Fitch Rates Topeka USD No. 501 Shawnee County, (KS) GO Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns the following rating to Topeka Unified School District No. 501 Shawnee County, Kansas' (the district) general obligation (GO) unlimited tax bonds:

--$118.2 million GO refunding and improvement bonds, series 2014A and 2014B 'AA'.

The bonds are scheduled for competitive sale on June 19. Proceeds from the sale of the bonds will be used to fund significant capital improvements at district facilities and refund a portion of the district's outstanding unlimited tax (ULT) debt for management of the district's debt service mill levy.

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district and are secured by its unlimited ad valorem tax pledge.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial profile is a positive credit factor characterized by large reserve levels and a consistent record of conservative budgeting practices.

STABLE AND DIVERSE ECONOMY: The regional economy is anchored by state government, several hospitals, and small manufacturing, the stability of which has maintained low city and county unemployment rates. Income levels are below average.

STABLE ENROLLMENT, HIGH RELIANCE ON STATE FUNDING: District population is expected to continue to grow at a modest, manageable rate, while enrollment appears to have stabilized after mild declines.

MODERATE DEBT BURDEN: The district's overall debt levels are high relative to taxable market value, although this sizable new money issuance is expected to meet the district's capital needs for the next decade and beyond. The district currently makes no pension payments and has minimal, capped other post-employment benefit obligations. Fitch believes the debt load is manageable due to the district's moderate carrying costs and stable economic prospects.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's healthy financial profile. Maintenance of solid reserves and economic stability are key credit considerations.

CREDIT PROFILE

The district, population 114,499, encompasses 36 square miles and serves most of the city of Topeka which includes the state capitol complex, with multiple government buildings providing employment for over 6,400. District K-12 enrollment of 14,095 for 2014 is down slightly from a peak of 14,183 in 2010.

SOLID FINANCIAL RESERVES

Following modest planned general and other fund drawdowns over the past three years, the district's reserves remain strong. General fund unrestricted fund balance was $9.7 million or 11.2% of actual spending in fiscal 2013 which coupled with a $3 million unrestricted reserve in the special education fund and $9.8 million in the capital outlay fund provide significant cushion against potential state funding changes or other budgetary stresses. Conservative budgeting of enrollment coupled with close expenditure management have enabled the district to maintain sound operating performance. Officials expect fiscal 2014 reserves to remain stable.

The sizable reserves somewhat mitigate the district's high dependence on state funding, over 70% for 2013. Fitch expects stable enrollment trends and conservative budgeting will enable the district to maintain continued sizable reserves.

The district levies local taxes at 30% of general fund expenditures (the maximum without voter approval) for its annual local option budget and eight (also the maximum) mills for capital outlay. Instructional salaries and benefits are the primary expenditures, which the district has been able to successfully manage to accommodate modest recent enrollment declines.

MODERATE DEBT BURDEN

In April 2014 district voters strongly approved $143 million of new GO debt to fund significant district facility renovations including safety and security, storm shelters, science labs, advanced learning centers and technology upgrades. Under the state school funding formula, the district expects state aid to cover approximately 46% of annual debt service. The state funding amounts are subject to legislative change but existing funding rates for outstanding debt have been historically maintained.

The district's overall debt profile is mixed. Debt is high including a $33 million issuance in 2016 at 7.04% of fiscal 2013 market value but moderate at $2,844 per capita, including a $33 million issuance in 2016. Amortization will be slow at 28% in 10 years. No additional debt is expected after fiscal 2016. Carrying charges are low at 8% in 2015 excluding state funding of district debt.

These renovations are expected to satisfy the district's capital needs for the next decade and beyond which, coupled with minimal and capped other post-employment benefits obligations (OPEB), will keep district carrying costs low if the state continues to make all employer pension contributions on behalf of the district. The district participates in the state pension plan administered by the Kansas Public Employees Retirement System (KPRS). However, district budgets are susceptible to future funding changes by the state given KPERS's low plan funding rate and large unfunded liability.

STABLE ENROLLMENT AND TAX BASE

The Topeka regional economy proved resilient during the recent economic downturn largely based on the state capital and several medical facilities. Other leading employers include several corporate headquarters, small manufacturing and significant retail centers. Fitch expects district population and enrollment trends to continue to be flat, as they have been over the past decade.

The district's tax base was modestly positive for 2013 but remains down 6.7% from the peak in 2006. City building permit activity has been improving slightly but given the largely developed nature of the district, Fitch does not expect significant tax base growth. The per capita tax base is low at $40,000, reflective of the significant tax-exempt government property. While the district does not receive any tax revenues or payments in lieu of taxes for the tax-exempt properties, it benefits from the state education funding formula, which incorporates property valuation and income levels.

City and county unemployment rates remained well below national averages through the recent downturn, with city's rate at 5.6% in February 2014, compared to 6.7 for the U.S. (but above the state (4.9%). Per capita money income of the district population is notably lower than the state (at 81%) and nation (77%) with an elevated poverty rate.

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 and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 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=832659

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Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1-212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1-212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com