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MOODY'S ASSIGNS Aa2 UNDERLYING RATING AND Aa2 (MSDE) ENHANCED RATING WITH STABLE OUTLOOK TO INDEPENDENT SCHOOL DISTRICT NO. 622 (NORTH ST. PAUL-MAPLEWOOD-OAKDALE) (MN) $6.72 MILLION GO ALTERNATIVE FACILITIES BONDS, SERIES 2011A

16 Mar 2011

Aa2 UNDERLYING RATING APPLIES TO $151 MILLION IN POST-SALE GOULT DEBT

Primary & Secondary Education
MN

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Alternative Facilities Bonds, Series 2011A

Aa2

Aa2

  Sale Amount

$6,720,000

  Expected Sale Date

03/22/11

  Rating Description

General Obligation Unlimited Tax (MSDE)

 

Opinion

NEW YORK, Mar 16, 2011 -- Moody's Investors Service has assigned a Aa2 underlying rating and a Aa2 enhanced rating with stable outlook to the Independent School District No. 622's (North St. Paul-Maplewood-Oakdale) (MN) $6.72 million General Obligation Alternative Facilities Bonds, Series 2011A. Concurrently, Moody's has affirmed the Aa2 underlying rating on the district's outstanding general obligation debt affecting $151 million post-sale. Moody's has also affirmed the Aa3 rating on the district's outstanding $8.6 million certificates of participation, subject to annual appropriation.

SUMMARY RATINGS RATIONALE

Debt service on the bonds is secured by the district's general obligation unlimited taxing pledge and proceeds from the bonds will be used to finance capital improvements and maintenance of school facilities. Assignment and affirmation of the Aa2 underlying rating is based on the district's large tax base favorably located within the Twin Cities regional area, stable financial operations supported by healthy reserves, and an above average, but manageable debt position. Affirmation of the Aa3 rating on the district's outstanding certificates of participation reflects the district's general obligation credit characteristics and the risk of annual non-appropriation for debt service.

Assignment of the Aa2 enhanced rating and stable outlook to the bonds is based on additional security provided by the State of Minnesota's School District Credit Enhancement Program (MSDE). Under the MSDE loan program the bonds are secured by the State's pledge of an unlimited appropriation from its General Fund (the State's general obligation debt is rated Aa1/stable outlook) should the district be unable to meet debt service requirements. The appropriation mechanism allows for continuing unlimited advances from the State's General Fund to avert default for qualified school districts. District repayment is either from State aid withholding or a required special school district levy outside normal levy limits. Key program components also include third-party notification of pending deficiency. Under Minnesota statutes, if the district believes it is unable to make a timely debt service payment it must notify the Department of Education at least 15 working days prior to the due date. The Commissioner, after consultation with the district and the paying agent, and the verification of information, will notify the Commissioner of Finance who issues a warrant and authorization for direct payment to the paying agent. Should a district fail to notify the state of an impending non-payment of debt covered by the program, the paying agent will undertake notification. The agent is to notify the State directly, three days prior to the payment date of the needed amounts. State funds equal to the request are then transferred directly to the paying agent. If the State makes a payment on behalf of a district, the district must submit a plan to the Commissioner of Education specifying the steps the district intends to take to resolve current and future funding problems.

STRENGTHS

-Large tax base in favorable location

-Healthy General Fund reserves

CHALLENGES

-Recent declines in taxable value

-Above average debt burden and below average principal amortization

-Uncertainty of state aid funding

DETAILED CREDIT DISCUSSION

MATURE COMMUNITY; RECENT DECLINES IN VALUATIONS

We expect the district's large tax base to begin to stabilize in the near term, despite recent declines in valuations. Favorably located in the Twin Cities metropolitan area within Ramsey (general obligation rated Aaa) and Washington (Aaa) counties, the district serves the large and mature communities of North St. Paul (Aa2), Maplewood (Aa1), and Oakdale (Aa2). The area continues to suffer from moderate depreciation in residential and commercial property values stemming from the lagging national economy. As a result, the district's large tax base of $7.96 billion has declined over the past three years, including a reduction of 5.7% in 2009. Reflective of declining valuations, the district's taxbase is slightly concentrated with the ten largest taxpayers comprising 20.6% of assessed valuation. As the district serves primarily mature communities, officials expect future growth will be modest as the economy begins to improve. Favorably, the district's largest employers and tax payers remain stable with Minnesota Mining and Manufacturing (3M) (senior unsecured rated Aa2/stable) representing 5% of the district's tax capacity and employing over 9,100 people. Xcel Energy (senior unsecured rated Baa1/stable), the district's largest taxpayer also remains strong, comprising 6.4% of the district's tax capacity. Stability provided by the largest employers is evidenced by the district's multi-county unemployment rate of 6.4% in December 2010, which is below that of the state (6.8%) and the nation (9.1%) in the same time period. The district also benefits from solid resident income statistics with per capita and median family income levels at 106.4% and 114.6% of state figures, respectively, according to the 2000 census.

As is somewhat typical of inner-ring suburban school districts, enrollment has been declining by about 1% on average annually over the past five years. Enrollment in the current year is 11,022, which is only slightly below last year's count of 11,083. Going forward, officials expect additional small declines before enrollment begins to stabilize.

EXISTENCE OF HEALTHY RESERVES; REDUCTION IN FUND BALANCE EXPECTED OVER NEXT TWO YEARS

Despite expected draws on the fund balance beginning in fiscal 2011, we expect the district's financial position to continue to benefit from conservative management practices and a commitment to reduce expenditures. From fiscal years 2006 through 2010, the district's General Fund posted consecutive operating surpluses, ending fiscal 2010 with a balance of $25.2 million, or a healthy 21.1% of revenues. The unreserved, undesignated fund balance at fiscal year-end 2010 was $19.9 million, or a healthy 16.8% of revenues. The level of reserves held in the undesignated balance was well above the district's General Fund balance policy to maintain a minimum of 5% of expenditures in undesignated reserves. Officials had budgeted a use of reserves in fiscal 2010, but favorable expenditure variances of nearly $5 million resulted in a General Fund surplus of $3.1 million. The large variance is primarily attributable to a use of federal stimulus funding to support employee benefits and a reduction in General Fund health insurance costs as a result of establishing a benefits trust. Management reports expected draws on existing reserves over the next two fiscal years. For fiscal 2011, the district has budgeted a use of $5 million of reserves and has implemented $2 million in cuts, primarily related to reductions in personnel. For fiscal 2012, district management is proposing to make $4 million in additional cuts and use $2.9 million of reserves to fund operations. Despite these planned draws upon fund balance, reserve levels are expected to remain healthy at 17.3 million, or about 15% of fiscal 2010 revenues.

Like other Minnesota school districts, the district is primarily state-funded, with total state sources making up 68% of fiscal 2010 General Fund revenues. This is followed by property tax revenues at 17%. The district's excess operating levy expires in 2012, prior to which management expects to ask voters for a renewal and potential increase in the per pupil amount. The levy currently provides about $10 million in annual revenue. Budget challenges with the State of Minnesota has led to delays in state aid payments to Minnesota school districts. While the state has not reduced the per pupil funding amount, the state has announced several forms of payment delays to school districts in order to alleviate the state's budget and cash flow pressures. In fiscal 2011, state aid payments to school districts were delayed such that 70% of a district's annual state aid is received in the current year, with the remaining 30% to be received in the subsequent fiscal year. In fiscal 2010, this proportion was 73% and 27%, and in previous fiscal years, the proportion was 90% and 10%.Many Minnesota school districts utilize cash-flow borrowing to bridge the gap between the receipt of revenues and expenditures. Officials report no need to cash flow borrow in the current year, but anticipate that borrowing may be required in fiscal 2012 depending upon ongoing modifications to state funding levels or additional distribution shifts.

ABOVE AVERAGE, BUT MANAGEABLE DEBT POSITION

Inclusive of the current transaction, the district's debt position is above average, but manageable at 3.7% (2.0% direct). Principal amortization of outstanding debt is slightly below average with 66% retired in ten years. The district reports no plans to borrow additional funds in the near term. All of the district's debt is fixed rate and there is no exposure to derivative or swap agreements.

WHAT COULD CHANGE THE RATING - UP

-Significant expansion of the district's tax base and improvement in socioeconomic indices

-Maintenance of healthy General Fund reserves

WHAT COULD CHANGE THE RATING - DOWN

-Material decreases in General Fund reserves to a level commensurate with lower rated school districts

-Issuance of large amounts of debt that would further increase the district's above average debt burden

KEY STATISTICS

2000 census population: 74,041 (26.7% increase since 1990)

2009 estimated population: 78,947 (6.6% increase since 2000)

Fiscal 2011 enrollment: 11,022 (1% average annual decrease since 2006)

2009 full valuation: $7.96 billion (1.5% five-year average annual increase)

Estimated full value per capita: $100,858

2000 per capita income: $24,692 (106.4% of MN; 114.4% of U.S.)

2000 median family income: $55,600 (114.6% of MN; 130.2% of U.S.)

Multi-county unemployment (December 2010): 6.4% (MN: 6.8%; U.S.: 9.1%)

Fiscal 2010 total General Fund balance: $25.2 million (21.13% of revenues)

Fiscal 2010 unreserved, undesignated General Fund balance: $19.9 million (16.8% of revenues)

Overall debt burden: 3.7% (2% direct)

Principal amortization (10 years): 66.3%

Post-sale general obligation unlimited tax debt outstanding: $151 million

Certificates of participation outstanding: $8.6 million

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

Matthew Butler
Analyst
Public Finance Group
Moody's Investors Service

Soo Yun Chun
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
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 UNDERLYING RATING AND Aa2 (MSDE) ENHANCED RATING WITH STABLE OUTLOOK TO INDEPENDENT SCHOOL DISTRICT NO. 622 (NORTH ST. PAUL-MAPLEWOOD-OAKDALE) (MN) $6.72 MILLION GO ALTERNATIVE FACILITIES BONDS, SERIES 2011A
No Related Data.
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