Fitch Affirms Toledo City Schools, OH's ULTGO Bonds at 'A-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed Toledo City Schools, Ohio's (the district) general obligation unlimited tax (ULTGO) bonds as follows:

--$25.7 million ULTGO bonds series 2009 at 'A-'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are a voted general obligation of the district, secured by an unlimited ad valorem tax levy outside the 10-mill limitation.

The bonds are also secured by the Ohio School District Credit Enhancement Program which is rated 'AA' by Fitch.

KEY RATING DRIVERS

IMPROVED BUDGETARY BALANCE: The Outlook revision to Stable from Negative reflects the district's improved financial operations which resulted in two consecutive annual surpluses and eliminated a sizable general fund deficit. Fitch expects the district to proactively address longer term budgetary challenges.

RENEWAL LEVY APPROVED: In November 2013 district voters approved a renewal levy though 2018 which should stabilize local revenues. Coupled with improved state funding and implementation of additional spending cuts, the levy is expected to facilitate budgetary balance in 2014 and 2015.

LIMITED FINANCIAL FLEXIBILITY: Reductions in state funding combined with multiple years of declines in property tax revenues have left the district with diminished financial flexibility. The near term outlook for state and local revenues appears stable to modestly positive, but the district faces budgetary challenges in 2016 and beyond.

BALANCED OPERATIONS LARGELY DEPEND ON VOTERS: The district's revenue-raising ability is largely dependent on voter approval from constituents who have repeatedly voted down new revenue raising initiatives but have been supportive of renewal levies.

TRANSFORMATION PLAN AND PERFORMANCE AUDIT GENERATE SAVINGS: A transformation plan for the district yielded expenditure reductions in 2012 and 2013 and appears to be minimizing enrollment declines. The district expects to implement additional revenue and expense solutions outlined in a performance audit completed in 2013.

BELOW AVERAGE ECONOMIC INDICATORS: Elevated unemployment, low wealth indices, and a high poverty rate reflect the depressed condition of the area economy. Recent job growth and the expansion of automotive manufacturing within the city are indicative of the potential for improvement but overall recovery will be slow.

MANAGEABLE DEBT PROFILE: Debt per capita is low and as measured by full value and carrying costs are moderate. Additional debt needs are low. This positive is tempered by likely increased carrying costs from rising future pension costs given the state plans' low current funding levels.

RATING SENSITIVITIES

MAINTENANCE OF BUDGETARY BALANCE: District financial operations largely hinge on continued voter approval of renewal operating millage and stable state funding coupled with tight expenditure controls in order to maintain balanced operations. Fitch believes that long-term structural balance and the building of stronger reserves will be challenging.

CREDIT PROFILE

The district covers 72 square miles in Lucas County in northwestern Ohio, approximately 75 miles east of the Ohio-Indiana border and within 5 miles of the Ohio-Michigan border. The district provided education to 22,937 students in grades K through 12 as of October 2012. Current enrollment is down 33% from over 34,000 in 2003 due to population declines and a shift to charter schools. The district's territory borders on Lake Erie and encompasses approximately 70% of the City of Toledo, 66% of Spencer Township, 8% of Harding Township and less than 1% of the Village of Ottawa Hills. The district's population has declined 9.4% over the past decade to 284,012 in 2013, impacted by the cyclicality of a large manufacturing presence.

IMPROVING BUDGETARY BALANCE, FINANCIAL FLEXIBILITY LIMITED

Consecutive general fund surpluses in 2012 and 2013 eliminated a sizable general fund balance deficit. Overall financial reserves remain low, leaving little margin for unexpected revenue shortfalls or spending needs.

After several years of large general fund deficits through 2011, the district implemented a comprehensive transformation plan in 2012. The plan generated significant wage and benefit cost savings resulting in a 2012 general fund surplus of $9.6 million (3.2% of expenditures) followed by a $1.3 million surplus in 2013. The unrestricted general fund balance improved to a negligible but positive $60,000.

State funding and property tax revenues, 68% and 31% of total general fund revenues respectively, stabilized in 2012 and 2013. Coupled with recurring expenditure savings from wage and benefits concessions and staff reductions, Fitch expects the improved revenue picture to lead to continued positive performance with a $3 million general fund surplus for 2014. However, the district faces budgetary challenges in 2015 and beyond. The district anticipates meeting these budgetary challenges by implementing further expenditure reductions as outlined in a recently completed performance audit which provides up to $91 million of cost savings initiatives over five years.

Improved budgetary balance and surplus results improved the district's weak cash position and eliminated the need for short term borrowing in fiscal 2012-2014.

DEPENDENCE ON VOTER INITIATIVES

Management's attempts to raise additional revenues through new levy millage ballot initiatives have failed, triggering cuts to school personnel and programs. The most recent failed attempt was in November 2012.The district did obtain strong positive voter approval in November 2013 for the renewal of a 6.50 mill operating levy that was set to expire at year-end. The renewal is for five years through 2018 and a separate 4.8 mill renewal levy expires in 2019. The district may seek approval for new levy monies as well but Fitch believes recent failures make approval uncertain at best. However, renewal levy initiatives have historically been successful.

The recently-approved renewal levy is included in the district's multi-year projections. Expenditure assumptions in the five-year plan are very conservative and do not include implementation of performance audit initiatives. Failure to obtain new levy revenues (which Fitch believes will be more challenging) or significant expenditure reductions will pressure the district's ability to maintain budgetary balance and restore financial reserves.

TRANSFORMATION PLAN AND PERFORMANCE AUDIT

In July 2011 the district implemented a transformation plan designed to reduce operations and costs to appropriate levels and improve classroom efficiency and effectiveness and overall operations. Large declines in enrollment have plagued the district in the past and declining enrollment has had a direct effect on the district's revenues as state aid is partly dependent on enrollment numbers. The transformation plan has begun to stem the enrollment declines and helped restore budgetary balance. The outlook for state funding is positive for 2014 and 2015 according to the adopted state budget, which is expected to increase funding to the district by $20 million.

An independent performance audit for the district was completed in 2013 and provides a five-year fiscal impact summary with up to $91 million of net savings over five years. The district is evaluating the recommendations and expects to implement some of the recommendations in the coming years. Large potential expenditure savings include selected management and educational staff reductions, programmatic reductions and efficiencies, some facilities consolidations, implementation of an energy management conservation program and transportation efficiencies. Fitch believes the district will be challenged to implement all of the recommendations given pressures to improve educational services and stem declining enrollments.

LOCAL ECONOMY REMAINS WEAK WITH SOME SIGNS OF IMPROVEMENT

The local economy is driven mostly by manufacturing with a concentration in the automotive industry complemented by the healthcare and university sectors. The city of Toledo reported unemployment of 8.6% in November 2013 which is down from a high 12.6% average in 2009 but remains higher than both the state and the nation. Recent economic activity includes several multi-million dollar manufacturing facility investments and job additions. Recently a $250 million casino opened and provides for additional employment opportunities for the area going forward. Wealth levels are below average both on a median household income basis and on a per capita personal income basis and 2011 poverty rates were nearly double those of the nation.

A sexennial property revaluation in 2012 revealed that the district's taxable assessed value (TAV) has declined 36% from its peak in 2007. Further TAV declines are expected to be modest following revaluation, including a negligible 0.5% decline for 2013. Declines should be somewhat mitigated by the addition of the casino and other local commercial developments. Leading taxpayers are diverse and include several utilities and large real estate holdings.

Property tax collections have remained weak at around 85% on a current basis for the past four years through 2012. Fiscal 2013 and 2014 indicate collections and delinquencies are stabilizing and large commercial refunds decreasing.

MANAGEABLE LONG-TERM LIABILITIES

The district's overall debt burden is low on a per capita basis at $1,230 but more moderate when compared to the tax base, at 4.3% of full value. Principal amortization is slow with only 38% of total principal retired within 10 years. This concern is offset in part by the district's limited future capital needs. Debt service costs should continue to be manageable as the district has no plans for additional debt.

The district contributes to two state-sponsored defined benefit pension plans, both funded at low levels. The district contributes the full statutorily-required amount in each year. Costs to the general fund are not overly burdensome but required future contributions may increase given the plans' weak actuarial funding levels. Other post-employment benefits (OPEB) are provided through two state run programs and the costs to the district are very manageable. Total carrying costs for debt service, pensions and OPEB are modest at 10% of total governmental funds excluding capital funds, due in part to slow amortization.

STRONG PROGRAM ESSENTIALS

The district's bonds also benefit from participation in the Ohio School District Credit Enhancement Program, which is rated 'AA' by Fitch. Program requirements are stringent including 2.5x coverage of MADS by unrestricted state foundation aid on proposed bonds and any outstanding obligations covered by the program. Fiscal 2014 estimated state foundation aid to the district is 18x MADS, well above the required 2.5x.

Program mechanics are strong. Ohio law requires the Ohio Department of Education 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 April 26, 2013 at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

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 and IHS Global Insight.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822821

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Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer, +1 212-908-9167
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1 212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer, +1 212-908-9167
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1 212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com