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MOODY'S ASSIGNS A1 RATING UNDERLYING AND Aa3 ENHANCED RATING WITH A NEGATIVE OUTLOOK TO VALLEY GROVE SCHOOL DISTRICT'S (PA) $6.86 MILLION GO BONDS, REFUNDING SERIES OF 2011

09 Feb 2011

A1 RATING APPLIES TO $13.66 MILLION IN POST-SALE GO DEBT

Valley Grove School District, PA
Primary & Secondary Education
PA

Moody's Rating

ISSUE

RATING

General Obligation Bonds, Refunding Series of 2011

A1

  Sale Amount

$6,860,000

  Expected Sale Date

02/22/11

  Rating Description

General Obligation Bonds, Refunding Series of 2011

 

Opinion

NEW YORK, Feb 9, 2011 -- Moody's Investors Service has assigned an A1 underlying rating and a Aa3 enhanced rating with a negative outlook to Valley Grove School District's (PA) $6.86 million General Obligation Bonds, Refunding Series of 2011. Concurrently, Moody's has affirmed the A1 underlying rating on the district's $6.8 million in outstanding general obligation debt.

RATINGS RATIONALE

The bonds are general obligations of the district and are secured by the district's unlimited tax pledge. Proceeds from the sale of the Series of 2011 bonds will be used to refund the district's outstanding Series 2006 bonds for a minimum net present value savings of $131,300 or 2.0% of refunded principal. The A1 underlying rating reflects the districts solid financial position with exceptionally high reserve levels, small rural tax base with below-average wealth levels and limited growth drivers, and an elevated, but manageable debt profile. The Aa3 enhanced rating reflects the additional security provided by the Commonwealth of Pennsylvania's Act 150 School District Intercept Program. This Act provides for undistributed state aid to be diverted to bond holders in the event of default. The negative outlook reflects the recent revision of the Commonwealth of Pennsylvania's outlook to negative, as the programmatic intercept rating is linked to the commonwealth rating.

STRENGTHS:

- Stable financial position

- Above-average reserve levels

CHALLENGES:

- Limited tax base

- Rising costs related to pensions and other post-employment benefits

CREDIT DISCUSSION

SLOW FUTURE GROWTH LIKELY FOR SMALL, RURAL TAX BASE

Moody's expects the district's small, $243 million tax base, will achieve only limited growth over the near-term given a historic pattern of slow natural growth in assessed valuations of less than 1% per annum, excluding two large reassessments in 2002 and 2006. Located in Venango County (not rated), approximately 75 miles north of Pittsburgh (GO rated A1/Negative), the district's economy is rural in character with a strong agricultural component along with a small, but longstanding manufacturing presence focused on plastic molding and mining equipment. The district's top ten taxpayers continue to remain stable and include Conair Group Incorporated (plastics), Joy Manufacturing Co. (mining equipment), and OMG Americas Inc. (petroleum products). Over the past decade, full valuation rose to a high of $253 million in 2007 from a low of $138 million in 2001, helped by both property reassessments and natural growth. Since 2007, full valuation has fallen by 4% to $243 million in fiscal 2010, where the district expects it to remain stable going forward.

The majority of district residents (80%) commute outside the district for employment, with two hospitals located in a neighboring school district and a state mental institution in Venango County being among the largest local employers. District unemployment rates were on par with the state at 8.8% in October 2010. District officials estimate that 60% of land in the expansive 62 square mile district is available for development, given the sizable quantities of undeveloped farmland and lack of zoning restrictions. Despite the large quantity of land available, we believe the district's tax base will likely exhibit limited growth over the near-term given the absence of large-scale residential and commercial development in recent years, in additional to modest population declines as measured during the last U.S. Census.

STRONG FINANCIAL POSTION CHARACTERIZED BY EXCEPTIONALLY ROBUST RESERVES

Moody's expects the district's financial position to remain strong over the medium term given management's history of conservative budgeting practices and maintenance of unusually robust reserve levels that include a projected $11.96 million General Fund balance, equal to 93.3% of revenues, as of June 30, 2010. While the General Fund balance has been high for many years, management also focused on keeping the fund balance levels elevated going forward to counter the potential for further increases in healthcare expenses, which have been growing by 13% per annum since 2000, and to reserve for higher pension costs estimated for Pennsylvania school districts in fiscal 2012 and beyond. District managers generated a healthy $405,000 fund operating surplus in fiscal 2009 spurred by positive variances in most revenue and expenditure items, which were achieved through conservative budget projections. The district's liquidity position was also exceptional with a cash balance of $12.9 million at 2009 fiscal year-end, equal to a healthy 104% of 2009 General Fund revenues.

District officials finished fiscal 2010 with a robust $1.28 million operating surplus, driven by $630,000 in internally-generated cost savings and positive revenue variances combined with the one-time use of $431,000 in unspent monies drawn from the Capital Projects Fund to pay General Fund debt service and an accumulation of $250,000 in unspent teacher's salaries in the General Fund due to the union contract not being finalized during fiscal 2010. While the district realized a $1.3 million surplus, the General Fund balance only increased by $9,000, due to a $1.27 transfer of funds into Capital Reserve to be used for future high-school renovations, deferred maintenance, and transportation costs. The district's liquidity remained high with a cash balance of $13.3 million, or 104% of General Fund Revenues, at fiscal year-end.

The board-approved 2011 budget grew by 2.6% ($350,000) over fiscal 2010 and does not rely on a fund balance appropriation to fill a $663,494 structural gap in revenues to expenditures. District officials plan to close the gap with a variety of cost savings including savings realized from the refunding of the Series 2005 and 2006 bonds, as well as through cost reductions in technology and equipment expenses. The 2011 budget also includes the district's first tax rate increase since 1998. The district raised the millage rate to 11.23 from 10.77 to generate additional revenues which will offset growing healthcare and pension costs.

Additionally, the fiscal 2011 budget also assumes a 5% increase in state aid. While Governor Tom Corbett has implemented a mid-year state aid cut to school districts in Pennsylvania, and replaced these funds with Federal stimulus money, the district only expects $127,000 of their state aid to be affected through fiscal 2012. In fiscal 2012, the district plans to budget state aid at fiscal 2008 levels, representing a $753,037 or 8.4% decrease from the current fiscal year.

ABOVE AVERAGE DEBT BURDEN LIKELY TO REMAIN MANAGEABLE

The district has an above-average direct debt burden of 5.6% of full valuation, which is more a measure of the district's small tax base than of the absolute amount of debt outstanding ($13.66 million). Moody's believes the debt burden will remain manageable given the absence of additional near-term borrowing plans, sufficient reserves, and the district's high level of state support (66% of revenues in FY10). After factoring in the overlapping debt of Venango County and the constituent municipalities, the district's overall debt burden rises to 13.1% of full valuation. Moody's believes this figure can be adjusted downward to 5.1% as result of the high percentage of debt reimbursement (38.9%) by the state on the district's debt issues. The district has no variable rate debt and is not party to any derivative agreements.

WHAT COULD MAKE THE RATING GO UP

- Substantial growth in district's full valuation

- Accelerated payout of debt burden

WHAT COULD MAKE THE RATING GO DOWN

-Multi-year declines in fund balance and liquidity

- Significant increase in debt burden, limiting financial flexibility

KEY STATISTICS:

2009 Population: 6,525 (0.7% decrease since 2000)

2010 Full Valuation: $243 million

2010 Full Value Per Capita: $34,932

1999 Per Capita Income (as a % of PA and US): $16,297 (78.1% and 75.5%)

1999 Median Family Income (as a % of PA and US): $53,600 (55.3% and 44.8%)

FY10 General Fund Balance: $11.96 million (93.3% of revenues) Direct Debt Burden: 5.6%

Overall Debt Burden: 13.1%

Payout of Principal (10 years): 63.7%

Post-sale Parity Debt Outstanding: $13.66 million

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 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

Jennifer Rinaca
Analyst
Public Finance Group
Moody's Investors Service

Jessica A. Lamendola
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
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 ASSIGNS A1 RATING UNDERLYING AND Aa3 ENHANCED RATING WITH A NEGATIVE OUTLOOK TO VALLEY GROVE SCHOOL DISTRICT'S (PA) $6.86 MILLION GO BONDS, REFUNDING SERIES OF 2011
No Related Data.
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