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MOODY'S ASSIGNS A1 RATING TO CIRCLEVILLE CITY SCHOOL DISTRICT'S (OH) $7.05 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2010A AND SERIES 2010B

15 Nov 2010

CIRCLEVILLE CITY SCHOOL DISTRICT (OH) HAS $44.9 MILLION OF TOTAL RATED DEBT, INCLUDING CURRENT OFFERING

Primary & Secondary Education
OH

Moody's Rating

ISSUE

RATING

Certificates of Participation (Circleville City School District, Pickaway County, Ohio), Tax-Exempt Bonds 2010A

A1

  Sale Amount

$1,500,000

  Expected Sale Date

11/17/10

  Rating Description

Certificates of Participation

 

Certificates of Participation (Circleville City School District, Pickaway County, Ohio), Build America Bonds 2010B

A1

  Sale Amount

$5,500,000

  Expected Sale Date

11/17/10

  Rating Description

Certificates of Participation

 

Opinion

NEW YORK, Nov 15, 2010 -- Moody's Investors Service has assigned an A1 rating to Circleville School District's (Pickaway Co. OH) $7.05 million Certificates of Participation, Series 2010A (Tax-Exempt) and Series 2010B (Federally Taxable-Build America Bonds-Direct Payment). Concurrently, we have also affirmed the Aa3 rating on the district's outstanding general obligation unlimited tax debt, affecting $37.9 million.

RATINGS RATIONALE

The certificates of participation (COPs) are secured by lease payments made by the district, subject to annual appropriation. Proceeds of the certificates will be used for locally funded initiatives as part of the district's plans to build a new central campus, including a new high school, middle school, and elementary school. Affirmation of the Aa3 general obligation rating and assignment of the A1 COPS rating reflect the district's well-managed financial operations, moderately sized tax base and elevated debt level. The A1 also incorporates satisfactory legal provisions and the essentiality of the financed projects, offset by annual appropriation risk.

ESSENTIAL PURPOSE; SATISFACTORY SECURITY FOR CERTIFICATE HOLDERS

We believe that the essential purpose of the project, as represented by the Board, provides strong motivation for the district to make timely appropriations for annual rental payments on the certificates. The current offering is secured by the base rent payments made by the school district under the lease. The lease is annually renewable by district appropriation. The first lease term will begin in December 2010 and will terminate on June 30, 2011, with subsequent terms renewable at the start of each fiscal year (July 1). The district's budget process typically entails a temporary annual budgetary appropriation approved by July 1st of the current fiscal year with a permanent appropriation authorized by October 1st. The district expects to make rental payments from the General Fund. Average annual debt service is expected to be $540,000, not including Build America Bond subsidies, and $504,000 net of the subsidy. If, for any reason, the district is unable to make payments from the General Fund, the Board plans to make lease payments from the district's 2.75 mill permanent improvement levy, which generates $708,000 annually and is approved on a continuous basis. Lease payments are due on June 1st and December 1st. The trustee (Huntington National Bank, issuer rating Baa1/stable outlook) is assigned a leasehold interest in the financed project and has the right to take possession of the project or re-let either upon default or non-renewal of the lease. The board of education has expressed its intent to continue to appropriate lease payments through final maturity, which is expected to be 2035.

MODESTLY-SIZED TAX BASE LOCATED SOUTH OF COLUMBUS

Located 35 miles south of Columbus (GO rated Aaa/stable outlook), the state capitol, the district encompasses the city of Circleville (Aa3), Wayne Township, and portions of two other surrounding townships. We expect that the district's $736 million modestly-sized tax base will experience modest growth in the near term due to appreciation of agricultural land in the townships and the availability of land for development. Over the last five years, the district's tax base has seen an average annual decline of 1.3%, primarily due to the state of Ohio's (Aa1/negative outlook) phase-out of its tangible personal property tax from 2006 to 2009, though real estate values also declined slightly in 2010. The district levies an earned income tax on district residents, allowing the district to benefit from the concentration of non-profit and government entities in the city of Circleville, including the county, city and school district. The city of Circleville is the county seat and also attracts area residents for shopping and health care. The county is the district's second largest employer with 450 employees, and Berger Hospital is the top employer, with 560 employees, as well as the top taxpayer representing 1.2% of the property tax base. Favorably, residents also benefit from employment opportunities in Columbus and Chillicothe (Aa3), both within a thirty minute drive of the city. Despite area employment opportunities, the Pickaway County (Aa3) unemployment rate remains elevated at 10.1% in August 2010, compared to 9.7% for the state and 9.5% for the nation for the same time period. Resident income indices are below national levels, with per capita and median family income at 81% and 86.4%, respectively in the 2000 census, reflecting the rural nature of portions of the district. Student enrollment has been decreasing with a 1.1% average annual decline over the last five years and further modest declines expected over the next five years, though we note that completion of the district's new central campus could attract new students to the district from surrounding communities.

SOLID FINANCIAL OPERATIONS CHARACTERIZED BY AMPLE CASH RESERVES AND LIMITED VOTER EXPOSURE RISK

We anticipate the district's financial operations will remain sound due to its ample cash reserves and limited voter exposure with all of its levies approved on a continuous basis and no foreseeable plans to return to voters in the near to medium term. The district began to build up its cash reserves following the adoption of two new levies in 2005. In November 2005, the district passed a new 7.9 mill levy and a 0.75% earned income tax, with fiscal 2008 the first full year of income tax collections. Both levies are approved on a continuous basis. Additionally, in November 2007, the district renewed a 16.8 mill operating levy on a permanent basis, eliminating the need for the district to return to voters for any levy renewals. The new levies allowed the district to generate substantial operating surpluses over the past four years, building up General Fund (GAAP basis) reserves to $12.2 million, or an ample 58.2% of revenues at the end of fiscal 2009. On a cash basis, fiscal 2009 ended with a balance of $14 million, or 62.9% of revenues. The fiscal 2009 cash basis ending balance is lower than previously reported in our July 23, 2010 credit report as the district recently discovered an error in the formulation of its May 2010 Five-Year Forecast, which led to a $4.3 million downward revision in its fiscal 2009 cash basis ending fund balance. The error involved the fiscal 2007 beginning cash balance, which was improperly entered in the district's forecast, and the mistake had been carried forward through the forecast. The district has since changed the software it uses in developing the forecast, which will reduce the risk of data entry errors going forward. Given the scrutiny that the district has placed on the Five-Year Forecast following the discovery of the error and a recent change in financial management, we expect that going forward the district's Five Year-Forecasts will not contain such errors.

In fiscal 2010, the district experienced a $1.3 million operating deficit on a cash basis, with an unaudited cash-basis ending General Fund balance of $12.7 million, or a strong 57.8% of receipts. Fiscal 2010 income tax receipts were 6.5% below 2009 receipts, contributing to the decline in reserves. The district is projecting income tax receipts to remain flat in fiscal 2011 with an estimated ending cash basis General Fund balance of $12.6 million, or a solid 56% of receipts. The district's long-term plan is to implement expenditure controls and financial policies to maintain solid reserves going forward, eliminating the need to return to voters for additional operating funds. The district's contract with its teacher's union is negotiated through 2013, with 2.5% annual increases each year. Additionally, in an effort to mitigate an increase in healthcare costs, the district changed its healthcare plan to a lower cost plan as part of the Pickaway County insurance consortium. In June 2010, the board adopted a formal debt policy, which sets a minimum targeted unreserved General Fund balance at 25% of expenditures, a level the district currently meets throughout all but the last year of its five-year forecast, which goes through fiscal 2015. State aid makes up the district's primary revenue source at 49% of 2009 operating revenues, followed by property taxes at 38.6%, and income taxes at 7.3%. The reliance on state aid makes the district somewhat vulnerable to state aid cuts, though we note that the state of Ohio has offset state aid reductions with federal stimulus funding for fiscal 2010 and 2011 and additional state aid cuts are not expected for fiscal 2011.

ELEVATED DEBT BURDEN WITH NO ADDITIONAL BORROWING PLANNED AND BELOW AVERAGE PRINCIPAL AMORTIZATION

We believe the district's direct debt burden at 6.2% of full value and overall debt burden at 6.7% will remain elevated in the near term due to the district's below average principal amortization. The elevated debt profile is associated with the recent borrowing for the central campus, and the district has no additional borrowing plans in the near term. Construction on the new central campus is set to begin in the summer of 2011, with completion of the project and the three new schools set for fall 2015. The existing high school and one elementary school that are on the new central campus site will be demolished. The middle school and three other elementary schools may be demolished or put up for sale. Principal amortization is below average, with 24.7% of principal repaid within ten years, though matches the useful life of the assets being financed. All of the district's long-term debt is fixed rate, and the district is not a party to any interest rate swaps.

WHAT COULD CHANGE THE RATING - UP

-Strengthening of the district's tax base and demographic profile

-Maintenance of strong liquidity and fund balance levels

- Improved and accelerated economic expansion as reflected in improved employment indicators.

WHAT COULD CHANGE THE RATING - DOWN

-Structural imbalance and an inability to maintain reserves at satisfactory levels.

- Deterioration of the district's tax base and demographic profile

- Rapid enrollment decline leading to material multi-year declines in fund balance

KEY STATISTICS:

Fiscal 2010 Estimated enrollment: 2,319 students (1.1% average annual decrease since 2005)

2000 Population: 15,360 (5.8% increase since 1990)

2010 Estimated full market valuation: $736 million (1.3% average annual decrease since 2005)

Estimated full value per capita: $47,905

Per capita income as % of U.S. (1999): 81%

Median family income as % of U.S. (1999): 86.4%

Pickaway County unemployment rate (August 2010): 10.1%

FY2009 (GAAP basis) General Fund balance: $12.2 million (58.2% of revenues)

FY2009 (cash basis) General Fund balance: $14 million (62.9% of receipts)

FY2010 (cash basis) General Fund (unaudited) balance: $12.7 million (57.8% of receipts)

Debt burden: 6.7% (6.2% direct)

Principal retirement (10 years): 24.7%

Post-sale general obligation unlimited tax debt: $37.9 million

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service 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

Megan Roudebush
Analyst
Public Finance Group
Moody's Investors Service

Emily Robare
Backup Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO CIRCLEVILLE CITY SCHOOL DISTRICT'S (OH) $7.05 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2010A AND SERIES 2010B
No Related Data.
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