NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Dodge City Unified School District No. 443 Ford County (the district), Kansas bonds:
--$85.6 million general obligation (GO) bonds series 2015-A;
--$10.2 million GO refunding bonds series 2015-B.
The bonds are scheduled to sell via competition on Oct. 26th. Proceeds of series 2015-A will finance various capital improvements to district facilities. Proceeds of series 2015-B will refund the 2016-2018 maturities of the GO capital outlay and refunding bonds, series 2008.
The Rating Outlook is Stable.
The bonds are direct obligations of the district and are backed by its unlimited ad valorem tax pledge.
KEY RATING DRIVERS
STABLE FINANCES, RELIANCE ON STATE: Financial operations are sound, showing a general trend of balanced to positive financial operations. The district's revenue base is highly dependent upon the state: state revenues account for 82% of general and supplemental general fund revenues, while local taxes account for only 18%.
LIMITED, AGRICULTURAL ECONOMY: The tax and employment bases are concentrated in the meat processing industry. Wealth levels are below state and national levels.
HIGH DEBT OFFSET BY STATE SUPPORT: Debt levels are high, tempered by expected 60% state support for debt service costs. Other long-term liability costs are minimal, as the state funds pension requirements and the district's other post-employment benefit (OPEB) obligations are limited to an implicit rate subsidy.
CHANGE IN STATE SUPPORT: The district is highly dependent upon state support for operations, debt and pensions. A material reduction in the amount of state support could pressure financial operations and result in a downgrade.
The district is located in southwest Kansas, two hours west of Wichita, two hours east of the Colorado border and one hour north of the Oklahoma border. It covers 426 square miles and a population of nearly 34,000. Approximately 6,900 students are served at 14 schools.
STABLE FINANCIAL PROFILE
The district's audited financial statements are reported on a cash basis of accounting, inhibiting analysis of both current and long-term liabilities; nevertheless, available cash balances in all funds provide sufficient liquidity to avoid external cash flow borrowing.
Operating funds (general and supplemental general funds) have recorded generally stable operations. The district maintains a local option budget, equivalent to 30% of its base (general fund) budget, funded from discretionary local taxes as well as state funding. Margins are generally narrow, as state regulations restrict the accumulation of reserves in the general fund. Ending unencumbered operating funds cash balance was a thin 1.4% of spending in fiscal 2014 and is projected to be solidly negative (-6.2% of spending) for fiscal 2015 as the operating funds advance resources for the current capital project.
Significant balances are maintained outside the general fund--notably in the capital outlay, gifts and grants, and contingency reserve funds. Netted against the negative balance in the operating funds, the combined unencumbered cash balance projected for fiscal 2015 in the general, supplemental general, capital outlay, gifts and grants, and contingency reserve funds was equivalent to 14.4% of fiscal 2014 spending.
The district budgets conservatively and typically underspends appropriations. The fiscal 2016 budget calls for spending to increase 22% and total reserves to decline by $16.6 million to an amount equivalent to 6.3% of fiscal 2014 spending. Fitch expects actual results to outperform the budget, with more moderate draws upon reserves likely.
HIGH RELIANCE ON STATE SUPPORT
The large majority (81%) of district operating revenues come from state sources. The environment for future funding of Kansas schools is uncertain, introducing some vulnerability to the district's main source of revenue. The state replaced the existing funding framework with a temporary, two-year block grant system, which is expected to be replaced with a new, comprehensive system for the fiscal 2018 school year.
The current funding framework has been challenged in court and prospects for future increases in education funding are clouded by the state's revenue weakness. Fitch believes the district retains sufficient financial flexibility to weather modest declines in state aid funding, but significant reductions in state funding could pressure the rating.
LIMITED, AGRICULTURAL ECONOMY
The district is rural in nature. Two meat processors account for 65% (5,750) of the jobs on the top 10 employers list and a combined 7.5% of assessed valuation. Resident educational attainment levels are well below average, contributing to per capita income levels that are 72% of the state and 69% of the U.S. averages.
The unemployment rate for Dodge City is quite low. The June 2015 rate of 4% was down from the 4.2% reported a year prior. The improvement was largely the result of the labor force contracting at a slightly greater rate than the loss in jobs recorded over the same timeframe.
Enrollment has risen steadily since fiscal 2007, averaging about 100 additional students (1.5%) per year. Enrollment pressure has led to the use of portable classrooms over the past several decades, all of which will be retired upon completion of the current project.
HIGH DEBT OFFSET BY STATE SUPPORT
Debt levels are high and amortization is slow with 37.6% scheduled for retirement within 10 years. Overall debt burden is a high 10.3% of full value or $4,973 per capita, without accounting for projected 61% state support of debt service. Allowing for state support, debt burden would fall to a still elevated 6.4%. The current issue represents a significant increase in leverage, but the district expects to service the new debt within the existing bond and interest mill rate. Existing debt is scheduled to mature by 2018.
Pension benefits are provided by the Kansas Public Employees Retirement System (KPERS), a state-wide multi-employer plan whose costs are paid by the state. OPEB is limited to an implied rate subsidy for retiree healthcare. Since the district incurs no costs for pension or OPEB, carrying costs are limited to debt service and accounted for 6.2% of all funds' (excluding agency funds) spending in fiscal 2014. The district remains vulnerable to changes in the state funding framework that could potentially increase its exposure to these costs.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Pursuant to Fitch policy, new rating assignments during the exposure draft period will be analyzed under both the existing and proposed criteria approaches. The rating(s) assigned in this Rating Action Commentary would be the same under both approaches.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form