west las vegas municipal school district 1, credit …...west las vegas municipal school district 1,...

U.S. PUBLIC FINANCE

CREDIT OPINION30 August 2017

New Issue

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Heather Guss [email protected]

John Nichols [email protected]

Alexandra S. Parker 212-553-4889MD-Public [email protected]

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West Las Vegas Municipal School District 1,NMNew Issue - Moody's assigns A3 UND/Aa2 ENH to West LasVegas MSD 1's, NM GO Bonds, Ser. 2017

Summary Rating RationaleMoody's Investors Service has assigned an A3 underlying rating to West Las Vegas MunicipalSchool District 1, NM’s $2.5 million General Obligation School Building Bonds, Series 2017.Moody’s maintains the A3 underlying rating on the outstanding parity debt. Concurrently,Moody's has also assigned a Aa2 enhanced rating to the Series 2017 bonds based on the NewMexico School District Enhancement Program (NMSDEP) – Post March 30, 2007.

The A3 underlying rating reflects the district's modestly-sized tax base with weaksocioeconomic profile, manageable debt burden, and elevated pension liability. The ratingfurther incorporates the district's weak reserve position, which is expected to remain narrowover the near term future.

The Aa2 enhanced rating is based on our assessment of the NMSDEP - Post March 30, 2007and a review of the district's proposed financing. For additional information on the program,please see Moody's report dated May 4, 2008.

Credit Strengths

» Modestly-sized, stable tax base

» Manageable debt burden with rapid principal amortization

Credit Challenges

» Reserve position will remain narrow over the near term

» Weak wealth and income indices

» Elevated pension burden

Rating OutlookOutlooks are usually not assigned to local government credits with this amount of debtoutstanding.

Factors that Could Lead to an Upgrade

» Trend of operating surplus leading to material increase in reserves

» Significant tax base expansion and diversification coupled with improved socioeconomics

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1088817

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Factors that Could Lead to a Downgrade

» Economic contractions measured by assessed valuation or student enrollment declines

» Material decline in reserves

» Significant increase in debt burden

Key Indicators

Exhibit 1

West Las Vegas Municipal School Dist. 1, NM 2012 2013 2014 2015 2016

Economy/Tax Base

Total Full Value ($000) $ 487,968 $ 541,550 $ 521,246 $ 527,021 $ 558,410

Full Value Per Capita $ 48,593 $ 55,698 $ 53,610 $ 54,750 $ 34,901

Median Family Income (% of US Median) 57.3% 56.0% 56.0% 46.0% 46.0%

Finances

Operating Revenue ($000) $ 15,245 $ 15,798 $ 15,843 $ 16,642 $ 15,817

Fund Balance as a % of Revenues 11.8% 10.7% 11.7% 17.8% 9.7%

Cash Balance as a % of Revenues 11.9% 12.6% 12.7% 13.2% 12.6%

Debt/Pensions

Net Direct Debt ($000) $ 8,885 $ 8,675 $ 8,200 $ 7,830 $ 7,260

Net Direct Debt / Operating Revenues (x) 0.6x 0.5x 0.5x 0.5x 0.5x

Net Direct Debt / Full Value (%) 1.8% 1.6% 1.6% 1.5% 1.3%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 3.1x 3.3x 3.5x 3.1x 3.2x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 9.8% 9.7% 10.7% 9.8% 9.1%

Operating Revenue, Fund Balance, and Cash Balance are General Debt Service Funds combinedSource: Moody's Investors Service; district's audited financial statements

Detailed Rating Considerations - EnhancedMoody's has assigned an enhanced rating of Aa2 to the Series 2017 General Obligation School Building Bonds, equivalent to theNMSDEP-Post March 30, 2007 programmatic rating. Ratings on individual intercept financings depend on the programmatic rating aswell as our evaluation of the sufficiency of interceptable revenues, the timing of the state's fiscal year relative to scheduled debt servicepayment dates, and the transaction structure.

Based on the district's state equalization guarantee (SEG) funds for fiscal 2016, interceptable state-aid provides an ample minimumof 7.3 times coverage of maximum periodic debt service. Further, state revenues provide a minimum 6.7 times maximum periodicdebt 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 are subject to mid-year cuts, as observed mostrecently in fiscal 2017. This weakness, however, is mitigated by ample debt service coverage even in the event aid is curtailed overthe course of the year. The district makes principal payments in three months of the year (August, October and December), with themajority due in August. The program requires the appointment of a third-party fiscal agent, who is required to notify the state if anintercept of SEG is required. BOKF, NA (Aa3) is the fiscal agent for the current sale.

Detailed Rating Considerations - UnderlyingEconomy and Tax Base: Small tax base expected to remain stableThe tax base will remain stable over the medium-term driven by positive reappraisals of existing property and some commercialdevelopment. Located 70 miles east of the City of Santa Fe (Aa3 stable), the district serves the City of Las Vegas (A2) andunincorporated potions of San Miguel County. Assessed value has been very stable with just one decline in the past ten years (3.7%

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 August 2017 West Las Vegas Municipal School District 1, NM: New Issue - Moody's assigns A3 UND/Aa2 ENH to West Las Vegas MSD 1's, NM GO Bonds, Ser. 2017

https://www.moodys.com/credit-ratings/BOKF-NA-credit-rating-87755

https://www.moodys.com/credit-ratings/Santa-Fe-City-of-NM-credit-rating-600025496

https://www.moodys.com/credit-ratings/Las-Vegas-City-of-NM-credit-rating-600027498


decline in fiscal 2014). Growth over the past five years has averaged 3% annually, and fiscal 2017 AV increased 0.7% to $187.3 million,which was derived from a full valuation (FV) of $562.5 million. Preliminary fiscal 2018 AV reflects a modest 1.1% increase to $189.3million. The top ten taxpayers account for a moderate 12.4% of fiscal 2017 AV and are diverse in industry.

The district's income levels are below average, according to the 2015 American Community Survey estimate. Median family income is55% of the state and 46% of US, and the poverty rate is high at 36%. San Miguel County’s unemployment rate is 8.5% (June 2017),which is higher than both the state (6.7%) and nation (4.5%).

Enrollment continues to decline due to the slow economic recovery, with families moving elsewhere for jobs, and charter schoolcompetition. Over the past five years, enrollment has declined an average of 1.8% annually. Fiscal 2017 total enrollment was 1,516, a2.3% decline from the previous year. The district is focused on recruiting and retaining new students by offering innovative programsand initiatives. Officials expect enrollment to remain at 1,500 students over the medium-term.

Financial Operations and Reserves: Reserves will remain narrowThe district will continue to operate with narrow reserves in comparison to national peers for the foreseeable future givenmanagement's target to maintain 5% of the budget. Audited fiscal 2016 results reflect a small $108,000 General Fund deficit, whichwas slightly better than projections made during our July 2016 review. Available General Fund balance declined to $1.1 million oran adequate 7.7% of revenues. When including the Debt Service Fund, available operating fund balance was $1.5 million or 9.7% ofcombined revenues. The district relies heavily on state aid, which accounted for 98% of 2016 General Fund revenues. Instructional andsupport costs account for the bulk of expenditures, representing roughly 75%.

In fiscal 2017, the district was subject to two unexpected mid-year cuts in state aid, a consequent of the state’s budgetary challenges.The district’s aid was cut $296,000 in October 2016, and then the district was subject to a $291,000 cash balance sweep in January.The district enacted a spending freeze to deal with the cuts and also realized savings in salaries (attrition), utilities, and supplies. As aresult, the district projects a slight General Fund surplus in 2017 despite the state aid cuts.

The fiscal 2018 budget was balanced with $1.2 million of cash reserves, a typical budgeting practice of New Mexico school districts.Going forward, management projects General Fund reserves to be around $750,000, which is equal to the target of approximately 5%of revenues. We note that this desired reserve level is limited compared to A3 peers and future credit reviews will focus on the district'sability to maintain, and ideally surpass, fund balance targets. Given the limited nature of the district's reserves, large declines in reservescould place downward pressure on the rating.

LIQUIDITYGeneral Fund cash has been stable over the past few years and was 4% of revenues at fiscal 2016 year-end. The difference betweenthe General Fund cash and fund balance was due to accounts receivables in the form of federal grants, which were collected in thebeginning of fiscal 2017. Inclusive of the Debt Service Fund, total operating cash was $2 million or 12.6% of total revenues. Liquiditylevels are expected to remain narrow given management's target reserve level.

Debt and Pensions: Manageable debt burden and elevated pension burdenThe debt burden will remain manageable given rapid amortization and reasonable future debt plans. Including the new issue, the directdebt burden is 1.5% of fiscal 2017 full value, which is in-line with state and national medians. State statute limits school district debtburdens to 2% of full valuation. When including debt from overlapping governments, the district’s overall debt burden is 1.8%.

The current issue is the first series from a $9.5 million bond authorization that was approved by voters in February 2017 for upgradesand improvements at current facilities. Post-sale, the district will have $7 million of authorized unissued GO bonds, which will be issuedin three tranches through 2020. In 2021, the district will likely go back to voters for a new $7.5 million GO bond authorization, thoughthe exact amount will depend on AV growth over the next few years.

Annual capital projects are funded through the district's SB-9 levy (2 mills), which generates roughly $400,000 annually. Theauthorization expires in 2019 and the district plans to seek reauthorization at that time.

DEBT STRUCTUREPost-sale, the district will have $8.7 million in GO bonds outstanding. All debt is fixed rate and principal amortization is fast with 94%repaid within ten years. All bonds are retired by 2029.



DEBT-RELATED DERIVATIVESThe district is not party to any interest rate swaps or other derivative agreements.

PENSIONS AND OPEBThe district has an elevated employee pension burden, based on unfunded liabilities for its share of the Educational Retirement Board(ERB), a cost sharing plan administered by the state. The district’s three-year average adjusted net pension liability (ANPL), under ourmethodology for adjusting reported pension data, is $50.6 million or an above average 3.2 times operating revenues and a very high9.1% of full value. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. Theadjustments are not intended to replace the district’s reported liability information, but to improve comparability with other ratedentities.

In fiscal 2016, the $1.3 million pension contribution was below Moody’s “tread water” value of $1.9 million, a credit negative. The“tread water” indicator measures the annual contributions required to prevent the reported net pension liability from increasing, underreported assumptions.

The New Mexico pension plan funding structure experienced several changes with the signing of SB 115, including the reduction of acost-of-living adjustment (COLA) and increases in employee contributions. The legislation will maintain the funding changes until theplan has reached 100% funding, which is estimated to be achieved in 2043. We believe the funding changes adopted in SB 115 willlimit budgetary pressure on the district related to future pension costs.

Total fixed costs for fiscal 2016, including debt service, required pension contributions and retiree healthcare payments, represented$4.8 million, or 27.3% of operating expenditures.

Management and GovernanceThe district is governed by a five-member board of trustees who serve four-year terms. The board performs policy-making andsupervisory functions and delegates administrative responsibilities to the superintendent of schools, who is the chief administrativeofficer of the district.

New Mexico school districts have an institutional framework score of “A,” or moderate. Districts have a low ability to raise revenuesbecause state aid provides over 95% of funding, and property taxes are subject to a small 0.5 mill cap. State aid is moderatelypredictable given a recent trend of increased funding and a history of funding cuts over the past decade. Expenditures, which areprimarily comprised of personnel and facility costs, are moderately predicable given flat student enrollment levels. Districts have amoderate ability to reduce expenditures given above average fixed costs.

Legal SecurityThe bonds are secured by ad valorem taxes that are levied against all taxable property within the district without limitation as to therate or amount.

Use of ProceedsBond proceeds will be used for various upgrades and improvements to current facilities.

Obligor ProfileServing the City of Las Vegas and surrounding areas within San Miguel County, the district manages 11 schools and provides K-12education services to approximately 1,500 students.

MethodologyThe principal methodology used in the underlying rating was US Local Government General Obligation Debt published in December2016. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Defaultpublished in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.



Ratings

Exhibit 2

West Las Vegas Municipal School Dist. 1, NMIssue RatingGeneral Obligation School Building Bonds, Series2017

A3

Rating Type Underlying LTSale Amount $2,500,000Expected Sale Date 09/05/2017Rating Description General Obligation

General Obligation School Building Bonds, Series2017

Aa2

Rating Type Enhanced LTSale Amount $2,500,000Expected Sale Date 09/05/2017Rating Description General Obligation

Source: Moody's Investors Service



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Contacts

Heather Guss [email protected]

John Nichols [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


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