NEW YORK--()--Fitch Ratings has assigned the following program rating based on the Ohio School District Credit Enhancement Program to Dayton City School District OH's (the district) unlimited tax general obligation (ULTGO) qualified refunding bonds:
--$94,505,000 (est.) series 2013A refunding bonds, 'AA'.
In addition, Fitch assigns an underlying rating of 'A+' to the series 2013A refunding bonds.
Fitch also assigns the following ratings:
--$4,000,000 (est.) limited tax general obligation (LTGO) refunding bonds, series 2013B bonds 'A+';
--$93,455,000 (est.) unlimited tax general obligation refunding notes, series 2013 'F1+';
--$94,505,000 (est.) unlimited tax general obligation refunding notes, series 2013B 'F1+'.
(The 2013B refunding notes will only be issued if the district declines to issue its series 2013A bonds due to market conditions).
In addition, Fitch affirms the following ratings:
-- Limited tax general obligation bonds, series 2003B, 2012A and 2012B at 'A+';
--Unlimited tax general obligation bonds, series 2003A and 2003D at 'A+';
-- Certificates of participation (COPS), series 2012 at 'A-'.
The Rating Outlook on the bonds is Stable.
The refunding bonds and notes are expected to sell via negotiation on or about March 14 and April 9, respectively.
PURPOSE OF CURRENT DEBT ISSUES
Proceeds of the series 2013A refunding bonds will be used to current refund the series 2003D bonds and terminate the related swaption. Present value savings is approximately $514,537. Final maturity is Nov. 1, 2022.
Proceeds of the series 2013B refunding bonds, will current refund the 2003B bonds. Present value savings is approximately $294,171. Final maturity is Nov. 1, 2023.
Proceeds of the series 2013 refunding notes will current refund the series 2003A bonds. In conjunction with the issuance of the notes, the district will enter into a swap with the Bank of New York. The notes will mature in October 2013 but are expected to be re-issued in one-year maturities thereafter until the swap is fully amortized in 2031, or sooner upon early termination at the district's discretion.
The series 2013A refunding bonds and series 2013 refunding notes (and 2013B refunding notes if issued) are voted general obligation debt of the district secured by an unlimited ad valorem tax levy outside the ten-mill limitation.
Additional security for the series 2013A refunding bonds is provided by the Ohio School District Credit Enhancement Program (state enhancement program) which requires the Ohio Department of Education (ODE) to forward state foundation program payments to the bond registrar if, prior to the bond payment date, the district has not transmitted funds sufficient to cover required debt service payments.
The series 2013B refunding bonds and outstanding LTGO bonds are non-voted general obligation debt of the district secured by an ad valorem tax levy within the ten-mill limitation.
The COPS are secured by an obligation of the district to make rental payments under the lease subject to annual appropriation. The COPS are additionally secured by a leasehold interest for the benefit of certificate holders in the leased assets.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: As a result of strong fiscal management and the implementation of significant expenditure cuts, financial operations have stabilized with the district recording operating surpluses over the last two fiscal years and the rebuilding of reserves to adequate levels.
STATE-AID DEPENDENT; DEMONSTRATED VOTER SUPPORT: The district is heavily reliant on state aid. The financial implications associated with impending changes to the state school funding formula are projected to be positive for the district, but are still uncertain. The bulk of remaining revenues are from continuous property tax levies which Fitch views positively in combination with a history of strong voter support for new levies.
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Socioeconomic indicators are weak as evidenced by below average wealth and income levels, poverty levels that are more than double state and national rates, above average unemployment rates, and poor property tax collection rates.
MANAGEABLE DEBT PROFILE: The district's debt profile is characterized by below average debt per capita and carrying costs but an elevated debt to full value ratio. Debt levels should remain stable as the district has no borrowing plans and amortization is slightly above average.
MARKET RISK ON NOTES: Market access risk in the event of annual rollover of the 2013 refunding notes is mitigated to some degree by the strong 'AA' rating afforded to prospective refunding bonds by their qualification for the state enhancement program.
STRONG PROGRAM ESSENTIALS: The series 2013A refunding bonds also qualify for the state enhancement program, which is characterized by stringent requirements and strong program mechanics.
COPS APPROPRIATION RISK: The 'A-' rating on the COPS reflects the annual appropriation risk inherent in the rental payments to be made by the district to the trustee and the general creditworthiness of the district. Fitch believes appropriation risk is elevated by the non-essential nature of the leased assets, one of which is an administrative facility and the other is being sublet to a third party.
DECREASE IN FINANCIAL FLEXIBILITY: A new state funding formula that has negative financial implications, which Fitch considers unlikely, a failure to pass a new property tax levy, declining property tax collections, and/or additional substantial enrollment declines could negatively impact the district's financial operations and result in downward rating pressure.
LEASED ASSET ESSENTIALITY: Should one or both of the leased assets securing the COPs become vacant or underutilized, Fitch believes the district's incentive to continue to appropriate for annual lease payments would be diminished.
The district is located in Montgomery County, 68 miles west of Columbus. Encompassing 49 square miles the district includes Harrison and Jefferson townships and portions of the cities of Dayton, Riverside and Trotwood. The district serves approximately 15,000 students and has experienced significant declines in enrollment as a result of population outflow and competition from charter schools. Enrollment is projected to decline an additional 5.4% by the 2014 - 15 school year.
CONSERVATIVE BUDGETING AND COST CONTROLS IMPROVE FINANCIAL POSITION
As a result of continued conservative budgeting and significant expenditure cuts, including the elimination of approximately 500 positions since 2008, the financial position of the district has continued to improve. For fiscal 2012 (year-end June 30), the district reported a general fund operating surplus after transfers of $7.9 million compared to a surplus of $4.3 million in 2011 and a deficit of $1.8 million in 2010. The unrestricted general fund balance (sum of committed, assigned and unassigned) at June 30, 2012 totalled $16.8 million or an adequate 8.0% of general fund spending compared to $8.8 million or 4.1% of spending in fiscal 2011.
The October 2012 five-year (fiscal 2013-2017) cash-basis forecast projects annual deficits of $1.7 million for fiscal 2013, increasing to $14.3 million in 2017. Ending cash balances remain positive through 2014 with a $1.4 million cash deficit projected in 2015, increasing to $28.6 million in 2017. Fitch expects management will continue to conservatively budget and implement expenditure reductions to maintain reserve levels and manage future budgetary gaps.
The district is highly reliant on state funding which represents about 70% of general fund revenues. Under the Governor's proposed new school funding formula, preliminary numbers project the district will benefit from additional state funds which could result in increased financial flexibility and positive cash balances through 2016. Fitch expects the district to benefit from a new funding formula given its low property values and weak wealth levels, but the final version is subject to modifications and approval by the state legislature.
CONTINUOUS PROPERTY TAX LEVIES AND STRONG VOTER SUPPORT ARE CREDIT POSITIVES
Property taxes represent approximately 26% of general fund revenues. Fitch views positively, the continuous nature of the district's property tax levies which do not require renewal. Additionally, voter support for new levies has been strong with the last levy approved by 58% of the voters in 2008. Depending on the financial implications of the final version of the new school funding formula, management may consider placing a new 5.5 mill levy on the ballot in November 2013 which, if passed, would generate about $7.2 million annually and relieve some future budgetary pressures. Property tax collections continue to be exceptionally weak with a current collection rate of only 84%. Total collections are better but still weak at 90%.
ECONOMIC RECOVERY CONTINUES; WEAK SOCIOECONOMIC INDICATORS PERSIST
The area's traditional manufacturing base in automobile parts and assembly was devastated by the recession, but is showing signs of recovery. The region has established itself as a hub for aerospace research and development, and Wright-Patterson Air Force base, which employs approximately 26,000 civilian and military personnel, provides stability to the local economy.
Although improving, the city's unemployment remains elevated. At December 2012, the city recorded an unemployment rate of 7.9%, an improvement from 9.6% recorded in December 2011, but still above the state and national rates of 6.6% and 7.6%, respectively. The improved unemployment rate appears to be due to the decline (1.7% from Dec. 2011 to Dec. 2012) in the labor force versus an increase in employment.
The district's population of approximately 152,000 has declined by almost 16% since 2000. Income levels as measured by per capita money income and median household income are well below state and U.S. averages. Typical of urban areas, the poverty level is more than double that of the state and nation. Fitch expects that these economic vulnerabilities will continue to pressure the district in the near-to-medium term.
MANAGEABLE LONG-TERM LIABILITIES
The district's debt burden is mixed with debt per capita below average and debt to full value somewhat elevated at 5.7%. Debt levels should remain stable given the slightly above average principal amortization and minimal future borrowing plans. The district recently completed a major $628 million capital program that replaced or remodeled 26 schools. Debt service represents a manageable 8.0% of 2012 general and bond retirement fund expenditures.
The district entered into two swaptions in 2009 related to the series 2003A and 2003D bonds, receiving a $9.6 million up front payment. This current financing contemplates the exercise of the swaptions by the counterparty in April. While the district will be able to refund the bonds and pay the swap termination fee on the 2003D bonds and still record a small net present value savings, at this point it is not economically feasible do so on the 2003A bonds.
For the 2003A bonds the district will issue refunding one-year 'rolling' notes until the economics are positive or at least break even. At that time the district would terminate the 2003A swap and issue refunding bonds. Fitch's chief credit concern regarding this transaction is the district's ability to access the short-term market to roll the notes. However, this risk is mitigated to some degree by qualification of prospective refunding bonds in the state enhancement program.
The district contributes to the School Employees Retirement System and the State Teachers Retirement System, both multiple-employer defined pension plans. The district is required to make contributions in accordance with rates established by the state and has annually met the annual contributions, although this has not always equaled the actuarially required contribution (ARC). Contributions represented a modest 4.9% of 2012 total governmental fund spending. Total carrying costs for debt service, pension payments and OBEP costs are manageable at 12.6% of spending.
STRONG PROGRAM ESSENTIALS
The 'AA' program rating is based on the qualification of the series 2013-A refunding bonds (and when issued the refunding bonds to take out the 2013 refunding notes - an aggregate total of $188.0 million) -- for participation in the state enhancement program.
Participation requirements are stringent, including 2.5 times coverage of maximum annual debt service by unrestricted state foundation aid on proposed bonds and any outstanding obligations covered by the program. Fiscal year 2013 estimated state foundation aid to the district is 3.5 times the maximum annual debt service for debt to which state aid is pledged.
Program mechanics are strong. Ohio law requires the Ohio Department of Education (ODE) to forward to a bond paying agent or registrar state foundation payments otherwise due to a participating school district if, prior to the bond payment date, the district has not transmitted funds sufficient to cover a required debt payment. For more information on the Ohio School District Credit Enhancement Program, see Fitch's report dated May 13, 2011 at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria