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Rating Update:

MOODY DOWNGRADES VAN DYKE PUBLIC SCHOOLS' (MI) UNDERLYING GO RATING TO A2 FROM A1 AND ASSIGNS NEGATIVE OUTLOOK

16 May 2011

A2 RATING AND NEGATIVE OUTLOOK APPLY TO $64.1 MILLION IN OUTSTANDING GO DEBT

Primary & Secondary Education
MI

Opinion

NEW YORK, May 16, 2011 -- Moody's Investors Service has downgraded to A2 from A1 the underlying rating on Van Dyke Public Schools' (MI) general obligation unlimited tax debt. Moody's has also assigned a negative outlook. The A2 rating and negative outlook apply to $64.1 million of outstanding general obligation debt.

SUMMARY RATINGS RATIONALE

The outstanding bonds are secured by the district's general obligation unlimited tax pledge. The downgrade to the A2 rating reflects the district's weakened financial position and limited General Fund reserves; declining trends in student enrollment; modestly-sized, declining tax base in the metro Detroit region; and above average debt burden. The negative outlook reflects overall revenue and expenditure pressures that are expected to continue given uncertainty regarding future state funding levels.

STRENGTHS

- Access to employment centers in the greater metro Detroit region

CHALLENGES

- Operating expenditures out of balance with declining revenues

- Declining enrollment trends expected to continue in the near-term

- Significant decreases in the district's full value

- Below average socioeconomic characteristics

Detailed Credit Discussion

NARROW FINANCES FACED WITH ADDITIONAL PRESSURES FROM STATE CUTS

We expect the district's financial position will remain pressured in the near-term due to falling revenues stemming from student enrollment declines and state aid reductions. The district maintained a relatively healthy financial position as recently as fiscal 2005, when its General Fund balance equaled $7.7 million, or a sound 19.6% of revenues. However, the expenditure trends in recent years have outpaced revenues resulting in operating deficits exceeding $1.25 million in four of the last five fiscal years. An operating surplus was achieved in fiscal 2009 entirely from a planned transfer of $5 million back to the General Fund from the district's Building and Site Fund to repay expenses related to a federal Title IX compliance project which occurred in fiscal 2004. The transfer helped to offset a mid-year reduction in state aid resulting in a $2.8 million operating surplus for the year, bringing reserves up to $5.3 million, or a moderate 12.9% of revenues. Declining revenues, especially in state and local sources have contributed to a sizable operating deficit in fiscal 2010, with an additional operating deficit expected for fiscal 2011. The district ended fiscal 2010 with an operating deficit of $4.2 million resulting from increased expenditures as well as lower than anticipated student enrollment which is a key determinant to state aid funding. The fiscal 2010 operating deficit would have been greater if not for a $2.3 million one-time transfer from one of the district's capital funds to the General Fund. We note that future reliance on one-time transfers to offset large operating deficits should not be expected, as flexibility in the district's other funds is minimal. The district's updated fiscal 2011 budget indicates an operating deficit of $2 million is expected for the year, which would result in a very narrow ending General Fund balance of approximately 1% of expected General Fund revenues. Preliminary budget documents for fiscal 2012 suggests a possible operating shortfall of up to $6.3 million depending on enrollment counts and the Governor's proposed budget for per-pupil foundation allowance cuts for each Michigan school district.

Like many Michigan school districts, the district relies heavily on state aid to fund operations. Approximately 74.4% of the district's current General Fund revenues are from state and federal sources with local revenues making up just 15.5%. We note the expected reduction in federal revenues as stimulus stabilization funding diminishes, as well as the uncertain future of state aid funding as the State of Michigan (GO rated Aa2/stable outlook) deals with its own budgetary pressures. Enrollment has averaged a considerable 4.9% decline annually over the past five years further stressing operating revenues. Management has begun planning the necessary steps to offset the sizable budget imbalance for fiscal 2012. Management's ability to offset potential revenue shortfalls and sustain the district's reserve balance will be important in maintaining the district's credit profile. We will continue to monitor the district's performance in light of these pressures.

MODESTLY-SIZED, RESIDENTIAL TAX BASE EXPERIENCING FULL VALUE DEVALUATION

The district's modestly-sized $1 billion tax base is mature and largely built out. It is located in Macomb county (GOLT rated Aa1, with stable outlook) with easy access to employment centers in southeastern Michigan. The state's sluggish economy and struggling overall housing market has lead to rapid full value depreciation of the district's tax base the last three years, with further depreciation expected in the near-term. From 2005 through 2010 the district's tax base experienced an average annual full value decrease of 6.4%. Concentration in the district's tax base is average with the top ten taxpayers comprising 10.1% of the district's tax base. Employers in the area are largely manufacturers tied to the auto industry with some commercial and retail present as well. Census 2000 socioeconomic indices for the district are far below state and national levels, with per capita income and median family income 70.5% and 74.6% of the state medians, respectively. The county's unemployment rate of 11.7% in March 2011 was higher than both the state and national rate during the same time period.

ABOVE AVERAGE DIRECT DEBT BURDEN WITH SLOW AMORTIZATION

The district's has a total of $64.1 million in outstanding general obligation debt. District voters authorized a majority of the debt ($62.6 million) in 2008 for renovations and improvements to the district's capital assets. District management reports that no additional issuances are anticipated in the near to medium-term. We anticipate the district's above average direct debt burden of 6.3% of full value, and overall debt burden of 7.3% of full value, to remain manageable with on-going reliance on the state of Michigan's School Loan Revolving Fund expected. Debt repayment is slow at 26.5% of principal retired in 10 years, but should match the useful life of the capital assets financed with bond proceeds. The district's debt profile is not exposed to any variable rate or swap agreements.

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Outlook

Outlook

The negative outlook on the district's general obligation rating reflects uncertainty regarding state revenue streams and potential expenditure pressures that will likely continue to stress the district's already limited financial flexibility.

What Could Make The Rating Go Up (or Remove the Negative Outlook)

- Significant growth in financial reserves

- Significant growth in taxable valuation

- Stabilized enrollment trends

What Could Make The Rating Go Down

- Continued deterioration of already narrow financial reserves

- Continued deterioration in the district's tax base and economy

- Continued declines in enrollment resulting in significant decreases in state funding

Key Statistics

Fiscal 2011 enrollment: 3,070 (4.9% average annual decrease since 2006)

2010 Population (estimated): 15,993 (4.9% decrease since 2000)

2010 Full value: $1.04 billion (6.4% average annual decrease since 2005)

2000 Per capita income (as % of state): 70.5%

2000 Median family income (as % of state): 74.6%

2010 Full value per capita: $62,250

Fiscal 2010 General Fund (GAAP) balance: $2.38 million (6.6% of General Fund revenues)

Net direct debt burden: 6.3%

Overall debt burden: 7.3%

Principal amortization (10 years): 26.5%

Outstanding general obligation debt: $64.1 million

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Andrew T. Van Dyck Dobos
Analyst
Public Finance Group
Moody's Investors Service

Elizabeth Foos
Backup Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY DOWNGRADES VAN DYKE PUBLIC SCHOOLS' (MI) UNDERLYING GO RATING TO A2 FROM A1 AND ASSIGNS NEGATIVE OUTLOOK
No Related Data.
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