NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying rating on the obligations of Lincoln Park School District, Michigan (the district) as follows:
--$21.5 million unlimited tax general obligation (ULTGO) bonds, series 2007 and series 2008 at 'BBB+'.
The Rating Outlook is revised to Positive from Stable.
The enhanced rating on the bonds, based on the state of Michigan State School Bond Loan Fund Program, is 'AA' with a Stable Outlook.
The ULTGO bonds are obligations of the district, payable from its full faith and credit and its unlimited ad valorem tax on all taxable property within the district.
KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: The Positive Outlook reflects the district's improved financial performance, including growth and maintenance of adequate reserves and reduced reliance on cash flow borrowing.
CONTINUED STATE AID IMPROVEMENTS: State aid, which represents the majority (over 80%) of district revenue, has continued to improve over the past several years following significant recessionary cuts.
ENROLLMENT TRENDS STABILIZE: District enrollment has historically been somewhat volatile, but has posted gains in five consecutive years. Enrollment is currently projected to decline modestly in 2016 (by less than 1%), with near-term enrollment expected to remain flat.
ECONOMIC WEAKNESS: Local economic indicators are weak, including long-term declines in employment, below-average wealth levels, above-average poverty, and declining district population.
TAX BASE STABILIZATION: Taxable assessed value (TAV) appears to be stabilizing after declines in prior years that resulted in a cumulative 34% decrease from the fiscal 2009 peak. However, the financial effects of this decline have been muted by the state's school district funding formula.
MANAGEABLE LONG-TERM LIABILITIES: District debt indicators are low-to-moderate and are expected to remain so even with modest planned additional issuance. Total carrying costs, including debt service, pension, and other post-employment benefit (OPEB) costs are expected to remain manageable, despite rising pension costs as the state addresses the weak pension plan funded position.
CONTINUED STRONG FINANCES AND ENROLLMENT STABILIZATION: Continued strong finances, including maintenance of adequate reserves, reduced cash flow borrowing, manageable carrying costs, and ongoing enrollment stability could result in a rating upgrade.
Lincoln Park School District encompasses the city of Lincoln Park (the city), which is located in southwest Wayne County about 12 miles from Detroit. Enrollment is slightly less than 5,000 students and district population of 37,151 in 2013 represents a cumulative 6.8% decline from population in 2000.
IMPROVING FINANCIAL PERFORMANCE
Improving state aid, conservative budgeting, and positive enrollment trends contributed to recent-year general fund surpluses (about $1.3 million in fiscal 2014 and $3 million in fiscal 2015), which raised unrestricted reserves to $6 million or 15.7% of spending. The district has budgeted a modest surplus ($90,159 or 0.2% of spending) for fiscal 2016. However, current projections indicate a surplus of about $800,000, driven largely by higher than budgeted enrollment, based on current estimates.
The district's current formal fund balance policy requires a minimum reserve balance of 5% of spending. However, management has indicated that the targeted level is 15% of spending. Recently increased reserve levels have benefited the district's liquidity position. The district has been borrowing for cash flow purposes through the state's state aid note program. Borrowing was $5 million annually in fiscal years 2014 and 2015, but is reduced to $2.5 million for fiscal 2016. Based on year-to-date performance, the district projects positive monthly cash balances for fiscal 2016 excluding the $2.5 million borrowing.
District revenue flexibility is very limited. The district's largest source of general fund revenue is state aid (over 80% of general fund revenue), which results in the district's revenues being highly reliant on state funding decisions. State cuts to K-12 education and declining enrollment levels were key drivers of multiyear deficit spending that eventually reduced unrestricted general fund balance to less than 1% of spending in fiscal 2011.
The district continues to slowly and carefully restore previously cut expenditures given the improved revenue environment. The district retains a sound degree of expenditure flexibility, including the ability to implement layoffs, and reductions in ancillary school services. Language currently in the district's labor contracts that makes step raises contingent on district financial performance strengthens budgetary control.
Maintaining stable or increasing enrollment levels is important for the continued recovery of district finances, as state aid is allotted on a per-pupil basis. Enrollment declined by a total of 15.9% between fiscal 2002 and fiscal 2011, but the district's decision to enact open enrollment has aided five consecutive years' enrollment growth. After bottoming out at 4,573 students in fiscal 2011, fiscal 2015 enrollment has recovered to 4,936 students. The district retains the option of capping/uncapping open enrollment at its discretion, so the district can manage potential growth within the confines of its existing facilities. Enrollment growth has occurred despite declining overall district population. Enrollment is currently projected to decline modestly in 2016 (less than 1%), with near-term enrollment expected to remain flat.
WEAK LOCAL ECONOMY
The local economy is part of the greater Detroit area and remains stressed. City unemployment continues to decline and is well below past highs, though the reduction largely reflects a long-term contraction of the labor force rather than improving employment. The August 2015 unemployment rate (5.7%) remains higher than the comparable state and national rates (5.2%), and represents a decline from 8.3% a year prior. City wealth levels are below average with per capita and median household income at 76% and 84%, respectively, of the state average, and 69% and 77% of the national average.
The district's tax base posted a cumulative 34% decline from its peak in fiscal 2009 through fiscal 2015. The tax base declines have had a relatively muted effect on the district's finances as foundation allowances are guaranteed by the state. Declines have been decreasing (less than 1% in 2015 vs. 3% to 10% in prior years) and management expects very modest growth (less than 1%) for fiscal 2016. This seems reasonable given recent and projected improvements in city residential values.
MANAGEABLE LONG-TERM LIABILITIES
Overall debt ratios are low at about $1,000 per capita and more moderate at 3.5% of market value for fiscal 2015. Outstanding direct debt amortizes rapidly, with 100% of principal retired within 10 years. The district does not maintain a formal capital planning document, but intends to fund immediate capital needs, generally building repairs, through the recently renewed sinking fund levy. The district is also contemplating modest issuance of $1.35 million in debt related to an energy savings performance contract, with savings from facility upgrades expected to cover debt service needs.
The district participates in the Michigan Public School Employees' Retirement System (MPSERS) for pension and other post-employment health benefits. The funded ratio has declined in recent years to 59.9% as of Sept. 30, 2014. Fitch estimates the funded ratio to be 54.0% using a more conservative 7% return assumption. Total carrying costs for MPSERS and debt service are manageable at about 25% of total governmental spending. Carrying costs for the district related to pensions have grown and, as the state addresses the weak MPSERS funded position, will likely continue to grow. However, Fitch expects these fixed costs will remain a manageable portion of the district's budget.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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, National Association of Realtors, and Zillow.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form