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MOODY'S ASSIGNS A1 UNDERLYING AND Aa3 ENHANCED RATINGS TO DANIEL BOONE A.S.D.'S (PA) $3.5 M GENERAL OBLIGATION BONDS

05 Jan 2011

TOTAL OF $98.4 MILLION IN LONG TERM DEBT OUTSTANDING, POST-SALE

Primary & Secondary Education
PA

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Bonds, Series of 2011

A1

Aa3

  Sale Amount

$3,515,000

  Expected Sale Date

01/10/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Jan 5, 2011 -- Moody's Investors Service has assigned an A1 underlying rating and an Aa3 enhanced rating with negative outlook to Daniel Boone Area School District's $3.5 million General Obligation Bonds, Series of 2011. The A1 underlying rating applies to $52.4 million of outstanding General Obligation parity debt, of which $40.4 million is secured by an unlimited General Obligation pledge. Although Moody's distinguishes between an unlimited and limited General Obligation security, the $12 million of outstanding of limited tax backed debt, due to the commonwealth's Act 1 property tax rate cap, receives the same A1 rating. The proceeds of the Series 2011 bonds will be used to currently refund the district's outstanding general obligation bonds series 2004 for an approximate net present value savings of $97,200 or 2.8% of refunded principal, with the majority of savings taken upfront without extending the original maturity.

RATING RATIONALE

The underlying A1 rating reflects the district's satisfactory financial position, pressured by declining state aid and real estate transfer taxes, growing residential tax base with higher than average income, and significant debt burden with slow payout rate.

The Aa3 enhanced rating is based upon the additional security for these bonds provided by the Commonwealth of Pennsylvania's Act 150 School District Intercept Program. The 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's rating.

WEAKENED FINANCIAL POSITION EXPECTED TO REMAIN SATISFACTORY

Moody's anticipates the district's financial position to weaken, but still remain satisfactory, over the near term due to declining state aid and real estate transfer taxes causing planned draw downs of General Fund reserves. Fiscal 2009 ended with a $22,000 General Fund surplus, including a $670,000 transfer to the Capital Reserve Fund to be used for future capital projects. The surplus was primarily created by a $665,621 positive variance in state aid receipts as a result of a miscalculation of aid by the state in fiscal 2008, which was paid in 2009 instead. Total General Fund balance ended at a satisfactory $3.9 million or 8.1% of General Fund revenues, a slight increase from $3.88 million or 8.5% of revenues in fiscal 2008. Fiscal 2009 was also the first year the district received receipts from state-wide gambling operations, $1.1 million or 2.2% of revenue, which is intended to offset property tax increases. The district derives the majority of its revenues from property taxes (56%) and state aid (30%) receipts.

Fiscal 2010 ended with a $631,000 deficit which decreased total General Fund balance to $3.3 million or below-average 6.7% of revenue. The deficit was primarily due to a $750,000 variance in Special Programs expenditures resulting from the district budgeting for federal stimulus revenues but not the related expenditures, reflecting poor budget management. Operations have also been pressured by above-average debt service expenditures (13.9% of 2010 expenditures) resulting from significant debt issued to finance school building improvements aimed at addressing the district's capacity needs. The deficit in fiscal 2010 is further notable, given that there no transfer to the Capital Reserve Fund, compared to the $670,000 transfer in the prior year, suggesting a over a $1.2 million negative swing in General Fund operating results.

The fiscal 2011 budget grew by 1.6% (budget-to-budget) and is balanced using $767,000 of appropriated General Fund balance, of which management expects to replenish $700,000. The resulting estimated $76,000 draw down would bring the General Fund balance to $3.2 million or 6.7% of revenue. Year to date, the district expects to be able to end the year as budgeted, barring any unforeseen negative budget variances. We believe near balanced results would be an important indication of the district's narrowing of its structural imbalance. Looking ahead, the district's ability to grow reserves in step with budgetary expansion, will be an important consideration in future rating reviews. Continued structural imbalance resulting in further decreases in reserves could result in downward pressure on the rating.

Positively, the district conservatively estimates property tax revenue collection at 94.8%, which is below the district's five-year average of 95.1%. The district also derives some financial flexibility from its Interest Rate Protection Fund, which had a $1.3 million balance at the end of fiscal 2010. However, we note that this amount is restricted only for the purposes of debt repayment. The Interest Rate Protection Fund was established and funded in 2007 with upfront proceeds related to the 2007 basis swap; this fund was established to provide resources to assist in managing the district's variable interest rate and swap exposure. While the district has fixed out all of its variable rate exposure, there is still a basis swap in place, which has a current net mark to market value that is negative $3.2 million.

MODERATED TAX BASE GROWTH

Previously aggressive growth in the district's $1.6 billion tax base has recently moderated, reflecting the national real estate slowdown, but remains stable given its favorable location. Located along Interstate-422, in Berks County (G.O. rated Aa1/Stable), the district benefits from its proximity to employment centers throughout greater Philadelphia (G.O rated A2/Stable). Over the past several years the district has experienced a healthy rate of tax base expansion with full value growth averaging 11.4% annually between 2006 and 2009, driven by new home construction and the appreciation of existing properties; however, 2010's full value growth has slowed to a more restrained 3.6% annual growth rate which brings the five year growth rate, through 2010, to 9.7%. We expect this more moderate level to continue going forward. In addition to ongoing residential expansion, the district's population and enrollment levels have also increased. The latest census figures indicate a sizeable 23.3% increase in population between 1990 and 2000 and enrollment numbers show a 16% increase between 2003 and 2009. Looking ahead, growth levels are expected to moderate, although continued expansion is possible given the availability of developable land within the district. Wealth levels exceed state medians with per capita and median family incomes at 114% and 130% of the state, respectively. The district's $92,378 full value per capita approximates the $79,017 state median. The strength of the district's credit profile depends on the size and strength of the tax base, including our expectation of continued growth, albeit at more moderate levels.

SIGNIFICANT DEBT BURDEN WITH SLOW AMORTIZATION RATE

Despite limited future borrowing plans, Moody's expects the district's debt burden to remain above average following large debt issues over the past several years given an already significant debt burden and slow amortization of debt. The district's direct debt burden at 6.1% of full value is considerably higher than both the state and national medians of 2.5% and 1.4%, respectively. When factoring the overlapping obligations of Berks County, the district's overall debt burden increases to a similarly above average 7.0% of full value. Payout of principal (37.6% within 10 year) is noticeably slower than state and national medians of 70% and 72%, respectively, which will challenge the district's ability to take on additional debt in future years without placing additional fiscal pressure on district operations.

BASIS SWAP AGREEMENT IN ASSOCIATION WITH 2007 BONDS

The district entered into a basis swap agreement in conjunction with a 2007 School Lease Revenue Obligation, issued through the State Public School Building Authority, with Wells Fargo (senior unsecured Aa2/Stable). The basis swap is structured to remain in place for the life of the bonds, expiring on April 1, 2030. Under the agreement, the district makes semi-annual payments based on SIFMA and receives semi-annual floating payments based on 67% of one-month LIBOR. Automatic early termination is not allowed, but the district has the right to terminate at any time without cause. Termination by the counterparty depends on specified termination events occurring, including if the programmatic rating of the Act 150 State Intercept Program falls below Baa1 by Moody's or BBB+ by S&P. The swap is insured by Assured Guaranty (rated Aa3/negative) and Wells Fargo may designate an early termination date if insurer fails to maintain a claims paying ability rating of at least A3 by Moody's and A- by S&P. If any of the specified termination events occur, the district would be liable to pay the full amount of mark-to-market swap value, currently -$3.3 million, to unwind the contract. As previously mentioned, the $1.2 million Interest Rate Protection Fund could be used for these purposes; state law also allows the district to issue bonds for termination costs.

State law enacted in September of 2003 allows for school districts, among other municipalities to enter into interest rate swaps and these tools became common for Pennsylvania school districts for asset and liability management. State law requires an interest rate management plan as well as provides for independent swap advisory firms to assist school districts in their management, and the Act 150 state intercept applies to periodic swap payments. Other than this, there is little state supervision for use of these instruments and termination payments are not subject to the state intercept. The use of swaps require ongoing credit monitoring given the introduction of counterparty risks associated with these instruments. Moody's will continue to base its analysis on the amount of exposure and our assessment of district management's understanding of the complexities and additional risks involved in swaps.

What could make the rating go up:

-Substantial tax base and economic growth

-Consistently strong financial operations

-Steady and significant reduction in debt burden

What could make the rating go down:

-Ongoing economic and tax base declines

-Further operating deficits that continue to reduce General Fund reserves

-Significant increase in debt burden

-Counterparty, Issuer or Swap Insurer credit downgrades, which trigger a swap termination or collateral posting event, requiring significant cash payments or additional borrowing

KEY STATISTICS:

2000 Population: 17,384

2010 Full Valuation: $1.6 billion

2010 Full Value Per Capita: $92,378

Direct Debt Burden: 6.1%

Overall Debt Burden: 7.0%

Payout of Principal (10 years): 37.6%

1999 PCI (as % of PA and US): $23,825 (114.1% and 110.4%)

1999 MFI (as % of PA and US): $63,824 (129.8% and 127.5%)

Fiscal 2010 General Fund Balance: $3.27 million (6.7% of General Fund revenues)

Fiscal 2010 Unreserved, Undesignated General Fund Balance: $2.5 million (5.1% of General Fund revenues)

Post-Closing Parity Debt Outstanding: $52.4 million ($45,983 of Lease Revenue Bonds are not General Obligations)

PRINCIPAL METHODOLOGY

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

Vito Galluccio
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


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

MOODY'S ASSIGNS A1 UNDERLYING AND Aa3 ENHANCED RATINGS TO DANIEL BOONE A.S.D.'S (PA) $3.5 M GENERAL OBLIGATION BONDS
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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