NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Dayton City School District OH's (the district) limited tax general obligation (LTGO) bonds and certificates of participation (COPS):
--$3,650,000 (estimated) LTGO refunding bonds, series 2012 A 'A+';
--$2,300,000 (estimated) LTGO equipment acquisition bonds, series 2012 B 'A+';
--$13,975,000 (estimated) COPS, series 2012 'A-'.
In addition, Fitch affirms its 'A+' rating on approximately $234 million unlimited tax general obligation (ULTGO), series 2003 A and D and LTGO bonds, series 2003 B.
The Rating Outlook is Stable.
The bonds and COPS are expected to sell via negotiated sale on or about April 12.
Purpose of current debt issues: Proceeds of the LTGO refunding bonds, series 2012 A will be used to advance refund the 2003 B LTGO serial bonds maturing 2013 through 2023.
Proceeds of the LTGO equipment acquisition bonds, series 2012 B will fund bus purchases, other vehicle purchases, and fixed equipment acquisitions.
Proceeds of series 2012 COPS will be used to advance refund some of the 2003 term certificates, and place the proceeds in escrow until the Jan. 1, 2013 call date.
SECURITY
The series 2012 A and series 2012 B LTGO bonds and outstanding LTGO bonds (series 2003 B) are non-voted general obligation debt of the district secured by an ad valorem tax levy within the ten-mill limitation.
The outstanding ULTGO bonds (series 2003 A and D) are voted general obligation debt of the district secured by an unlimited ad valorem tax levy outside the ten-mill limitation.
The COPS are secured by an obligation of the district to make rental payments under the lease subject to annual appropriations. The COPS are additionally secured by a leasehold interest for the benefit of certificateholders in the leased assets.
KEY RATING DRIVERS
IMPROVING FINANCIAL OPERATIONS: As a result of conservative budgeting and strong fiscal management which has successfully implemented significant expenditure cuts, the financial position of the district is showing signs of improvement with stable operations and rebuilding of reserves.
BELOW-AVERAGE ECONOMIC INDICATORS: Socioeconomic indicators are weak as evidenced by below-average wealth and income levels, poverty levels that are more than double state and national rates, above-average unemployment rates, tax base declines, and poor property tax collection rates.
ELEVATED FINANCIAL OBLIGATIONS: The aggregate debt burden is elevated but manageable as the district has minimal future borrowing plans. An element of market risk is present as a result of a swaption that can be exercised by the counterparty beginning in June 2013.
COPS APPROPRIATION RISK: The 'A-' rating on the COPS reflects the annual appropriation risk inherent in the rental payments to be made by the district to the trustee, what Fitch considers the non-essential nature of the assets (administrative facility buildings), and the general creditworthiness of the district.
CREDIT PROFILE
ENROLLMENT STABILIZING AND ACADEMIC QUALITY IMPROVING DESPITE SIGNIFICANT EXPENDITURE CUTS
The district is located in Montgomery County, 68 miles west of Columbus. Encompassing 49 square miles the district includes Harrison and Jefferson townships and portions of the cities of Dayton, Riverside and Trotwood. The district serves approximately 15,000 students and has experienced significant declines in enrollment as a result of population outflow and competition from charter schools. However, enrollment declines have slowed, with management forecasting stable enrolment for the current five-year forecast.
The district has proactively addressed enrollment declines by significantly cutting teachers and staff since 2003. The district eliminated 500 positions in 2008 cutting expenditures by approximately $31 million. In addition, the district restructured areas of operations - custodial and transportation - to achieve efficiencies and lower costs. The 2013 recommended budget decreases 106 positions for a cost savings of $3.5 million.
The earlier significant expenditure reductions affected the district's academic quality, with the Ohio Department of Education (ODE) ranking revised downward to 'academic watch' in 2008 from 'continuous improvement.' For the 2010-11 school year, the district was upgraded to 'continuous improvement' by the ODE. Fitch believes that while challenging, management has proven its ability and willingness to focus on balancing cost reductions and restoring fiscal balance with improving academic quality. However, Fitch also believes the district's academic ranking is subject to continued volatility.
CONTINUED ECONOMIC WEAKNESS
The Dayton area local economy is improving, but slowly. The area's traditional manufacturing base in automobile parts and assembly was devastated by the recession and there has been no sustained rebound in manufacturing jobs. The region has established itself as a hub for aerospace research and development, and Wright-Patterson Air Force base, which employs approximately 26,000 civilian and military personnel, provides some stability to the local economy. Although improving, unemployment remains elevated at 9.3% in December 2011, well above the state and national rates of 7.6% and 8.3%, respectively. The improvement was due entirely to labor force declines, which were greater than the drop in employment.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The district continues to feel the effect of the recession as evidenced by weak economic trends and indicators. The city continues to lose population, income levels are well below average and poverty rates are more than double the state and nation. District population has declined since 2000 as a result of the weak economy and employment contraction. In 2010 the population totaled 151,498, a decline of 15.9% since 2000. Fitch expects that these significant economic vulnerabilities will continue to pressure the district in the near and medium term.
CONSERVATIVE BUDGETING AND COST CONTROLS IMPROVE FINANCIAL POSITION
As a result of continued conservative budgeting and significant expenditure cuts, the financial position of the district is showing signs of improvement. For fiscal 2011, on an unaudited basis, the district reported a general fund operating surplus after transfers of $4.3 million compared to a deficit of $1.8 million in 2010. The district implemented GASB 54 in fiscal 2011, reporting an unrestricted general fund balance (sum of committed, assigned and unassigned) at June 30, 2011, of $8.8 million or 4.1% of spending. This compares favorably to $4.5 million or 2.1% of spending at June 30, 2010 (restated to conform to GASB 54) and a low $279,000, or 0.1% of total expenditures for fiscal 2009. On a cash basis the district ended fiscal 2011 with a $14.5 million balance compared to $8.1 million in 2010.
The district's revised current five-year forecast projects positive ending cash balances through 2014 with a $5 million cash deficit in 2015 and a $19 million deficit in 2016. Given management's conservative budgeting practices Fitch believes projections are reasonable.
Collections of property taxes, which represent approximately 27% of general fund revenues, continue to be weak with a current collection rate of about 86%. Total collections which include delinquencies are slightly better at 91%. On the plus side, all tax levies are continuing and do not require renewal. In addition, the district has a history of strong voter approval with the last levy approved by 58% of the voters in 2008. Management plans to put a new 4.3-mill levy on the ballot in November 2012 which, if passed, will generate about $6 million annually and relieve future budgetary pressures. The new levy is not considered in the forecast. Fitch expects management will continue to conservatively budget and implement expenditure reductions to build reserve levels and manage future budgetary gaps.
ELEVATED DEBT OBLIGATIONS
The district's overall debt burden is somewhat elevated at 6.2% of full market value and should remain stable given the stagnant real estate market, below-average principal amortization and minimal future borrowing plans. The district recently completed a major $628 million capital program that replaced or remodeled 26 schools. Debt service represents a manageable 8.2% of 2011 general and debt service fund expenditures. The district entered into a swaption in 2009, receiving a $9.6 million upfront payment. The swaption, which can be exercised by the counterparty beginning in June 2013, currently has a mark-to-market value of negative $25 million to the district. Fitch's chief credit concern regarding this transaction is the district's ability to access the short-term market to sell notes upon the exercise of the swaption. This risk is mitigated to some degree by qualification of prospective refunding bonds in the Ohio School District Credit Enhancement Program. In addition, the district is negotiating with a group of banks to provide liquidity enhancement.
The district contributes to the School Employees Retirement System and the State Teachers Retirement System, both multiple-employer defined pension plans. The district is required to make contributions in accordance with rates established by the state and has annually met the annual contribution. Pension and other post employment benefits represented a manageable 7.4% of 2011 general fund expenditures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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