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TMCNet:  Fitch Affirms Mechanicsburg E. V. Sch. Dist., OH ULTGO Underlying Ratings at 'AA-'; Outlook Negative

[March 20, 2014]

Fitch Affirms Mechanicsburg E. V. Sch. Dist., OH ULTGO Underlying Ratings at 'AA-'; Outlook Negative

NEW YORK --(Business Wire)--

Fitch Ratings has taken the following actions on Mechanicsburg Exempted Village School District, Ohio's (the district) unlimited tax general obligation (ULTGO) bonds:

--$6.4 million ULTGO bonds series 2004 and 2012 underlying ratings affirmed at 'AA-'.

The Rating Outlook on the underlying ratings remains Negative.

The series 2012 bonds also carry a 'AA' program rating based on enhancement provided by the Ohio School District Credit Enhancement Program. The Rating Outlook for the Ohio School District Credit Enhancement Program is Stable.

SECURITY

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.

The Ohio School District Credit Enhancement Program requires the Ohio Department of Education (ODE) to forward state foundation program payments to the bond registrar if, prior to the bond payment date, the district has not transmitted funds sufficient to cover required debt service payments.

KEY RATING DRIVERS

NEGATIVE OUTLOOK REFLECTS WEAKENED FINANCES, RESERVE DECLINES: The district's recent operating deficits caused drawn-downs in general fund balance levels, ultimately resulting in a negative unrestricted fiscal year 2012 ending balance. The district returned to balanced operations in fiscal year 2013, resulting in a positive, but very modest unrestricted ending balance (1.7% of spending). Current projections indicate surplus operations and continued near-term growth in reserves.

DEPENDENT REVENUE STRUCTURE: The district's revenue structure is heavily reliant on outside parties including state aid and voter approval for continuing tax levies. As a result, Fitch expects district finances to continue to be challenged by potential fluctuations related to these revenue sources.

STABLE ECONOMY; BELOW-AVERAGE INCOME INDICATORS: Local employment has been stable and unemployment rates remain below state and national levels. Per capita personal income indicators are below state and national averages. The district's taxable assessed value (TAV) has held stable in recent years and grew significantly in fiscal year 2014 due to revaluation.

MODERATE DEBT PROFILE: Overall debt levels are moderate. Amortization is average, and no additional debt issuance is currently contemplated. Total carrying costs, including debt service, pension, and other post-employment (OPEB) costs are low as a percentage of governmental spending.

RATING SENSITIVITIES:

FINANCIAL IMPROVEMENT: The 'AA-' rating assumes financial stabilization and increased reserve levels more in line with prior years. The district's inability to achieve budget surpluses and build back reserve levels would likely result in a downgrade to the district's rating.

CREDIT PROFILE

The district serves a rural area approximately 35 miles northwest of Columbus that includes the village of Mechanicsburg, OH and two small townships near the village. Enrollment, estimated at about 900 in 2014, has been declining since 2010 but is projected to remain stable in the near term. Recent years have shown stabilization after significant declines in 2011 and 2012.

FY 2013 FINANCES STABILIZE; LOW RESERVE LEVELS

District finances have been negatively affected by reductions in state aid and increased general fund spending needs in recent years. Three years of net deficits resulted in a negative unrestricted fund balance in fiscal year 2012. The district's general fund unrestricted balance decreased from $922,000 or 9.8% of spending in fiscal year 2011 to a deficit of $123,000 (-1.3% of spending) in fiscal year 2012.

Finances stabilized in fiscal year 2013 following significant spending controls, including wage freezes and a reduction in staffing by 16 positions. The district achieved an operating surplus and the general fund unrestricted balance increased to a very modest $148,000 or 1.7% of spending.

FINANCIAL IMPROVEMENT PROJECTED

The district's current budgetary cash basis financial forecast indicates continued financial strengthening. Operating surpluses and increased ending balances are estimated for the current year and projected for fiscal year 2015. Ending ash balances are estimated at $483 thousand for fiscal year 2014 (about 6% of spending), increasing to $876 thousand in fiscal year 2015 (about 10% of spending). The current forecast reflects a marked improvement over the district's projections a year ago.

Fiscal year 2014 general fund revenues are expected to grow reflecting increased state funding and growth in property taxes due to valuation growth. Projected expenditure decreases reflect labor concessions including continued wage freezes and reduced health benefit costs due to a switch to lower cost health insurance now provided by the Stark County Council of Governments self-insurance program.

Fiscal year 2015 projections assume additional state aid increases, based on state biennial budget figures, and continued growth in property taxes. Expenditures also increase, reflecting expected growth in staff costs under upcoming labor contract negotiations, following two years of wage compression. Fiscal year 2015 projections show surplus operations and continued growth in reserves.

DEPENDENT REVENUE STRUCTURE

School districts in Ohio operate in a constrained environment with property tax revenue growth dependent on new construction and/or voter approval of increased levies, with potential subsequent voter renewals required. The district renewed the expiring 1% portion (about $937 thousand in annual revenue) of its 1.5% income tax levy in May of 2011 for five years. In November 2013, the district's permanent improvement property tax levy was renewed (about $202 thousand annually) and made continuing.

The district will seek to renew its emergency tax levy (about $189 thousand annually) for 10 years in the upcoming May 2014 election. In recent years, new property tax levies and renewals for temporary income tax and property tax levies have been approved by voters. Property taxes and income taxes made up about 19% and 17% of general fund revenues, respectively, in fiscal year 2013.

The district relies on state aid for approximately 50% of the general fund revenues, which has presented challenges due to recent year state funding uncertainties. State foundation aid increased by about 6% in fiscal year 2014 and is projected to increase by 3% in fiscal year 2015, based on state budget figures.

STABLE LOCAL ECONOMY

Unemployment rates in Champaign County have dropped from a high of over 11.7% in 2009 to 5.8% in December 2013, which is below both state (6.6%) and national (6.5%) levels. Employment returned to modest growth in 2011 after prior year declines. Local per capita personal income indicators remain below state and national averages.

The school district is the largest local employer, though many residents of the district are employed at a Honda (News - Alert) plant in nearby Marysville. All Accords sold in North America are manufactured at the Marysville plant. The Honda facility has seen recent expansions, with additional expansions planned related to production of a new sports car model.

The district's TAV has been stable, with essentially flat performance in recent years after a decline of 4.9% in fiscal year 2009. TAV increased significantly in fiscal year 2014 (13.5%) due to revaluation, chiefly related to the valuation of agricultural properties. The district expects TAV to remain flat over the near term.

MODERATE DEBT PROFILE

The district's overall fiscal year 2013 debt burden is moderate at $1,429 per capita and 2.9% of market value. Fiscal year 2013 debt service as a percentage of governmental spending is also moderate at about 4.3%. Principal amortization is midrange with about 44% retired in 10 years and the district has no immediate plans for additional debt.

Pensions and other post-employment benefits (OPEB) are provided through the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS). Both SERS and STRS are state administered, cost-sharing, multiple-employer defined benefit systems. June 30, 2013 funding levels for both plans are low at about 61% for STRS and 60% for SERS, based on a Fitch estimated 7% rate of return rate of return.

The district's combined fiscal year 2013 pension required contributions, OPEB payments, and debt service costs as a percentage of governmental spending are low at about 10.5%. However, pension related costs could rise over time if STRS moves towards full funding of its actuarially required contribution (ARC). The plan funded only 46% of the ARC in fiscal 2013. The STRS plan has been fully funding its ARC.

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 (News - Alert) Global Insight, 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).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824498

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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