Fitch Rates Fairfield City School District, OH's Qualified ULTGO Bonds 'AA'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following program rating based on the Ohio School District Credit Enhancement Program to Fairfield City School District, OH's (the district) unlimited tax general obligation (ULTGO) program qualified bonds:
--$61,355,000 (est.) GO school improvement bonds, series 2014 'AA'.
In addition, Fitch assigns an underlying rating of 'AA' to the series 2014 bonds.
The Rating Outlook is Stable.
The bonds are expected to sell via negotiated sale on Aug. 27, 2014. Proceeds from the sale of the bonds will be used to fund the district's self-funded portion of school construction under the Ohio Classroom Facilities Assistance Program.
The bonds are secured by the levy of an ad valorem tax on all taxable property within the district without limitation as to rate or amount.
KEY RATING DRIVERS
STABLE AND DIVERSE ECONOMY: The economy benefits from its close proximity to Cincinnati and diverse employment opportunities including financial services, healthcare and manufacturing. Income indices are above state levels and comparable to national averages.
IMPROVING FINANCIAL PROFILE: Over the last two years, the district's financial position has improved primarily as a result of the passage of a new, continuing operating levy. Reserve levels are expected to remain solid given management's history of conservative budgeting.
MANAGEABLE LONG-TERM OBLIGATIONS: With consideration of this debt issue, the district's overall debt levels should remain moderate given below-average amortization and no plans for future debt issuance. Carrying costs inclusive of debt service, pension and other post-employment benefits (OPEB) are manageable.
STRONG PROGRAM ESSENTIALS: The series 2014 bonds qualify for the Ohio School District Credit Enhancement Program (state enhancement program), which is characterized by stringent requirements and strong program mechanics.
SHIFT IN FUNDAMENTALS: The underlying rating is sensitive to shifts in the district's fundamental credit characteristics including continued voter support for new levies and maintenance of healthy reserve levels.
PROGRAM RATING: The program rating is sensitive to changes in the state's 'AA+' GO bond rating on which the program rating is based, as well as changes in the statues, regulations, or administrative procedures governing the program.
Fairfield City School District is located in Butler County in southwest Ohio, approximately 18 miles from downtown Cincinnati and 36 miles from downtown Dayton. The district, one of the largest of the 614 in the state, encompasses the City of Fairfield (the city; 69% of the district's assessed valuation) and Fairfield Township. After growing substantially (13.4%) from 2000 to 2010 the district's population, estimated at 65,239, has remained stable over the last few years. Enrollment has also remained fairly constant, totaling 10,034 for the 2013-2014 school year. Enrollment is expected to remain stable as the city is built out.
STABLE AND DIVERSE ECONOMY
The district economy is diverse, with financial service companies, healthcare, government, and manufacturing. It also benefits from its close proximity to Cincinnati which provides numerous employment opportunities. The district's largest employers include Cincinnati Insurance (3,171 employees), Mercy Hospital (1,917 employees) and Liberty Mutual (1,471 employees). Unemployment rates are not available for the district, but the city's rate of 4.9% for June 2014 was below the state and national rates of 5.9% and 6.3%, respectively.
The district's assessed valuation has remained stable, declining by only 3.8% from 2010 to 2014. The district is currently undergoing a sexennial reappraisal with another small decline anticipated. The May 2014 five-year forecast reflects modest inflationary growth through 2018, which Fitch views as reasonable. Per capita income is above the state and comparable to the national level.
DEMONSTRATED VOTER SUPPORT FOR TAX LEVIES
Property tax revenues, which represent the largest source of general fund revenues at 54%, are healthy with an average three-year current collection rate of 97%.
Unlike many Ohio school districts, the district has all continuing levies and has historically had ample voter support when passing new levies, both of which provide financial stability relative to other districts in the state. The most recent operating tax levy was for 6.5 mills (approximately $9 million annually), passed in November 2011 with a 51% voter approval rating. Additionally, in May 2014 the current bond issue and related .50-mill permanent improvement levy were approved by 58% of the voters after being defeated in November 2013 by a narrow margin. No new levies are being contemplated for the medium term.
IMPROVING FINANCIAL POSITION
Audited results showing ebb and flow of the general fund balance is very common among Ohio school districts (even those with largely continuing levies) given the reliance on voter support for new tax levies.
On a GAAP basis, after recording general fund deficits after transfers of $5.3 million (7% of spending)in 2010 (fiscal year-end June 30) and $1.6 million (2.1% of spending) in 2011, operations improved as a result of expenditure reductions and the passage of the 6.5-mill permanent property tax levy in November 2011.
For 2012 and 2013 the district reported general fund operating surpluses after transfers of $4.7 million (6.6% of spending) and $10.1 million (13.8% of spending), respectively. These surpluses have resulted in increased reserve levels. The unrestricted fund balance at June 30, 2013, totalled $15.4 million or a healthy 21% of general fund spending compared to 4% at June 30, 2011.
For fiscal year-end June 30, 2014, on an unaudited cash basis, the district reported a general fund ending cash balance of $30.4 million, better than the forecasted $28.8 million and a solid 40% of spending compared to 33% at June 30, 2013. GAAP-based results comparable to prior fiscal years are not yet available.
STRONG CASH RESERVES OVER FORECASTED PERIOD
The May 2014 five-year cash forecast projects positive operations through fiscal 2016. After increasing 6.25% and 10.5% in 2013 and 2014, state funding, which represents approximately 32% of general fund revenues is projected to remain stable over the forecasted period. Deficits of $3.6 million (4.2% of spending) and $8.3 million (9.1% of spending) are projected in 2017 and 2018, respectively. Despite the expected deficits, positive ending cash reserves are projected for each year of the forecasted period, ending with an $18 million or healthy 20% of spending in 2018. Fitch believes projections are reasonable given management's practice of conservative budgeting with actual results proving better than forecast.
MANAGEABLE DEBT BURDEN
Fitch considers the district's overall debt burden moderate at 3.4% of market value. Debt levels should remain stable as the district has no plans for future borrowing but slowly amortizes debt. This new debt issuance, which is expected to have a 38 year amortization in line with the State's adoption of a 40-year life for buildings, will reduce amortization to what Fitch considers a slow 28% over 10 years.
The district contributes to the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS) to fund both pension and OPEB. Both SERS and STRS are cost-sharing, multiple-employer defined benefit plans. At June 30, 2013, funding levels for both plans were low at approximately 61% for STRS and 60% for SERS, based on a Fitch estimated 7% rate of return.
Total carrying costs for debt service, pensions and OPEB are affordable at 13.1% of total governmental fund expenditures and will increase modestly with this new debt issuance. The SERS plan has been fully funding its actuarially required contribution (ARC). The moderate cost is due in part to the slow amortization and STRS' underfunding of its ARC; the plan funded only 46% of the ARC in fiscal 2013. Pension related costs could rise over time if STRS moves towards full funding of its ARC. Contributions to STRS represent 5.6% of the district's fiscal 2013 government fund spending and Fitch believes the district could absorb a moderate increase.
STRONG PROGRAM ESSENTIALS
The 'AA' program rating is based on the qualification of the series 2014 bonds for participation in the state enhancement program.
Participation requirements are stringent, including 2.5x coverage of maximum annual debt service (MADS) by unrestricted state foundation aid on proposed bonds and any outstanding obligations covered by the program. Fiscal year 2014 estimated state foundation aid to the district is 3.5x the MADS for debt to which state aid is pledged.
Program mechanics are strong. Ohio law requires the Ohio Department of Education to forward to a bond paying agent or registrar state foundation payments otherwise due to a participating school district if, prior to the bond payment date, the district has not transmitted funds sufficient to cover a required debt payment.
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, CoreLogic-Case-Shiller Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.
--'Ohio School District Credit Enhancement Program', April 26, 2013.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria