Fitch Affirms Lincoln Park School District, MI's Underlying ULTGO Bonds at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the underlying rating on the obligations of Lincoln Park School District, Michigan (the district) as follows:

--$23.2 million unlimited tax general obligation (ULTGO) bonds, series 2007 and series 2008 at 'BBB+'.

The Rating Outlook is Stable

The enhanced rating, based on the State of Michigan School Bond Loan Fund Program, is 'AA' with a Stable Outlook.

SECURITY

The ULTGO bonds are obligations of the district, payable from its full faith and credit and its unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

CONTINUED STATE AID IMPROVEMENTS: State aid, which represents the vast majority of district revenue, has continued to improve over the past several years following significant recessionary cuts and is approaching pre-recession levels.

IMPROVING RESERVE LEVELS: District reserves continue to grow after hitting historic lows in fiscal 2011, with budgeted fiscal 2015 fund balance approaching levels viewed by Fitch as adequate; however, liquidity remains a weak point.

CONTINUED ENROLLMENT GROWTH: District enrollment, which has historically been somewhat volatile, has posted gains in five consecutive years.

STRESSED ECONOMY: The local economy remains stressed as evidenced by long-term declines in employment, below average wealth levels, and declining district population.

TAX BASE DECLINES EXPECTED TO SLOW: Management expects another mild assessed value (AV) decline in fiscal 2015 before stabilizing over the near-term, which Fitch views as a reasonable assumption given recent housing market improvements. A decline in fiscal 2015 AV represents a cumulative 35.3% decline from fiscal 2009 peak AV. However, the financial effects of this decline have been muted by the state's school district funding formula.

MANAGEABLE LONG-TERM LIABILITIES: Carrying costs are moderate and are expected to remain affordable. Capital needs do not appear to be onerous.

RATING SENSITIVITIES

ENROLLMENT AND RESERVES DETERMINE POSITIVE CHANGE: Upward rating movement will be dependent on a stable enrollment trend, the district's ability to continue building its reserve position, and continued effort to reduce cash flow borrowings.

CREDIT PROFILE

Lincoln Park School District encompasses the city of Lincoln Park (the city), which is located in southwest Wayne County about 12 miles from Detroit. Enrollment is slightly fewer than 5,000 students and district population of 37,313 in 2013 represents a cumulative 6.4% decline from population in 2000.

IMPROVING FINANCIAL PERFORMANCE

District revenue flexibility is very limited and the district's largest source of general fund revenue is state aid (nearly 87% of fiscal 2014 general fund revenue), which essentially leaves the district's revenue environment at the behest of the state. State cuts to K-12 education and declining enrollment levels were key drivers of multiyear deficit spending that eventually reduced unrestricted general fund balance to less than 1% of spending in fiscal 2011. Recent strengthening at the state level has resulted in year-over-year restoration of cut state aid. Improving state aid, conservative budgeting, and a positive enrollment trend contributed to a $1.3 million general fund surplus in fiscal 2014, which raised unrestricted reserves to $3.0 million (8.1% of spending).

The district continues to slowly and carefully restore previously cut expenditures given the improved revenue environment. The district retains a sound degree of expenditure flexibility, including the ability implement furloughs, layoffs, and reductions in ancillary school services. Fitch views positively the presence of language in the district's labor contracts that makes step raises contingent on district financial performance.

The district has budgeted for a $389,000 surplus in fiscal 2015, based on state determined per-pupil foundation allowances that are approaching pre-recession peak levels. If a surplus were to materialize in this amount, it would increase unrestricted general fund reserves to $3.4 million or about 9% of spending; Fitch views this reserve level adequate for the current rating level. Fitch believes that the district's fiscal 2015 budget has a degree of conservatism built in, as the district has budgeted for a loss of students over the past several years (despite some upward movement) and does not budget for certain categorical revenues.

CONTINUED ENROLLMENT GROWTH

Maintaining stable or increasing enrollment levels is important for the continued recovery of district finances, as state aid is allotted on a per-pupil basis. Enrollment declined by a total of 15.9% between fiscal 2002 and fiscal 2011, but the district's decision to enact open enrollment has resulted in five consecutive years of enrollment growth. After bottoming out at 4,573 students in fiscal 2011, fiscal 2015 enrollment has recovered to an estimated 4,909 students. The district retains the option of capping/uncapping open enrollment at their discretion, so the district can manage potential growth within the confines of its existing facilities. Enrollment growth has occurred despite declining overall district population.

STRESSED LOCAL ECONOMY AND TAX BASE

The local economy is part of the greater Detroit area and remains stressed. The city's unemployment rate of 6.8% in September 2014 is well below past highs but the reduction largely reflects a long-term contraction of the labor force rather than improving employment. City wealth levels are below average with per capita and median household income at 75% and 86%, respectively, of the state average, and 69% and 78%, respectively, of the national average.

The district's tax base is projected to post a cumulative 35.3% decline from its peak in fiscal 2009 through fiscal 2015. The tax base declines have had a relatively muted effect on the district's finances as foundation allowances are guaranteed by the state. Management expects that a projected 2.2% AV decline in fiscal 2015 will represent a bottoming out of the district's tax base, which Fitch believes is a reasonable expectation given recent improvements in the city's Zillow Home Value Index.

MANAGEABLE LONG-TERM LIABILITIES

Overall debt ratios are a low $885 per capita and more moderate at 3.2% of market value. Outstanding debt amortizes rapidly, with 94% of principal retired within 10 years. The district does not maintain a list of all required capital needs, but intends to fund most immediate capital needs through the recently renewed sinking fund levy. The district does not appear to have any major capital projects planned and does not plan on going to voters for new debt over the near-term.

The district participates in the Michigan Public School Employees' Retirement System (MPSERS) for pension and other post-employment health benefits. The funded ratio has declined in recent years to 61.3% as of Sept. 30, 2013. The funded ratio is an estimated 55.2% using Fitch's more conservative 7% return assumption. Total carrying costs for MPSERS and debt service are a manageable 18.0% of total governmental spending. Fitch believes carrying costs will likely grow as the state addresses the weak MPSERS funded position. However, Fitch expects these fixed costs will remain a manageable portion of the district's budget.

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, National Association of Realtors, and Zillow.

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=943315

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher
Analyst
+1-212-908-0686
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher
Analyst
+1-212-908-0686
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com