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MOODY'S ASSIGNS Aa3 UNDERLYING AND Aa2 ENHANCED (MSDE) RATINGS TO HOPKINS ISD NO. 270 (MN) $10.7 MILLION GO SCHOOL BUILDING BONDS, SERIES 2010A; POSITIVE OUTLOOK ASSIGNED

13 Oct 2010

Aa3 UNDERLYING RATING AND POSITIVE OUTLOOK APPLIES TO $128.4 MILLION OF OUTSTANDING GO DEBT, INCLUDING CURRENT ISSUE

Primary & Secondary Education
MN

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation School Building Refunding Bonds, Series 2010A

Aa3

Aa2

  Sale Amount

$10,660,000

  Expected Sale Date

10/14/10

  Rating Description

General Obligation Unlimited Tax (MSDE)

 

Opinion

NEW YORK, Oct 13, 2010 -- Moody Investors Service has assigned an Aa3 underlying rating with positive outlook and a Aa2 enhanced (MSDE) rating with stable outlook to Hopkins Independent School District No. 270's (MN) $10.7 million General Obligation School Building Bonds, Series 2010A. Concurrently, Moody has affirmed the Aa3 underlying rating and assigned a positive outlook on the district's $128.4 million outstanding general obligation debt.

RATING RATIONALE

The bonds are secured by the district's general obligation unlimited property tax pledge. Proceeds of the bonds will refund the district's outstanding General Obligation Bonds, Series 2002B for estimated net present value savings. The Aa3 underlying rating reflect the district's emergence from Statutory Operating Debt (SOD) status and significantly improved financial operations, declining enrollment, wealthy suburban Minneapolis tax base that benefits from a significant commercial presence, and debt burden that is expected to remain manageable despite future borrowing plans. The positive outlook reflects the district's continued improvement in financial operations supported by increasing reserve levels and conservative budgeting practices.

The enhanced Aa2 rating and stable outlook are due to the additional security provided by the State of Minnesota's School District Credit Enhancement Program (MSDE). Under the MSDE loan program, established and designed by the State of Minnesota, 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 with a 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.

SIGNIFICANTLY IMPROVED FINANCIAL OPERATIONS WITH GROWING GENERAL FUND RESERVES

Moody anticipates the district's recent positive trend of improving financial results will continue based on the strength of new management, the district's demonstrated willingness to make budgetary adjustments and growing General Fund reserves. The past three fiscal years are a marked departure from financial performance posted earlier in the decade. Beginning in fiscal 2002, the district deliberately chose to spend down reserve levels to avoid reducing educational programs, which contributed to operating deficits. Declining enrollment trends exacerbated the situation, factoring unfavorably into the state aid formula. Like many Minnesota school districts, the district's primary revenue source comes from the state aid funding formula (68.9% in fiscal 2009). After posting significant operating deficits and a negative General Fund balance in fiscal years 2004 through 2006, the state classified the district as being in Statutory Operating Debt (SOD) at the close of fiscal 2005. By year-end, the district's fund balance was a negative $3.1 million, or -3.7% of revenues. In accordance with state statutes, management submitted a special operation plan to emerge from SOD by June 30, 2008.

Favorably, the district was able to emerge from SOD status under direction from a new management team at the end of fiscal 2007, a full year earlier than anticipated. Significant expenditure reductions and revenue enhancements were implemented to help the district return to healthy financial operations. The district reduced over $6 million in expenditures through fiscal 2008 including the closing of an elementary school, an increase in class sizes, elimination of 40 staff positions and reductions in transportation and administrative services. In addition to these expenditure cuts, operations improved with the support of new local revenues. District voters approved a renewal and an increase in the per pupil excess operating levy, which became effective in fiscal 2007. The levy increase generated an additional $800,000 in fiscal 2007 and is scheduled to increase an average of $40 per pupil, per year until it expires in 2016. By the end of fiscal 2007 the district had rebuilt reserves to $3.1 million, or 3.6% of General Fund revenues. The district posted another sizeable surplus of $5.6 million in fiscal 2008, ending with a General Fund balance of $8.7 million, or a much healthier 10% of revenues. Further demonstrating the district's commitment to restore reserves to prior levels, fiscal 2009 closed with an additional $2.6 million surplus, bringing the General Fund balance to $12.3 million, a stronger 14.4% of revenues.

State aid, which is largely based on enrollment, is the district's primary operating source, comprising 68.9% of the district's General Fund revenues in fiscal 2009. The district's enrollment has declined an average of 2.5% per year since 2005, negatively impacting the amount of total state revenues received by the district. Favorably, the declines in enrollment have not been as precipitous as originally budgeted. Officials projected a decline of 200 students for fall 2010, but experienced a loss of just 100 students. To mitigate declining enrollment, the district participates in open enrollment which nets a positive 550 students annually, stabilizing the negative trends. Declining enrollment trends are expected to continue, although the district has begun a marketing campaign and program reevaluation to attract and retain students in the district.

While the district's financial position has improved markedly and is expected to remain stable, it is facing additional challenges in the current fiscal year, largely related to general economic trends and budget pressures at the state level. 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. Reflecting the district's improved financial position, the cash flow borrowing has declined in recent years. The district borrowed a high of $16.2 million in cash-flow notes in fiscal 2006 and reduced the amount borrowed to $2.9 million in fiscal 2008. Due to higher General Fund reserves, the district did not utilize cash-flow borrowing in fiscal 2009 and 2010. However, despite the district's improved cash position, the district may resort to cash-flow borrowing in fiscal 2011 due to the additional delay of state aid payments.

In addition to state aid pressures and uncertainties related to contract negotiations, officials conservatively budgeted revenues and expenditures. The district budgeted a 2% reduction in state aid and 3% decline in enrollment for the fiscal 2010 budget and projected a $1.3 million operating deficit. However, the state has determined that aid will remain at 0% and the district's enrollment declined by a lesser 1.9% for fiscal 2010. As a result, with better than expected enrollment combined with conservatively budgeted revenues and expenditures, the district officials project balanced to positive operations for fiscal 2010 and passed a balanced budget for fiscal 2011. The district adopted a formal General Fund policy in February 2007 stating the district will maintain an unreserved, undesignated fund balance of at least 6% of expenditures. Though this margin is below both the state and national medians for school districts, it represents a significant improvement from prior reserve levels. Further demonstrating management's commitment to maintaining structurally balanced operations, the district also adopted a long-term strategic plan that incorporates financial and enrollment goals and program efficiency. Moody believes that, though faced by current uncertainties and financial pressures, the district's finances will remain healthy and continue to improve over the long-term as the administration and board have demonstrated in its recent history of structurally balanced operations and increasing reserves.

WEALTHY AND MATURE SUBURBAN MINNEAPOLIS TAX BASE WITH SIGNIFICANT COMMERCIAL PRESENCE

Despite the nationwide recession, Moody anticipates that the district's tax base will remain relatively stable due to the district's favorable location in the Twin Cities metropolitan area and diverse tax base. Bordering the western boundary of Minneapolis (GO rated Aaa/stable outlook) in Hennepin County (Aaa/stable outlook), the district primarily serves the cities of Hopkins (Aa2), Golden Valley (Aaa), and Minnetonka (Aaa). The district's substantial $9.7 billion tax base had previously grown at a moderate pace but has experienced recent declines in valuation. Reflective of the national recession, full value increased a modest annual average rate of 0.7% over the past five years.

A diverse mix of corporations provides a degree of stability to the tax base. Approximately 42% of the district's assessed valuation is classified as commercial or industrial, as several large company headquarters are located in the district including General Mills Inc. (senior unsecured Baa1/stable outlook), Cargill Inc. (senior unsecured A2/stable outlook), Allianz Life Insurance Co. of North America (insurance financial strength A2/stable outlook), and United HealthCare Inc. (senior unsecured Baa1/stable outlook). Despite reductions in operations and headcount in other locations, operations are reportedly stable at the aforementioned top taxpayers and employers. Hennepin County's unemployment rate of 6.9% in August 2010 is comparable to the state average of 6.9% and lower than the national rate of 9.5%. Wealth levels exceed state medians, with per capita income and median family income levels at 158% and 127.1% of state, respectively.

DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE

Moody believes the district's debt burden will remain manageable given moderate borrowing plans. The district's direct and overall debt burdens are average at 1.3% and 2.6%, respectively. Principal amortization is slightly slower than average, with 68% of all debt retired in ten years. Minnesota school districts benefit from the state's statutory requirement to levy 105% of annual debt service due on tax-backed general obligation debt. The district maintains a ten-year facility improvement plan which is supported by an Alternative Facilities levy. The Alternative Facilities levy generates $3.5 million annually which helps the district finance capital projects. In addition, management plans to issue approximately $18 million in 2011 and $18 million in 2013 to address deferred maintenance needs. Moody believes the district will able to easily absorb the additional debt due continued, although more moderate, tax base growth.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Hopkins Independent School District 270 ( MN) was General Obligation Bonds Issued by U.S. Local Governments rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody website.

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 Investors Service's information, confidential and proprietary Moody Analytics' information.

Moody Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Outlook

The positive outlook reflects our expectation that the district's operations will continue to improve going forward and the district will make sufficient budgetary adjustments to maintain structurally balanced operations.

What could change the rating - UP

- Preservation of General Fund balance at adequate levels over the near to medium term

- Maintenance of tax base and demographic profile

- Continued positive enrollment growth

What could change the rating - DOWN (removal of positive outlook)

- Significant structural imbalance in the General Fund leading to material declines in fund balance and liquidity

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

- Negative multi-year enrollment trends

KEY STATISTICS

2000 Census population: 70,236

2009 Full valuation: $9.7 billion

2009 Estimated full valuation per capita: $138,412

Overall debt burden: 2.6% (1.3% direct)

Principal retirement (10 years): 68%

Fiscal 2009 General Fund balance: $12 million (14.4% of General Fund revenues)

Per capita income as a % of US: 169.8%

Median family income as a % of US: 144.4%

Median home value as % of US: 146.2%

Annual enrollment trend (past five years): -2.5%

Post-sale general obligation debt outstanding: $128.4 million

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

Soo Yun Chun
Analyst
Public Finance Group
Moody's Investors Service

Rachel Cortez
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 Aa3 UNDERLYING AND Aa2 ENHANCED (MSDE) RATINGS TO HOPKINS ISD NO. 270 (MN) $10.7 MILLION GO SCHOOL BUILDING BONDS, SERIES 2010A; POSITIVE OUTLOOK ASSIGNED
No Related Data.
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