Fitch Upgrades Dodge City USD No. 443 Ford County (KS) GOs to 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Dodge City Unified School District No. 443 Ford County (the district), KS ratings to 'AA-' from 'A+':

--Issuer Default Rating (IDR)';

--$93.9 million outstanding general obligation (GO) bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

The district has limited control over revenues, but state aid provides a reliable funding source. The district has solid control over expenditures and an elevated, but still moderate long-term liability burden. Fitch believes that the district's sound reserves would provide a good financial cushion in a moderate economic downturn stress scenario.

Economic Resource Base

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 has a population of nearly 34,000. Approximately 6,900 students are served at 14 schools.

Revenue Framework: 'a' factor assessment

The district does not have the legal ability to independently increase its revenues. Fitch expects general fund revenue gains to be moderate, below the rate of GDP growth but above the rate of inflation.

Expenditure Framework: 'aa' factor assessment

Expenditure flexibility is sound, with low fixed carrying costs. Given the expectations for moderate revenue growth, the natural pace of spending growth is likely to be marginally above that of revenues, requiring some ongoing budget management.

Long-Term Liability Burden: 'a' factor assessment

Fitch considers the district's overall long-term liability burden to be elevated but still in the moderate range.

Operating Performance: 'aaa' factor assessment

Fitch considers the district's gap-closing capacity strong, with the district maintaining good fundamental financial flexibility.

RATING SENSITIVITIES

Statutory Changes: The rating is sensitive to changes in the state's statutory framework for financing education, a risk given ongoing litigation regarding school funding adequacy and equity.

CREDIT PROFILE

The district is rural in nature. Two meat processors account for 65% of the jobs on the top 10 employers list and a combined 7.5% of total district assessed valuation. Enrollment has risen steadily since fiscal 2007, averaging about 100 additional students (1.5%) per year.

Revenue Framework

The district receives approximately 80% of its general fund and supplemental general fund revenues from the state. Approximately 16% comes from property tax revenue. The Kansas state education funding formula places the majority of school funding for K-12 education on the state with the goal of equalizing local property taxes and per-pupil spending for education. The funding plan, in place since 1992, equalized local property tax rates across the state to 20 mills, but this formula did not account for the differing assessed values (AV) among school districts, which resulted in funding inequities. The entire state funding formula has been the subject of ongoing litigation since 2010 challenging its equity and adequacy. Most recently, the state Supreme Court opined on the equity issue, and as a result, the state reverted back to a per-pupil funding formula during a June 2016 special legislative session. The approved per pupil supplemental state aid figure for fiscal 2016 was approximately $4,490 and state aid for fiscal 2017 represented a healthy increase over the prior year. Expected enrollment growth should temper budgetary risks posed by high reliance on enrollment based state funding for operations.

Revenue growth was above the rate of both inflation and GDP growth in the 10 years through fiscal 2015, which Fitch believes will likely continue given the trend of modestly growing enrollment and the recent increase in per pupil funding. Fitch also expects property taxes to continue to grow at a modest rate as well. Uncertainty remains regarding the level of future state aid given the legal challenge over funding adequacy, which may impact future funding levels.

The district's independent legal ability to raise revenue for operations is limited under Kansas state law. The bond and interest fund is supported by a separate unrestricted levy not subject to state levy limitations.

Expenditure Framework

The district's main operating fund expenditure items in the general fund and supplemental general fund are student instruction and school operations (67% of FY 2015 general fund/supplemental general fund expenditures). The district transfers operating surpluses out of the general fund on an annual basis to pay for capital outlay and for programs such as special education and bilingual education.

The natural pace of expenditure growth is expected to be marginally above the projected moderate revenue gains. The main driver of expenditure growth is teacher salary increases, which have been in line with inflation over the past several years; this trend is expected to continue.

Fitch believes that the district has solid expenditure flexibility. Fixed carrying costs for debt service and annual pension payments are low when adjusted for the state's pension contributions made on behalf of the district, at less than 10% of governmental fund expenditures. The state's pension contributions are susceptible to future funding changes given the low ratio of assets to net pension liability. Management has strong control over employee salary increases but only moderate control over managing headcount.

Long-Term Liability Burden

The district's long-term liability burden is elevated but still in the moderate range, with the unfunded pension liability and overall debt currently at approximately 23% of district personal income (a combined $234 million, $159 million of which is in the form of direct debt). The district does not have any significant borrowing plans in the near future.

The district participates in the Kansas Public Employees Retirement System (KPERS), a cost sharing multiple employer defined benefit plan. The state contributes to the plan on behalf of all public school employees based on a statutorily required contribution. The statutory requirement is less than the actuarially required contribution which has resulted in a sizeable gap between plan assets and liabilities. Fitch estimates the combined adjusted ratio of assets to liabilities to be 55% assuming a 7% discount rate.

Operating Performance

Fitch believes that the district's financial resilience is exceptionally strong given the maintenance of solid levels of available reserves throughout the recession and subsequent recovery. The district reports on a modified accrual, regulatory basis of accounting which is not compliant with GAAP standards. The available reserves for operations include the district's combined cash balances from the general fund, supplemental general fund, and other operational funds. Although the use of cash-basis accounting overstates the level of reserves when compared to the more common GAAP-basis reports that Fitch uses in rating local governments, Fitch believes that the level of financial cushion is sound.

The district's increasing enrollment trends and conservative budgeting practices have contributed to available reserves. The collective amount of operating fund reserves has consistently been over 9% of operating fund spending since fiscal 2010. Cash balances at July 1, 2015 in the combined supplemental general fund, contingency fund, and gifts and grants fund totaled $8.5 million or 14% of the combined operating fund expenditures. Fiscal 2016 operations are expected to be balanced.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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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Contacts

Fitch Ratings
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+1-212-908-0548
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
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Director
+1-212-908-0593
or
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+1-512-215-3729
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0548
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon McCue
Director
+1-212-908-0593
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com