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Fitch Downgrades Solon City School District, OH's ULTGO Bonds to 'AA+' from 'AAA'; Outlook StableFitch Ratings has downgraded the following ratings for Solon City School District, OH to 'AA+' from 'AAA': -- Approximately $2.6 million ULTGO, series 2012 ; -- Long-Term Issuer Default Rating. The Rating Outlook is Stable. SECURITY The bonds are payable from an ad valorem tax on all taxable property within the district's boundaries, unlimited as to rate or amount. KEY RATING DRIVERS The downgrade results from the application of Fitch's revised criteria for U.S. tax-supported ratings released on April 18, 2016. In particular, the revised criteria highlight the limited growth prospects for district revenues and the highly constrained independent legal ability of management to increase them. The district's financial profile is characterized by exceptionally strong operating performance, underpinned by financially conservative management, strong voter support and substantial reserves. Given the modest volatility of the revenue stream and midrange budgetary flexibility, the district has strong capacity to withstand an economic downturn. Economic Resource Base The district is located in southeastern Cuyahoga County, 19 miles southeast of Cleveland and 22 miles northeast of Akron. The district encompasses all of the city of Solon and the Village of Glenwillow. The city of Solon is fully developed, with an affluent population. Per capita income is almost twice the state level. District enrollment peaked at around 5,300 in 2007 and is currently approximately 4,600 with further declines possible. Revenue Framework: 'bb' factor assessment The district generates most of its revenues from property taxes and benefits from permanent, fixed-rate voted levies with no renewal risk. However, it lacks independent ability to raise revenues and will likely experience modest revenue declines due to tangible personal property tax (TPP) revenue loss. Expenditure Framework: 'aa' factor assessment The district implemented cost reductions through a school closure, as well as staffing level and salary cuts. Meaningful expenditure flexibility remains and carrying costs are moderate. Long-Term Liability Burden: 'aaa' factor assessment Overall debt plus pension liabilities are low in relation to personal income. The district's net pension liabilities make up the majority of the long-term liability burden. Operating Performance: 'aaa' factor assessment The district has consistently achieved operating surpluses since 2011, which contributed to the buildup of substantial general fund reserves at a sufficient level for the rating, given midrange budget flexibility and modest revenue volatility. RATING SENSITIVITIES SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's strong voter support, conservative financial management practices, and solid reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. CREDIT PROFILE Revenue Framework Ohio school districts operate within a restrictive revenue environment. The district receives most of its revenues from property taxes (over 70%), and a relatively small portion from state foundation funding, unlike most other Ohio schools. The district's state foundation funding is capped, so declining enrollment will not cause funding loss in the near term. The bulk of property tax revenues are from voted levies and the district enjoys strong voter support, having been successful with 20 out of 21 new levies since 1986. All voted levies are fixed rate, insulated from assessed value fluctuations due to home price changes, but benefit from additions due to new construction. The state-wide TPP phase-out affects the district disprportionally. State hold harmless dollars completely offset the loss in fiscal years 2016 and 2017 but future state reimbursement amounts are uncertain. Continued declines of TPP reimbursement will likely cause total general fund revenue to fall, absent new voter-approved levies. All of the existing voted levies are permanent with no renewal risk. However, the levies provide very limited growth and the district is reliant on voter approval of new levies every few years. The very strong voter support is partly a result of quality education that the district provides. The high school has consistently been recognized as one of the state's and nation's top high schools. Expenditure Framework Expenditures have been flat due to cost cutting measures and declining enrollment. Fiscal 2015 general fund total expenditures were lower than its 2009 level. Looking ahead, expenditure natural growth is expected to be modest, given the declining enrollment trend and settled labor contracts through fiscal 2017 with limited salary and benefit cost increases. Expenditure flexibility is solid. The district successfully curbed costs during the downturn through rolling back the salary schedule, eliminating positions and increasing employee benefit contributions in 2011 and 2012. At the end of fiscal 2016, the district pro-actively responded to the declining enrollment trend by closing an elementary school recently and reducing staffing levels. The district also benefits from affordable carrying costs. The district provides substantial additional programs and services to students, which represents expenditure flexibility. Class sizes are close to the maximum allowed. Long-Term Liability Burden The district's long-term liability burden is low in relation to its personal income level. No additional new money direct debt issuance is planned, but direct debt is a modest portion of the overall liability burden. The district contributes to the Ohio School Employees Retirement System and the Ohio Teachers Retirement System, both of which have historically been underfunded. The state-required contributions are now actuarially-based and growth in net pension liabilities is expected to stabilize. Operating Performance Financial resilience is exceptionally strong. The district's reserves provide substantial cushion to augment midrange budgetary flexibility and should allow the district to withstand a moderate economic downturn without erosion in overall flexibility. Due to a lower cost base and recent operating surpluses, the reserve cushion remains far higher than the level Fitch believes is sufficient for the current rating. The district demonstrates proactive and prudent management although the reliance on voter approval leads many districts in Ohio to draw down fund balances in anticipation of requesting additional levies. This dynamic makes the continued voter support key to the district's ability to maintain financial flexibility. The five-year forecast expects structural balance to continue through at least 2018 based on what Fitch believes are conservative estimates. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools. Applicable Criteria U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009934 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009934 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160803006763/en/ |
