DALLAS — After years of struggling to keep up with a rapidly growing state population, the Arizona School Facilities Board goes to market this week with $100 million of certificates of participation and something entirely new — school enrollments that appear to be leveling off.

Morgan Stanley leads the negotiated pricing expected to take place Thursday, with RBC Capital Markets, Wells Fargo Securities and Piper Jaffray & Co. as co-managers.  Stone & Youngberg serves as financial adviser, with Squire, Sanders & Dempsey LLP as bond counsel.

The COPs will be issued as qualified school construction bonds, with direct interest-subsidy payments from the federal government. The debt earned ratings of A-plus from Standard & Poor’s and A1 from Moody’s Investors Service.

Moody’s downgraded the board from Aa3 to A1 in July, but has a stable outlook on the debt. Standard & Poor’s has a negative outlook.

“Arizona has acted to stabilize its finances and the current outlook reflects the belief that the state will continue to address ongoing budget concerns,” Moody’s analyst Maria Coritsidis wrote.

Created by the Arizona Legislature in 1998 to equalize school facility funding, the School Facilities Board was authorized to issue up to $100 million in qualified school construction bonds in 2010.

With schools representing the largest expenditure, the state’s 34% decline in revenue since 2006 has added enormous budgetary strain, forcing the state to borrow through short-term warrants.

While statewide enrollment is up by about 7,205 students, the state Department of Education attributes most of that to charter school attendance.  Public schools throughout the state, including the once-booming Phoenix area, have reported lower enrollments for the first time in years.

Education officials generally cite two factors: a growing residential foreclosure crisis and the loss of students due to SB 1070, whose express purpose was to drive illegal aliens out of the state.

A federal judge has halted enforcement of SB 1070’s requirement that police and sheriff’s deputies investigate the immigration status of anyone they stop or question if they have a “reasonable suspicion.” However, Arizona media have reported an exodus of Hispanics since the law was passed and signed earlier this year.

The latest reports from the research firm CoreLogic show that 56% of homeowners in the Phoenix area had negative equity in their homes in June and nearly 53% of sales were distressed sales. Despite the severity of those numbers, they are actually an improvement from 2009.

One in every 165 Arizona housing units received a foreclosure filing in August, the nation’s third highest state foreclosure rate, says research firm RealtyTrac. Neighboring Nevada ranking first for the 44th straight month, followed by Florida.

According to the latest Census Data, Arizona is now the second poorest state as measured by percentage of people living below the poverty line. Only Mississippi had higher poverty figures.

While short-term borrowing helped Arizona get through the last fiscal year, an outside line of credit is no longer available after Treasurer Dean Martin decided not to renew it.

The economic headwinds are the new reality for a state long considered an icon for rapid expansion. Arizona’s population grew 29% to 6.6 million people during the nine years ending July 1, 2009, according to the U.S. Census Bureau.

Arizona could borrow about $300 million from state agencies if voters approve a November ballot ­initiative.

“We expect that the state will lag in the economic recovery as it will take some time to rebound from the severe housing market downturn, which has led to weakening in state finances and economy that is more significant than in other states,” Moody’s Coritsidis wrote. “Until the economy rebounds, the state will continue to experience fiscal pressure which will be difficult to address given constraints on the state’s financial flexibility.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.