Fitch Ratings has taken the following rating action on Canton City School District, OH's bonds:
--Approximately $43 million general obligation unlimited tax (ULTGO), affirmed at 'A';
--Approximately $730,000 special obligation tax anticipation notes, affirmed at 'A-'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The ULTGO bonds are secured by an unlimited voter-approved debt service millage, outside the general operating millage, that is adjusted to yield sufficient revenue to pay debt service payments.
The special obligation tax anticipation notes are secured by receipts from a 2.5 mill Permanent Improvement Levy. The notes will be fully paid off on June 1, 2013.
KEY RATING DRIVERS
OUTLOOK REVISED TO STABLE: The Outlook revision to Stable reflects Fitch's view that fiscal pressures have been significantly reduced due to voter approval of a new permanent tax levy which will generate approximately $5.5 million in annual revenue beginning in fiscal 2012.
ADEQUATE FINANCIAL FLEXIBLITY: The approval of the new tax levy combined with management's demonstrated willingness to implement expenditure cuts provides the district with increased financial flexibility to rebuild reserves to adequate levels.
ECONOMY REMAINS CHALLENGED: Although the local economy has diversified from manufacturing and has a significant presence in the more stable health care sector, above average unemployment and low wealth indices persist. The recent designation of Stark County and the city of Canton as a 'sweet spot' for Utica shale extraction may provide employment opportunities in the emerging oil and gas industries.
MODERATE DEBT LEVEL: The district's debt level is moderate and future capital needs are minimal.
CREDIT PROFILE
NEW TAX LEVY RELIEVES BUDGETARY PRESSURE
District voters approved a new permanent 7.9 mill property tax levy in November 2011, which will generate about $5.5 million on an annual basis. For school districts in Ohio, property tax revenue growth is dependent on new construction and/or voter approval of new and renewal levies. On a positive note, the new levy will provide much needed budgetary relief and increased financial flexibility. In addition, all property tax revenues, which represent 22% of total general fund revenue, are derived from non-expiring levies, minimizing the district's dependence on voter approval.
STATE FUNDING CURRENTLY STABLE
District finances rely heavily on state funding, comprising approximately 73% of general fund revenues. Funding has remained relatively stable over the last few years. A temporary state funding formula is in place in anticipation of a permanent system to replace the Evidence Based Model to be devised at a later, unspecified date. For fiscal years 2012 and 2013, school districts are guaranteed operating funding in an amount equal to the amount of state operating funding (excluding state fiscal stabilization money) received in fiscal 2011.
IMPROVING FINANCIAL FLEXIBILITY
The district reduced expenditures by $3.8 million in fiscal 2011 with staff reductions attained through attrition, savings in employee health insurance coverage, energy conservation and re-negotiation of rental agreements. An estimated $2.7 million in expenditure reductions were identified for fiscal 2012 but were not needed due to the passage of the new tax levy. Fitch believes that given that no layoffs or furlough days have been implemented to date, the district has flexibility to reduce expenditures if necessary to maintain structural balance.
For fiscal 2011, the district reported a general fund operating surplus after transfers of $2.8 million compared to a deficit of $2.5 million in 2010. The district implemented GASB 54 in fiscal 2011, reporting an unrestricted general fund balance (sum of committed, assigned and unassigned) at fiscal year-end June 30, 2011, of $2.6 million or 2.6% of spending compared to a negative unreserved fund balance of $4.1 million or negative 0.6% of spending at June 30, 2010. On a cash basis, the district ended fiscal 2011 with a $12.5 million balance compared to $13.1 million in 2010.
The district's current five-year forecast projects positive ending cash balances through 2013 with a $9.4 million cash deficit in 2014 increasing to $31.7 million in 2016. The current forecast does not include the $5.5 million of revenues that will be generated from the new permanent 7.9 mill levy which when added will increase ending cash balances over the five year period.
STABLE ENROLLMENT PROJECTED
The district has suffered from declining enrollment of about 3,000 students over the last 12 years. The decline is a result of population outflow and competition from charter schools. With a current enrolment of 9,600 students, district officials report that declines have slowed and are forecasting stable enrolment for the current five-year forecast. Additionally, management is researching strategies to draw students from charter schools. On an annual basis, approximately $8 million of state aid is passed through the district to charter schools, providing management with a strong incentive to attract students to district schools.
DIVERSYFING ECONOMY BUT WEAK INDICATORS REMAIN
The district, located in Stark County (the county), is approximately 58 miles south of Cleveland and serves most of Canton City (the city), Village of Lake Meyers, and small portions of neighboring townships. Major employers in the district include two healthcare facilities (Aultman Hospital and Mercy Medical Center), the county, the district, and Timken Company, a major manufacturer of tapered roller bearings and specialty steel. The local economy has diversified away from manufacturing to more stable sectors anchored by healthcare services.
City unemployment levels, although improving, remain above state and national rates. In February 2012, the city recorded an unemployment rates of 10% compared to a state rate of 8.5% and national average of 8.7%. Taxable assessed valuation has declined by 19% since fiscal 2007 but appears to have stabilized. District per capita income levels are weak, comprising only 68% and 62% of state and U.S. levels, respectively. Additionally, poverty levels are almost double the state and national rates.
MANAGEABLE LONG-TERM LIABILITIES
The district's debt burden is low to moderate at $900 per capita and 2.8% of market value and should remain stable as the district has no plans to issue additional debt in the near to medium term. Amortization is slightly above average with 56% repaid in 10 years. Debt service represents a low 2.8% of 2011 general and debt service fund expenditures. The district contributes to the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS) to fund both pension and other post employment benefits. Both SERS and STRS are cost-sharing, multiple-employer defined benefit plans with the district contributing 100% of the annual required payments for each system. Pension and other post employment benefits represented a manageable 10% of 2011 general fund expenditures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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