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Rating Update:

MOODY'S AFFIRMS Aa2 AND Aa3 RATINGS ON WARREN CONSOLIDATED SCHOOL DISTRICT'S (MI) OUTSTANDING RATED GOULT AND GOLT DEBT

13 Apr 2011

Aa2 and Aa3 RATINGS APPLY TO $111.5 MILLION OF MOODY'S RATED DEBT

Primary & Secondary Education
MI

Opinion

NEW YORK, Apr 13, 2011 -- Moody's Investor's Service has affirmed the Aa2 rating on Warren Consolidated School District's (MI) outstanding rated general obligation unlimited tax debt and the Aa3 rating on the district's outstanding rated general obligation limited tax debt. As of June 30, 2010 the district had $101.4 million of outstanding rated general obligation unlimited tax debt and $10.1 million of outstanding rated general obligation limited tax debt.

SUMMARY RATING RATIONALE

The district's Aa2 and Aa3 ratings reflect the district's large and declining tax base with significant auto industry taxpayer concentration, satisfactory financial position, and above average debt levels.

STRENGTHS

- Stable to increasing enrollment, a key determinant in state aid

- Benefit from hold harmless and sinking fund levies, which provide some financial flexibility

CHALLENGES

- Potential additional reductions in state aid in fiscal 2012

- Recent declines in liquidity and reserves

DETAILED CREDIT DISCUSSION

LARGE BUT DECLINING TAX BASE IN DETROIT METRO; AUTO INDUSTRY CONCENTRATION WITH SIGNIFICANT GM AND CHRYSLER PRESENCE

Located primarily in Macomb County (GO Aa1/Stable Outlook), the district serves portions of the cities of Warren (WR), Sterling Heights (Aa1) and Troy (Aaa) north of Detroit (Ba3/Negative Outlook). While the district's tax base experienced modest increases through 2007, its full value declined by 5.6% in 2008, 8.0% in 2009 and an additional 13.2% in 2010, decreasing it to $8.1 billion in 2010 from $10.7 billion in 2007. The district faces auto concentration issues with General Motors (Long-Term Rating Ba2) and Chrysler making up the two largest taxpayers (accounting for 7.4% of assessed valuation; 16.0% of assessed value with IFT values included). Despite the declines in full valuation, district officials report a stabilizing local economy. After Chrysler filed for and left Chapter 11 bankruptcy protection in 2009, the stamping plant located in the district was slated for closure in 2010. However, the plant remains open and feeds the nearby Sterling Heights Assembly Plant where the Chrysler 200 is assembled. District officials also reported that over the past two years the US Army has transferred approximately 1,000 employees to the Detroit Arsenal where the Army's TACOM Life Cycle Management Command is headquartered. The district has set up a bus stop on the army grounds with four bus runs bringing students to various district schools.

Income levels are slightly above state levels with per capita income and median family income at 110.8% and 119.4% of state averages respectively. Unemployment levels in the district, at 11.9% in February 2011, are above both state and national averages for the same period.

SATISFACTORY FINANCIAL POSITION WITH DECLINING RESERVES

We expect the district's financial position will remain satisfactory despite pressured revenue streams from state aid cuts due to district officials' commitment to maintain reserves, demonstrated expenditure reductions in light of past revenue declines, and adequate reserves. Similar to other school districts across the state of Michigan (GO rated Aa2/stable), the district has been challenged by reductions in its primary revenue sources (property tax and state aid receipts) in recent years, due to declining property tax valuations and state aid reductions. In fiscal 2010, the state of Michigan announced its plans to cut state foundation allowance by $165 per pupil as well as eliminate Section 20j categorical aid payments, totaling $265 per pupil for the district, in October 2009, which represented roughly $8.1 million in state aid for the district. After the cuts were announced, the district budgeted for an operating deficit of $5.5 million but reduced expenditures throughout the district and closed fiscal 2010 with an operating deficit of approximately $3.0 million and a General Fund reserve of $17.7 million, or an adequate 10.8% of revenues. For fiscal 2011, the district initially budgeted for a General Fund reserve draw down of $4.5 million. However, due to increased enrollment over budgeted amounts, early retirements by teachers and staff, and the closure of two underutilized buildings, district officials now anticipate a General Fund reserve draw down of less than $1.1 million. A draw down of $1.1 million would result in a General Fund reserve of approximately $16.6 million, or a narrowing but still satisfactory 9.9% of revenues.

The state budget for fiscal year 2012 has not been set and may include additional declines in per pupil funding. The Michigan governor's current budget recommendation includes an additional per pupil reduction of $300 for fiscal 2012 from 2011 funding levels. School district officials are in the process of working on its fiscal 2012 budget and targeting $14.0 million in reductions, the gap of current year expenditures over revenues if per pupil funding is reduced by $300. District officials anticipate reducing staff, increasing class sizes, reducing the scope rather than eliminating some programming, reducing energy expenditures, and using some General Fund reserve balance to manage through potential aid cuts.

State aid accounts for 61.3% of the district's General Fund reserves, and 27.8% comes from local property taxes. The district benefits from a hold harmless levy which expires in 2018 and provides the district a more balanced revenue stream between local property taxes and state aid. which affords them some cushion from state revenue pressures. Enrollment in the district has increased over the past several years as the district has benefited from its School of Choice campaign and outward migration of students from the City of Detroit School District. Enrollment in 2011 increased to 15,985, up from 15,296 in fiscal 2006. As state aid is primarily enrollment driven, future declines or could continue to place revenue pressure on district operations and reserve levels.

MANAGEABLE DEBT BURDEN WITH FUTURE BORROWING PLANNED

We expect the district's debt levels will remain manageable despite plans future borrowing plans. Voters passed a $65.7 million referendum in November 2009 supporting capital improvements at the district's facilities; the district plans to issue the remaining $15.0 million later in 2011. The district's current overall debt burden is average at 2.7% and direct debt burden slightly above average at 2.1%. Including the planned $15.0 million issue, the debt burdens increase to 2.3% (direct) and 2.9% (overall). Payout of principal is below average at 51.2% but within the useful life of the assets financed.

WHAT COULD MOVE THE RATING UP

- Significant growth in financial reserves

- Significant growth in taxable valuation above entities in the rating category

WHAT COULD MOVE THE RATING DOWN:

- Increase in the district's debt burden

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

- Continued deterioration of financial reserves

KEY STATISTICS

2010/2011 enrollment: 15,394 (1.0% annual average increase since 2006/2007)

2008 estimated population: 13,100 (0.8% decrease since 1990)

2010 full valuation: $8.1 billion

2010 full valuation per capita: $71,187

2000 Median family income: $63,801 (119.4% of state, 127.5% of US)

2000 Per capita income: $24,563 (110.8% of state; 113.8% of US)

District unemployment rate (February 2011): 11.9% (MI at 11.0%, US at 9.5%)

Direct debt burden: 2.1%

Overall debt burden: 2.7%

Payout of principal (10 years): 51.2%

Fiscal 2010 General Fund balance: $17.7 million (10.8% of General Fund revenues)

Outstanding general obligation debt: $168.6 million (as of June 30, 2010)

PRINCIPAL METHODOLOGY USED

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 assigning a credit rating.

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

Kathryn Gregory
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


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MOODY'S AFFIRMS Aa2 AND Aa3 RATINGS ON WARREN CONSOLIDATED SCHOOL DISTRICT'S (MI) OUTSTANDING RATED GOULT AND GOLT DEBT
No Related Data.
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