 billion, derived from a sizeable full value of $4.2 billion. In the last several years, the cyclical nature of the oil and gas industry has caused unusual tax base fluctuations. For example, after declining by 33% between fiscal 2003 and 2004, the tax base increased by 47.5% in fiscal 2005 and increased by 20.2% and 27.7%respectively in fiscal 2006 and 2007. The increases were followed by two consecutive years of loss in fiscals 2008 and 2009 followed by 7.8% increase in fiscal 2010. Due to the downturn in natural gas prices during late to mid 2010, appraisal values for fiscal 2011 declined by a considerable 41.5% to $818.8 million assessed value and $2.5 billion full value. Given that natural gas prices have rebounded from the value trough experienced when fiscal 2011 values were derived, the tax base is expected to increase again in fiscal 2011. Although the value loss is considerable, the expected $2.5 billion full value remains comparable to other Aa3 rated credits across the nation.

Although fluctuating values of natural gas production have decreased the full value, moderate residential growth is occurring in Aztec. District officials report that over 1,000 new home starts have been permitted by the City of Aztec since fiscal 2008. Retirees are attracted to the area and have contributed to the growth in the housing market. Retail and restaurants have been attracted to the area to meet the demand from the population growth. Socioeconomic indicators are average with per capita incomes of 94.6% of the state and 75.6% of the U.S. Although development is occurring, it is not enough to offset the considerable natural-gas related values located in the district and Moody's expects the base to continue to be vulnerable to the fluctuations of natural gas prices.

FINANCIAL POSITION STABLILIZED BY STATE FUNDING; DEBT SERVICE TAX RATE ADJUSTED

District operations are largely supported by state revenues with only 2.3% of fiscal 2009 general fund revenues derived from local property taxes. Debt service payments are fully financed through property tax collections and have been adequately adjusted to compensate for the tax base loss. In anticipation of the effect of falling natural gas prices, officials increased the unlimited interest and sinking (I&S) tax rate by $2.50/$1,000 ad valorem value (AV) to $5.50/$1,000 AV In fiscal2010. The rate will be further increased to $5.69/$1,000 AV in fiscal 2011.

In the general fund, officials will offset the 2% decline in local revenues through attrition and other cost control measures. Under New Mexico public school finance laws, the district's maximum cash balance is $1.7 million. Fiscal 2009 ended with a cash position of $1.6 million or 6.9% of revenues, just under the allowed carry-over balance. Fund balance was 6.2% of revenues. Fiscal 2010 ended in June and officials report balanced operations and a cash and fund balance position similar to fiscal 2009. The district has not expended approximately $277,000 of federal stimulus dollars and has plans to spend these in fiscal 2011. District officials report a goal of maintaining a 7% fund balance position over the near term to allow for potential mid-year reductions in state aid. Mid-year reductions occurred in fiscal 2009 and fiscal 2010 and could potentially occur in fiscal 2011 as the state grapples with ongoing revenue stress. Enrollment has been flat to declining in recent years, but increased by 4.5% in fiscal 2010. Moody's expects the district to continue financially sound management practices and maintain a similar cash and fund balance position.

MANAGEABLE DEBT BURDEN

The district's debt burden is below average at 1.9% direct and 2.1% overall, both based on fiscal 2011 taxable full values. Payout is swift with 84.9% retired in ten years. New Mexico law limits the amount of debt outstanding to 6% of the assessed valuation. Given the decline in property values in fiscal 2011, the district will not have additional bonding capacity until values increase and existing debt is paid off. Given the limited issuance capacity of the district, the lack of outstanding authorization and the rapid amortization, Moody's believes the district's debt burden will remain manageable.

KEY STATISTICS

2008 Population Estimate: 18,700

Full value per capita: $170,271

2010 Full value: $4.2 billion

2011 Full value: 2.5 billion

Direct debt burden: 1.9%

Overall debt burden: 2.1%

Payout of principal (10 years): 84.9%

Fiscal 2009 Undesignated General Fund balance: $1.5 million (6.2% of General Fund revenues)

WHAT COULD CHANGE THE RATING -UP

*Growth of tax base and diversification away from natural resources to offer stability

*Trend of increasing fund balance that provides greater financial flexibility

WHAT COULD CHANGE THE RATING -DOWN

*On-going taxable value declines that place values below rating category median

*Deterioration of fund balance that deteriorates district's financial flexibility

PRINCIPAL METHODOLOGY

The principal methodology used in rating Aztec Municipal School District 2, NM was General Obligation Bonds Issued by U.S. Local Governments rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

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.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Michelle Smithen
Analyst
Public Finance Group
Moody's Investors Service

Leslie Lukens
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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

MOODY'S ASSIGNS Aa3 UNDERLYING AND Aa1 ENHANCED RATING TO AZTEC M.S.D.'S (NM) G.O. REFUNDING BONDS, SERIES 2010B; ENHANCED RATING BASED ON NMSDEP
No Related Data.
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