Fitch Rates West Ottawa School District, MI's ULTGOs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following West Ottawa School District, MI's (the district) bonds:

--Approximately $46.5 million school building and site bonds (general obligation - unlimited tax), series 2014-1.

The bonds are expected to sell competitively the week of May 27. Proceeds will be used to fund school district capital improvements.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the district's full faith and credit and unlimited pledge of ad valorem taxes.

KEY RATING DRIVERS

EXPENDITURE FLEXIBILITY; STRONG RESERVES: The 'AA-' rating primarily reflects the district's spending flexibility and high reserves, offsetting its lack of revenue control and growing fixed-cost burden. Active financial management support healthy reserves despite state and federal funding cuts.

AVERAGE WEALTH, LIMITED ECONOMY: Wealth indicators are average and the local economy is limited. Taxable value declined a moderate amount through the recession and has shown signs of recovery, posting two years of gains through 2014.

MODERATE LIABILITIES, HIGH COST OF CARRY: The district's pro forma debt burden is moderate. Amortization is currently rapid but will moderate with the current offering. Rising pension and retiree healthcare costs have and will likely continue to expand the already high fixed-cost burden on the budget as the district is exposed to the underfunded statewide pension plan for school employees.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The district's ability to manage expenses and maintain robust reserves is key to rating stability given Fitch's expectations for modestly declining enrollment and rising fixed costs.

CREDIT PROFILE

The district is located in western Michigan on Lake Michigan in Ottawa County (rated 'AAA'/Stable Outlook) and encompasses approximately 73 square miles. The district is immediately north of the city of Holland and includes portions of the townships of Holland, Olive, Park, and Port Sheldon. District population is growing, up 9.5% since 2000 to an estimated 49,305 in 2013.

DECLINING ENROLLMENT & STABILIZING FINANCIAL PERFORMANCE

District enrollment has declined 10.4% since 2005 to 7,249 students in 2014. Fitch is somewhat concerned about this trend, given that state aid funding is determined on a per-pupil basis. The district is projecting further declines over the coming five years as larger class sizes graduate, and is making efforts to right-size its facilities. The current offering will enable the district to close one school, saving $1 million-$2 million annually. Fitch thinks that the district has managed funding reductions well thus far.

The district's primary sources of financial cushion are evidenced in strong reserves and adequate spending flexibility, given the lack of revenue control. The district's financial profile is stabilizing after revenue reductions in 2012 drove negative performance in 2012. The district prudently built up fund balance in 2011 in anticipation of revenue shortfalls. Operating deficits in 2012 and 2013 decreased unrestricted fund balance levels to $11.3 million (17% of spending, down from 20.4%), still in excess of the district's 15% fund balance level. Nevertheless, the district performed better-than-budget in both years.

The district's adjustments have been largely non-instructional. Budgetary balance has been managed by attrition, healthcare adjustments, and through outside vendors. Future adjustment will largely be from expenditures as the district's revenues are predominantly inflexible state sources and therefore less flexible.

Fitch believes that the district has ample ability to trim its expenditure base given few instructional staffing changes and low student-teacher ratios. Further, the recently negotiated teachers' contract will help keep cost increases moderate in future years. Importantly, school districts in Michigan maintain the ultimate ability to impose contract provisions if negotiations are unsuccessful.

The district's original 2014 budget contained a $1.6 million use of fund balance (2.4% of expenditures) and conservatively estimates state aid, enrollment declines, and instructional expenditures, consistent with the district's prior practices. Management projects an approximate $500,000 operating surplus (after transfers), driven by two factors: a recently negotiated teachers' contract reducing step increases and increasing health care contributions, and strong approval of the district's bonding measure which will move bus replacement costs out of the general fund. Fitch believes that the district's projections are reasonable given the district's history of conservative budgeting.

LIMITED ECONOMY; TAV HAS STABILIZED

The district economy is limited with the district as leading employer. However, the county economy is more robust, with leading employers in automotive manufacturing, education, and healthcare, and downtown Grand Rapids located approximately 25 miles away.

The district's tax base performed well through the recession, with a manageable peak-to-trough loss of 8.7% 2011 to 2013 and a 2.7% increase in 2014. The local housing market is performing adequately, with a 5.8% increase in Zillow's home value index over the past year. Wealth levels are approximately average. Median household income in 2011 was equal to 113% of the state and 104% of the national average. The Ottawa County unemployment rate was low at 6% in March 2014, below state (8%) and national (6.8%) averages.

MODERATE LONG-TERM LIABILITIES

The district's pro forma debt burden is moderate at 4.2% of market value and $3,477 on a per capita basis. The district anticipates using its remaining $43 million bond authorization in approximately five years in which time $68 million is scheduled to retire. Amortization is currently rapid at 67% in 10 years but will slow to 54% with the current and anticipated borrowings through 2019. The 2014 offering is structured to maintain the district's current debt service millage rate.

RISING PENSION COSTS; HIGH COST OF CARRY

The district participates in Michigan Public School Employees' Retirement System (MPSERS); a cost-sharing multiple employer teacher's pension plan which is underfunded at 61.3% (based on a reported 8% rate of return) or a Fitch-estimated 55.2% (assuming a 7% rate of return). MPSERS has been underfunding its actuarially calculated annual required contribution (ARC) since 2010; funding was 70.6% in 2013. The district's OPEB costs are also managed through the plan. The state enacted wide-ranging reforms to MPSERS pension and OPEB benefits in 2012 intended to reduce the unfunded liability by raising employee contributions, but reforms have been subject to litigation. The state has also begun offsetting employer pension contributions over a specific threshold, subject to state appropriation.

Cost of carry of debt, pension, and OPEB was high at 29.6% in 2013, up from 23% in 2008. This increase was largely driven by a 52% increase in pension costs between 2008 and 2013, reaching 12.6% of spending, from 8.3%. The burden would have been even higher if MPSERS was fully funding the ARC.

The high fixed-cost burden remains driven by rapidly amortizing debt (debt service totals 17% of spending in fiscal 2013). However, Fitch believes retiree costs will remain a source of pressure given the challenged funding status of MPSERS and slowing debt amortization. However, cost escalation could moderate to the extent legislated plan reforms take effect.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow, 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=831527

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Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com