Fitch Ratings has affirmed the following Allen East Local School District, Ohio (the district) unlimited tax general obligation bonds (ULTGOs):
--$623,412 ULTGO bonds, series 2004, at 'AA-';
--$5.8 million ULTGO bonds, series 2007, at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are a general obligation of the district, payable from a voter-approved debt millage that is adjusted without limitation to yield sufficient revenue to pay debt service.
KEY RATING DRIVERS
HEALTHY RESERVE LEVELS: Prudent cost management has resulted in continued positive operations and strong reserve levels.
STATE AID IMPROVEMENTS: State aid, which represents the vast majority of district revenue, has improved over the past few years following the implementation of a new state funding formula.
STABLE ENROLLMENT: District enrollment has remained relatively stable over the past several years and management does not expect material changes over the near- to mid-term.
LIMITED RURAL ECONOMY: The district's economy is predominantly agricultural but the surrounding area is more diverse in nature, offering more employment opportunities.
FAVORABLE DEBT PROFILE: The district's debt burden is low with no future capital projects planned and average amortization. Fixed costs related to debt service and retirement benefits are a relatively small portion of the district's total budget.
RATING SENSITIVITIES
STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics, including the district's stable enrollment trend and maintenance of healthy reserves. The Stable Outlook reflects Fitch's expectation that such shifts are not likely.
CREDIT PROFILE
The district serves a rural area in Allen County, located in west central Ohio, 80 miles from Toledo and 65 miles from Dayton. The district's current enrollment and population of approximately 1,157 and 5,787, respectively, have remained fairly stable since 2000.
HEALTHY FINANCIAL OPERATIONS RESULT IN STRONG RESERVES
Improving state aid, conservative budgeting, and stable enrollment has contributed to the district having recorded only one year of deficit spending, which was planned, in the past 17 years.
The largest source of general fund revenue is state aid (approximately 63% of fiscal 2014 general fund revenue). As a property-poor, low-wealth district, the district has benefitted from a recent state-wide overhaul of the school funding formula. Unrestricted state aid increased by 8.1% from fiscal 2013 to fiscal 2014. Management is conservatively budgeting for little or no increases through 2016.
Property tax accounts for approximately 28% of total general fund revenues with the majority of levies not requiring voter renewal. Historically, voter support for renewal levies has been very strong. In May 2014, voters renewed (by 67%) a five-year, 2.75 mill levy that generates approximately $330,000 (4% of general fund revenues) on an annual basis. This levy has been successfully renewed since 1994. The other renewal levy was renewed by 60% of the voters in 2012 for a five-year period. Given the district's conservative budgeting practices and strong reserve level, no new tax levies have been needed in the past several years and none are being contemplated at this time.
The district uses a cash basis of accounting, which is not unusual for small Ohio school districts. For the fiscal year-end June 30, 2013, on an audited cash basis, the district recorded a general fund operating surplus after transfers of $8,000 or 0.1% of general fund spending. The unrestricted fund balance totaled $3.9 million or a very healthy 46.7% of expenditures, relatively unchanged from 48.4% at June 30, 2012. On an unaudited cash basis, for year-end June 30, 2014, the district recorded a $425,000 surplus and an ending cash balance of $4.3 million or 51% of spending. Year-to-date results for fiscal 2015 are tracking to budget with a small surplus ($31,000) projected and maintenance of reserve levels.
The October 2014 five-year (2015-2019) forecast, which Fitch views as conservative, projects balanced operations through 2015 with an $111,000 deficit in 2016 increasing to $1.2 million in 2019. Cash reserves remain positive through the forecast period totaling $2.2 million in fiscal 2019 or a still healthy 23% of projected spending. The district has flexibility to reduce expenditures. To date, there have been no staff reductions with costs controlled through attrition, consolidation, and favorable contract terms.
Fitch believes the district will continue to report balanced operations and stable reserve levels given strong budgetary controls combined with some expenditure flexibility.
LIMITED DISTRICT ECONOMY
The district economy is predominantly agricultural. The surrounding area is more diverse with two hospitals, Proctor and Gamble, and Ford Motor among the major employers. Ford maintained employment levels through the recession and Proctor and Gamble's workforce continues to be stable. Positively, district assessed value has increased 4% cumulatively over the last five years due in part to higher revaluation of agricultural land.
County unemployment rates have historically been above state and national levels but are showing positive trends. As of November 2014, the county recorded an unemployment rate of 4.4%, below the 4.5% state rate and 5.5% national rate and down from 7.3% a year earlier. County employment increased by 1.6% over the same time period, outpacing the 1.5% decline in the laborforce.
District per capita money income is below average at 87% and 80% of state and national averages, respectively. Median household income is above state (106%) and slightly below (97%) national averages.
FAVORABLE DEBT PROFILE
Overall debt levels are low at $1,111 per capita and 1.9% of district market value. Levels should remain stable as no future borrowing is planned. Principal is amortized at an average rate with 50% of debt retired within 10 years.
The district contributes to the Ohio School Employees Retirement System (OHSERS) and the Ohio State Teachers Retirement System (OHSTRS), both multiple-employer defined benefit pension plans. The district's annual contributions to OHSERS and OHSTRS cover other post-employment benefits (OPEB) as well. The district's required contributions are statutorily determined and fall short of actuarially-based levels. Although system-wide funded ratios for both plans are weak (as adjusted by Fitch to reflect a 7% return assumption), at 60.3% for OHSERS and 61.3% for OHSTRS, the state has implemented reforms intended to improve plan funding over time.
Fitch expects recent legislative changes requiring increases in employee contributions to provide the district with fairly predictable contribution rates over the near term. Total carrying costs related to debt service and retirement benefits are an affordable 11.9% of the district's total governmental budget, although they would be larger if pension payments were actuarially-based.
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 Global Insight and, 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=965355
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