NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Lincoln Park School District, MI ratings at 'BBB+':
--$21.5 million unlimited tax general obligation bonds, series 2007 and 2008 underlying ratings;
--Issuer Default Rating (IDR).
The Rating Outlook has been revised to Stable from Positive.
The enhanced rating on the bonds, based on the state of Michigan State School Bond Loan Fund Program, is currently 'AA'/Stable Outlook.
SECURITY
The general obligation bonds are payable from an unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
The district's 'BBB+' IDR reflects below-average revenue framework and financial resilience assessments that are offset by adequate expenditure controls and a moderate long-term liability burden. The revision of the Outlook to Stable from Positive reflects implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016.
Economic Resource Base
Lincoln Park School District encompasses the city of Lincoln Park, which is located in southwest Wayne County about 12 miles from Detroit. The district's enrollment was 4,900 in the 2015 school year, a decline of approximately 10% since 2001. Enrollment rebounded by around 8% since from FY 2011 to FY 2015. Fitch expects enrollment to be stagnant in the 2016 and 2017 school year. The district's population was 36,932 in 2014, a decline of approximately 7% since 2000.
Revenue Framework: 'bbb' factor assessment
Like most school districts, Lincoln Park lacks independent ability to raise revenues, and is highly dependent on state funding for its operations. Given the expectation of continued stagnant enrollment, general fund revenue is expected to increase at a rate below CPI growth.
Expenditure Framework: 'a' factor assessment
Fitch expects the natural pace of spending growth to be above the stagnant revenue growth rate. The district has adequate expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The district's overall long-term liability burden is moderate.
Operating Performance: 'bbb' factor assessment
Fitch considers the district to have adequate gap-closing capacity but recognizes that financial operations could become stressed in a downturn.
RATING SENSITIVITIES
Revenue Growth Prospects: The rating is sensitive to any decreases in expectations for enrollment that would pressure revenue growth beyond already weak levels and further increase pressure on the district's ability to maintain available reserves.
Reserve Expectations: The rating is also sensitive to any material change in Fitch's expectations for available reserve levels that would affect the district's ability to maintain flexibility throughout an economic cycle.
CREDIT PROFILE
The local economy is part of the greater Detroit area and remains pressured despite some improvement after severe weakening during the great recession. The region suffered from significant employment loss during the recession, and recent recovery in jobs has been slower than the state. The tax base endured years of decline, but is showing signs of stabilization.
Revenue Framework
The district derives most of its revenues from state sources (almost 90% of total revenues), which supplement local property tax based on a per-pupil formula.
Fitch expects general fund revenue to continue to grow at a stagnant rate, as weak enrollment trends are offset to some degree by state funding increases. State aid per pupil increased 3.7% in fiscal 2016 and is budgeted to grow 1.6% for 2017. The district's enrollment has fluctuated during the past decade, declining approximately 10% between FY 2001 and FY 2011 before increasing around 8% in the last 5 years, partially due to the district's enactment of an open enrollment policy. After peaking in 2015, however, student numbers are expected to be stagnant over the next two years.
The district is extremely limited in its ability to legally raise revenue due to the nature of Michigan school district funding. Under Proposition A, the state funds the majority of school budgets and leaves little to no local control over revenue to the individual districts.
Expenditure Framework
The district's main expenditure items include student instruction (65% of FY 2015 general fund expenditures) and support services (34%).
The natural pace of spending growth absent policy action is expected to be above the stagnant revenue growth. Teacher contracts are settled through fiscal 2021 with no COLA adjustments, and the staffing level is expected to be stable.
Expenditure flexibility is adequate, with debt service and post-employment benefit carrying costs somewhat elevated at approximately 20% of governmental spending, a level that Fitch expects to increase. The district relied on a state aid note program for cash flow borrowing in previous years, amounting to $5 million in fiscal 2015 and $2.5 million for fiscal 2016. The district projects positive cash balances going forward and does not expect to need short-term borrowing beginning fiscal 2017 due to improved cash balances.
Long-Term Liability Burden
Fitch considers the combined debt and pension burden to be moderate due to limited borrowing by the district and overlapping entities. The district recently issued $1.4 million in notes for an energy savings project, which is expected to be cost neutral. No further new money debt issuance is expected. Over 70% of the total liability is in the form of unfunded pension liabilities. The district participates in the Michigan Public School Employees' Retirement System (MPSERS), a cost-sharing multiple employer teachers' pension plan which includes OPEB. The fund has a reported 66% ratio of assets to liabilities, although Fitch estimates the ratio to be approximately 60% using Fitch's more conservative 7% investment return assumption.
Operating Performance
The district has significantly increased available reserves as it recovered from multi-year deficits due to state funding declines. At the end of FY 2015, the unrestricted general fund balance was 15.7% of expenditures, up from 4.7% in fiscal 2013. In a future economic downturn, however, Fitch believes the district's limited revenue raising flexibility could lead to stressed financial operations, leaving further expenditure reductions and use of fund balance as the only methods within the district's control to close the subsequent operating gap. Although management has indicated that the targeted level of available reserves is 15% of spending, the district's current formal fund balance policy requires a minimum reserve balance of only 5% of spending.
The district has taken steps in managing its budget throughout the recovery to increase available fund balance levels. Management projects that FY 2016 ended with a $1.6 million surplus, bringing reserves to approximately 20%, continuing that trend.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013792
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