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Fitch Affirms Parma City School District, OH's COPs at 'A'; Outlook StableFitch Ratings has affirmed the following Parma City School District, OH ratings: --$5.3 million outstanding certificates of participation (COPs), series 2006, at 'A'; --Issuer Default Rating (IDR) at 'A+'. The Rating Outlook is Stable. SECURITY The series 2006 COPs are secured by lease payments from the district subject to annual appropriation. The COPs are intended to be paid from the revenues of a 2.0 mill permanent improvement levy. KEY RATING DRIVERS The affirmation of the district's IDR at 'A+' and the COPs at 'A' is indicative of the district's low long-term liability burden and solid expenditure flexibility, which offset limited revenue raising ability and challenged operating performance. The one notch distinction of the COPs from the IDR is due to the appropriation-based security, which has a higher degree of optionality associated with the payment. Economic Resource Base The district is located in Cuyahoga County and serves the communities of Parma City, Parma Heights and Seven Hills. The local economy is anchored by a GM stamping plant; three health care facilities, a community college and other government sector employment also lend stability to the area. The district's population has grown 4% since 2010, while student enrollment has declined 10% over this same period. Enrollment declines are attributed to charter school competition. Revenue Framework: 'bbb' factor assessment The district exhibits revenue growth in line with the level of inflation, reflective of state aid trends. Ohio school districts have limited legal ability to independently raise revenues but have some flexibility to raise fees, charges, and other locally-controlled revenues, which contribute only modestly to the budget. Expenditure Framework: 'aa' factor assessment The natural pace of spending growth is expected to be above revenue growth, requiring ongoing budget management. The flexibility of main expenditure items is solid. Long-Term Liability Burden: 'aaa' factor assessment The district's long-term liability burden is low in relation to the economic resource base and direct debt amortizes very rapidly. Operating Performance: 'bbb' factor assessment The district exercises cyclical budgeting practices that are reliant on renewal levy approval to support gap-closing capacity, which Fitch considers to be limited. The state has declared the district to be in a state of fiscal caution. Management is working to regain compliance with state-mandated budget requirements. Fitch believes management's plans to improve fiscal performance are feasible. RATING SENSITIVITIES Voter Support of Renewal Levies: Voter support for renewal and new levies remains key to financial stability. Failure of voters to support renewal and new levies could decrease financial flexibility and put downward pressure on the rating. Restoring Financial Balance: The rating assumes that the district will be successful in its plans to re-balance revenues and expenditures and will improve its liquidity position in the next few years. CREDIT PROFILE The district serves a population of about 112,000. The district's tax base has remained relatively flat over the past few years, with 2015 assessed value totaling $2 billion, a 0.11% increase compared to 2014 but approximately 20% below 2009. Fitch believes the tax base has stabilized given marginal variances at times of re-assessment. The tax base is diverse, with the top 10 taxpayers representing utilities, retail, and development firms. Parma city's labor force and employment numbers have shifted positively, with the year-over-year unemployment rate decreasing. Unemployment rates are marginally above the state and national rates. Revenue Framework Property tax and state aid comprise approximately 64% and 31% of general fund revenues, respectively. Property taxes are levied on both a continuing and renewal (every five to 10 years) basis. Continuing levies comprise 42% of total revenues. Renewal levies add greater risk to operations - particularly during economic declines, when voters may be disinclined to reapprove them; such levies are equal to 18% of revenues. Historical revenue growth has been above the rate of inflation, but it is influenced by voter approval of new tax levies. Reliance on state aid links the district's growth prospects to those of the state and changes in enrollment. The district expects state aid to grow at a faster pace of 7.5% in fiscal 2017, driven by the state aid unding formula, which caps annual aid increases at this level. Sustained enrollment declines are due to charter school growth. Enrollment declined approximately 10% since 2010, but management expects the pace to stabilize between 10,000-11,000 students. The district has some buffer from student-body decreases, as modest shifts in enrollment may not impact state aid expectations for districts qualifying for the maximum annual increase. Fitch thinks enrollment expectations may be somewhat optimistic as the pace of charter school growth has remained strong. Management expects ad valorem revenue to remain flat in the near term. Fixed rate mills capture new construction and are sensitive to assessed value reductions but not AV growth. Ohio school districts operate within a restrictive revenue environment. The ability to raise new operating revenues without voter approval is limited to increases in fees, charges, and other locally-controlled revenues. Total revenue from these sources are nominal. Expenditure Framework The largest expenditure item is instruction, which includes teachers' salaries, accounting for 60% of total general fund spending. Fitch expects the pace of spending growth would be above the expected pace of revenue growth without the use of strong expenditure controls. The district has solid flexibility to cut spending, if necessary, throughout the economic cycle. Fiscal 2015 carrying costs for debt, pension, and other post-employment benefits (OPEB) are manageable at 12.8% of government spending. Mandatory charter school per-pupil-based spending is equal to approximately 6% of general fund expenditures, further reducing the discretionary portion of the budget. Prolonged charter school enrollment gains could pressure expenditure flexibility. The student-teacher ratio is 18:1, which is below the 25:1 state maximum. This indicates that the district has some instruction-related expenditure flexibility. Management has identified approximately $7 million in potential staffing-related and non-personnel cost savings, equal to about 4% of general fund spending. Current labor contracts include step increases to salaries, with overall salary expenditures increasing 1.9% for 2018 and 1.8% for 2019 through 2020. Long-Term Liability Burden The combined burden of overall debt and unfunded pension liabilities is moderate at 6.2% of personal income and 100% of direct debt is scheduled to be retired within the next 10 years. Management has no plans for future debt issuance. The bulk of the district's long-term liability burden is in the form of net pension liabilities. Parma City School District provides pension benefits and OPEB through two state-sponsored defined benefit pension plans, the Ohio School Employees Retirement System (SERS) and the Ohio State Teacher Retirement System (STRS). When both plans are combined, they report an assets to liabilities ratio of 74.2%, assuming a 7.75% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated assets to liabilities ratio is 68.6%. Operating Performance The district has been drawing on reserves to support operations in recent years and Fitch believes that its expenditure flexibility and expected reserve position throughout the economic cycle provide only limited gap-closing capacity in the context of elevated historical revenue cyclicality. Historical revenue volatility is due the failure to receive voter approval for renewal levies at times that coincide with economic downturns. Typically, the district builds up reserves after passage of a new levy and over time begins to make continuous draws on reserves as inflation erodes the value of the levies until the next revenue-raising policy action is taken. Management will return to the ballot for renewal levy approval in 2016. Should the levy fail, the district is prepared to make expenditure cuts equal to operating variances. Fitch believes that, while remaining vulnerable to cyclical declines, the district's expenditure flexibility supports the ability to execute this plan. The state declared the district to be in a state of fiscal caution effective August 1, 2016, due to forecasted current fiscal year deficits on a cash basis and subsequent fiscal deficits in the district's five-year forecast (2016-2020). The district is now subject to monthly monitoring by the state. Management responded to the designation by identifying significant cost-savings measures and developing a plan to regain compliance with the state requirement for positive year-end cash balances. While new management has yet to be proven, Fitch expects that the district will continue efforts to increase budget flexibility and comply with state mandates. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's 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/site/re/879478 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010985 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010985 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/20160830006161/en/ |
