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Fitch Downgrades West Ottawa School District, MI's ULTGOs to 'A+' on Criteria ChangeFitch Ratings has downgraded the following West Ottawa School District, MI ratings to 'A+' from 'AA-': --$41.5 million school building and site bonds (general obligation), series 2014-1; --Issuer Default Rating (IDR). The Rating Outlook is Stable. SECURITY The bonds are payable from an unlimited pledge of ad valorem property taxes within the district's boundaries. KEY RATING DRIVERS The downgrade to 'A+' from 'AA-' reflects implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The revised criteria places increased focus on the pace of natural revenue growth and the ability of an entity to independently increase revenue and to manage budget gaps that may occur in an economic downturn. Fitch expects the district's natural revenue growth will be stagnant and that it has very limited flexibility to increase local revenue sources independent of voter approval. Fitch also believes that through a recessionary period operations could become more challenged than is the case for higher rating levels, although the district would likely recover financial flexibility as conditions improve. Economic Resource Base The district is located in western Michigan on Lake Michigan in Ottawa County and encompasses approximately 73 square miles. The district is immediately north of the city of Holland and includes portions of the townships of Holland, Olive, Park, and Port Sheldon. District population was 50,622 in 2014, with enrollment of approximately 6,900. Revenue Framework: 'bbb' factor assessment The district does not have the legal ability to independently increase its revenues. With a combination of steadily declining enrollment somewhat offset by expected increases in state funding, Fitch expects general fund revenue to be stagnant. Expenditure Framework: 'a' factor assessment Expenditure flexibility is adequate, with comparatively high fixed carrying costs. Given the expectations for stagnant revenue growth, the natural pace of spending growth is likely to be above that of revenues, requiring ongoing budget management. Long-Term Liability Burden: 'aa' factor assessment Fitch considers the district's overall long-term liability burden to be moderate. Operating Performance: 'a' factor assessment Fitch considers the district's gap-closing capacity strong, although financial operations could become challenged in a downturn. RATING SENSITIVITIES Reserve Expectations: The rating is sensitive to any material change in Fitch's expectations for available reserve levels that would affect the district's ability to maintain adequate reserves for the rating category throughout an economic cycle. CREDIT PROFILE The county economy is diverse, with leading employers in automotive manufacturing, education, and healthcare. Downtown Grand Rapids is approximately 25 miles away. The district's taxable value continues to recover after a cumulative 10% drop from 2008 to 2013. County personal income is average and its unemployment rate compares favorably to the state and national levels. Enrollment has declined by 7% since 2010 and is projected to continue to decline by approximately 4% through the 2018 school year. Revenue Framework The district is reliant on the state to fund the bulk of its operations (72% in fiscal 2015). State funding is mostly based on a per-pupil formula, and the overall state school funding appropriation is expected to increase by 3% overall for fiscal 2017. Fitch believes that future revenue growth will be stagnant, below the level of CPI growth. The district has experienced declining enrollment, which has led to slow state aid growth over the last several years. The district projects enrollment to continue to decline over the next several years, at a rate that may offset the majority of any per-pupil foundation allowance growth. The district is extremely limited in its ability to legally raise revenue due to the nature of Michigan school district funding. Under Proposition A, the state funds the majority of school budgets and leaves little to no local control over revenue to the individual districts. Expenditure Framework The district's main expenditure items are student instruction (69% of FY 2015 general fund expenditures) and support services (30%). The natural pace of spending growth is expected to be above that of revenue growth. As enrollment is falling, personnel costs are expected to be stable, due to natural attrition, limited salary and benefits increases, as well as more steps in the salary schedule to slow down annual salary growth. The district closed down a school site recently to save operating expenditures, but has no plan to close more sites. The district has an adequate amount of expenditure flexibility. Debt service, pension, and OPEB carrying costs are comparatively high at over 27% of governmental expenditures. Labor union contracts tend to be three to five years in length with no re-openers, which reduces flexibility when faced with a revenue drop, although salary increases in current contracts are very reasonable at 1% COLA plus step increases. Importantly, school districts in Michigan maintain the ultimate ability to impose contract provisions if negotiations are unsuccessful. Long-Term Liability Burden The district's long-term liability burden is moderate, with the unfunded pension liability and overall debt currently at approximately 15% of district personal income (a combined $284 million, $129 million of which is in the form of direct debt). The district has over $40 million bond authorzation left from recent referenda and plans to issue new debt in FY 2020. Fitch does not expect this to have a significant impact on the district's liability burden as almost $30 million of current debt will be retired by that time. The district participates in one cost-sharing multiple-employer pension plan, the Michigan Public School Employees' Retirement System, which includes OPEB. The district contributes 100% of its required contribution to the plan, with the state contributing the remainder of the contribution to equal the actuarially determined amount. Fitch calculates the combined adjusted ratio of assets to liabilities to be 60% assuming a 7% discount rate. Operating Performance The district's board maintains a 15% fund balance policy to which management adhered even through the great recession and subsequent recovery. In an economic downturn, however, Fitch believes the district's limited revenue raising flexibility would lead to challenged financial operations, with further expenditure reductions and use of fund balance as the only methods within the district's control to close the subsequent operating gap. The district budgets conservatively, and to date has managed its declining enrollment and flat revenues successfully through strict expenditure controls. Fiscal 2015 ended with a 19.6% unrestricted fund balance, while fiscal 2016 operating performance is estimated to be balanced. Projected fiscal 2017 results shows a small deficit, but Fitch believes the year is still likely to end with a reserve above the 15% policy threshold. 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) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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