Fitch Affirms Solon City School District, OH's ULTGO Bonds at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has taken the following actions on Solon City School District OH's (the district) unlimited tax general obligation (ULTGO) bonds:

--Approximately $12.7 million ULTGO, series 2012 and 2005 affirmed at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the levy of an ad valorem tax on all taxable property within the district without limitation as to rate or amount.

KEY RATING DRIVERS

DIVERSE ECONOMY/AFFLUENT POPULATION: The economy is diverse among healthcare, manufacturing and education. Wealth levels are significantly above county, state and U.S. averages.

DEMONSTRATED VOTER SUPPORT: The district benefits from strong voter support for permanent operating property tax levies.

HEALTHY FINANCIAL POSITION: The permanent nature of the operating tax levies affords a good deal of financial stability relative to other Ohio school districts, as does the district's solid reserve level.

MANAGEABLE LONG-TERM OBLIGATIONS: The district's debt levels should remain modest given no additional borrowing plans, above average amortization, and the availability of a separate permanent improvement fund dedicated to maintenance and capital costs. This positive is tempered by potential increased carrying costs from rising pension costs given the state plans' low current funding levels.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and outstanding fund balance levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located in southeastern Cuyahoga County (the county), 19 miles southeast of Cleveland and 22 miles northeast of Akron. The district encompasses all of the City of Solon (the city) and the Village of Glenwillow. The city is fully developed, while commercial and industrial growth continues in Glenwillow.

Enrolment peaked at 5,300 five years ago and is currently approximately 4,815. Management projects an additional slight decline in enrolment because the area is built out, and lower birth rates are expected. The district's population totaled 23,894 in 2010, an increase of 9.3% since 2000.

The district continues to be rated as one of the top academic public school districts in the state and nation. In 2013 the district again was recognized by both Newsweek and U.S. News & World Report as having one of the state's and nation's top high schools based on a variety of student achievement and accountability criteria including graduation rate, matriculation rate and average ACT and SAT scores.

DIVERSE ECONOMY SUPPORTED BY AFFLUENT POPULATION

The economy is diverse among education, healthcare and manufacturing with large employers including Nestle, CVS Caremark, and the Cleveland Clinic-Solon Contact Center. Unemployment rates are not available for the district or the city due to their small size. The county unemployment rate of 7.4% for March 2014 was above the state and national rates of 6.2% and 6.8%, respectively. Given the strong economics of the district and city we would expect unemployment rates to be lower than that of the county, state and U.S. District wealth levels are high; 2011 per capita money income was 174% of the county, 182% of the state, and 167% of the U.S.

DEMONSTRATED VOTER SUPPORT FOR TAX LEVIES

Property tax collections, which represent the largest source of general fund revenue at 72%, are strong and consistently stable at a current collection rate of 98%. Unlike many Ohio school districts, the district has permanent levies and has historically had very strong voter support when passing new levies, both of which provide financial stability and which Fitch views as positive credit factors. The district has had 20 out of 21 new levies passed since 1986. The most recent levies were passed in Nov. 2013, and were comprised of a 0.4 mill permanent improvement levy and a 0.4 mill operating expense levy. Both are continuous and generate about $425,000 each on an annual basis.

STRONG RESERVES AFFORD FINANCIAL FLEXIBILITY

District officials budget conservatively and have successfully reduced expenditures, implementing approximately $2.7 million in cuts in both fiscal years 2011 and 2012. Expenditure reductions included salary freezes and reductions in personnel as well as cuts to salary and benefits for administrative, teaching and custodial staff.

Historically, financial operations have been favorable. Audited results showing ebb and flow of the general fund balance is very common among Ohio school districts as the operation levies are cyclical. The district is reliant on voter approval but not to the same degree as districts with expiring levies. For fiscal year 2012 and 2013 (year-end June 30), the district reported general fund operating surpluses after transfers of $8 million (12.8% of spending) and $5.2 million (8.4% of spending). The unrestricted fund balance totaled $24.5 million at June 30, 2013, a healthy 39.5% of general fund spending.

For fiscal year-end June 30, 2014, on a cash basis, the district is projecting a $5.6 million operating surplus and an unreserved fund balance of $28.4 million or 43.8% of expenditures.

FORECAST SHOWS SMALL OPERATING DEFICITS IN OUT YEARS

The May 2014 five-year cash forecast projects positive operations through fiscal 2016. Deficits of $1.5 million (2.1% of spending) and $4.3 million (5.9% of spending) are projected in 2017 and 2018, respectively. Fitch's concern regarding these out-year deficits are mitigated by management's conservative projections and the district's strong history of voter approval for new tax levies. Additionally, the district has the ability to implement, with voter approval, an income tax of up to 2%, something the district does not plan to do.

Strong positive ending cash balances are projected for each year of the forecasted period despite the expected deficits, ending with a $30.4 million or 41% of spending in fiscal 2018.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt is modest at $1,715 per capita and 1.2% of market value. Fitch expects debt levels to decrease given limited planned capital projects due to the good condition of the facilities, rapid principal amortization (91% retired in 10 years), and the availability of approximately $7 million in the permanent improvement fund which can be used for building maintenance.

The district contributes to two state-sponsored defined benefit pension plans, the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS). The district contributes the full statutorily-required pension cost each year. Pension costs 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 manageable. Total carrying costs for debt service, pensions and OPEB are currently affordable at 12% of total governmental fund expenditures.

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, CoreLogic-Case-Shiller 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

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=830716

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Karen Wagner
Director
Fitch Ratings, Inc.
+1-212-908-0230
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Leslie Cook
Analyst
+1-212-908-0507
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568512-215-3725

Sharing

Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Karen Wagner
Director
Fitch Ratings, Inc.
+1-212-908-0230
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Leslie Cook
Analyst
+1-212-908-0507
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568512-215-3725