NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the program rating of 'AA' to the following Wayne-Westland Community Schools, MI's (the district) bonds:
--Approximately $37.41 million refunding bonds (general obligation - unlimited tax; ULTGO), series 2014.
The 'AA' rating is based upon qualification for the Michigan School Bond Loan Fund (SBLF), whose bond guarantee program is rated 'AA' by Fitch.
The bonds are expected to price the week of July 14. Proceeds will be used to refund all or a portion of the district's outstanding 2004 refunding bonds, dated Dec. 16, 2004, which are due and payable May 1, 2015 through May 1, 2019 for net present value savings of approximately $2.8 million.
In addition, Fitch assigns an 'A' underlying rating to the series 2014 bonds.
The Rating Outlook is Stable.
The bonds are secured by the district's full faith and credit and unlimited pledge of ad valorem taxes. The 2014 bonds are also secured by the state of Michigan's SBLF guarantee.
KEY RATING DRIVERS
PRESSURED FINANCES: Significant revenue declines over the past two years, driven by enrollment falloffs and state funding cuts, caused a sizable reduction in general fund reserves.
PROSPECTS FOR IMPROVING BUDGETARY PERFORMANCE: Following significant revenue pressure, management reduced expenditures through negotiation of long-term labor contracts which generate material recurring savings. Together with recently increased state funding, Fitch expects the cuts to enable the district to return to budgetary balance and rebuild reserves to adequate levels.
BELOW-AVERAGE INCOME; STRAINED LOCAL ECONOMY: District income indicators are below average and the regional economy pressured as residents participate in the weakened greater Wayne County economy. Fitch rates the county's implied ULTGOs 'BB'/Rating Watch Negative, Taxable assessed value (TAV) declined significantly since 2008 and has been slow to recover.
MODERATE DEBT AND LONG-TERM LIABILITIES: The district's debt burden is moderate as the district is exposed to the state's underfunded pension plan. Carrying costs for debt service, pension and other post-employment benefits (OPEB) were moderate in 2013 and projected to remain manageable.
STATE CREDIT QUALITY: The enhanced rating is sensitive to changes in the state of Michigan credit quality and the SBLF program, on which the 'AA' rating is based.
FINANCIAL PROFILE KEY: The underlying 'A' rating is sensitive to material changes in enrollment, state funding and other factors that affect the district's ability to maintain budgetary balance and strengthen currently low reserves.
The district provides pre-K through 12th grade, adult and career education services and is located in western Wayne County in southeast Michigan which encompasses approximately 27.4 square miles. The district includes all of the city of Wayne, most of the city of Westland and small portions of Canton Township and the cities of Inkster, Dearborn Heights and Romulus with an approximate population of 100,000. Enrollment has declined 14% since 2004 with some stabilization in 2014 following the expansion of some programs which attracted additional students from neighboring districts.
WEAKENED ECONOMY; TAV DECLINES
Wayne County has suffered significant tax base and employment declines in the recent recession but continues to have a significant commercial and industrial employment base. The district employment base includes several Ford Motor Company facilities, currently employing 3,576, and is complemented by Oakwood/Annapolis hospital (1,200) and numerous small manufacturing and retail firms. Long-term challenges remain for the regional economy as it continues to slowly recover and diversify away from the automotive industry.
The district's equalized tax base has declined 18% since 2010 with a much lower annual decline of 1% for 2014. Flat-to-minimal TAV growth is projected over the next five years according to the district. Market value per capita is below average at $45,000. District wealth levels overall are also below average, with very low levels in the city of Wayne and stronger levels in Westland. Per capita money income in 2011 was low at 86% of the state and 78% of the national average, with median household income at 89% and 82%, respectively.
The city of Westland unemployment rate remained below average during the recent economic downturn and was 4.8% for April 2014. Data for the city of Wayne are not available. The Wayne County unemployment rate continues to be elevated at 8.9%, above the state (7.3%) and national (5.9%) averages.
REVENUE PRESSURE; EXPENDITURE CUTS; ADEQUATE RESERVES
The district has faced budgetary pressure as a result of declining enrollments, which coupled with per pupil reduced state funding over the past few years has resulted in several general fund operating deficits. These deficits reduced unrestricted fund balance to a low $5.2 million or 5% of expenditures at fiscal year-end 2013. State funding represents a high 80% of the annual budget.
In response to fiscal pressures, management launched several expenditure reduction initiatives in early 2013, including renegotiation of all labor contracts which include 5% pay reductions, step freezes, and changes to high-deductible health insurance plans. Management estimates labor savings of a recurring $10 million through fiscal 2017 when the current contracts expire. Additionally, the district focused on energy conservation for savings and expanded academic offerings to attract additional students to stem enrollment declines. Enrollment declines were much less than budgeted for fiscal 2014 and appear to be leveling off. Management projects that these measures reduced the budgeted fiscal 2014 general fund operating deficit of $2.4 million to $1 million, and will maintain fund balance at a low $4 million or 4%.
The adopted fiscal 2015 budget is conservative with regard to per-pupil state funding and enrollment and projects a $500,000 deficit. The budget is expected to benefit from a state legislative school aid bill signed following the district's budget adoption which will increase per-pupil funding and result in an approximately $1.1 million increase in unbudgeted revenues. This should offset the budgeted deficit and result in a small surplus. However, Fitch believes the district will continue to face budgetary challenges with a high reliance on state funding and enrollment vulnerability. The district's ability to budget conservatively, further cut expenditures, and attract students will remain key to restoring fund balance levels to the 5%-10% policy target and maintaining its underlying 'A' rating.
MODERATE DEBT AND LONG-TERM LIABILITIES
The district's debt burden is moderate at 3.0% of market value and $1,365 per capita. All debt matures within 10 years. The district does not anticipate further new money debt in the coming three years.
The district participates in Michigan Public School Employees' Retirement System (MPSERS), a cost-sharing multiple employer teacher's plan whose funded ratio is low at 61.3% or a Fitch-estimated 55.2% (assuming a 7% rate of return). Fitch views the underfunded status of the pension plan as a long-term risk, increases for which will likely present increased future budgetary pressure for the district. However, the state's newly instituted program to stabilize local contribution rates may shield the district from budgetary pressures.
District employees can participate in the MPSERS OPEB plan. District OPEB costs were $5.4 million (3.6% of spending)for 2013.
Cost of carrying debt, pension, and OPEB was moderate at 19% in 2013. The district's rapid debt amortization and limited future capital needs somewhat offset concerns about increased pension/OPEB costs.
'AA' PROGRAM RATING
For further information on Michigan's School Bond Loan Fund Program, see the press release dated July 17, 2013, which is available at www.fitchratings.com.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow, 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);
--'Fitch Upgrades Michigan School Bond Loan Fund Program Rating to 'AA'; Outlook Stable' (July 17, 2013).
--'Rating Guidelines for State Credit Enhancement Programs', (April 18, 2013).
Applicable Criteria and Related Research:
Rating Guidelines for State Credit Enhancement Programs
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria