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MOODY'S ASSIGNS INITIAL A2 UNDERLYING RATING AND Aa2 ENHANCED RATING TO ST. LOUIS PUBLIC SCHOOL'S (MI) 2010 REFUNDING BONDS (GOULT)

01 Nov 2010

A2 UNDERLYING RATING AFFECTS $7.01 MILLION OF GOULT DEBT

Primary & Secondary Education
MI

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

2010 Refunding Bonds (General Obligation - Unlimited Tax)

A2

Aa2

  Sale Amount

$7,010,000

  Expected Sale Date

11/15/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Nov 1, 2010 -- Moody's Investors Service has assigned an A2 underlying rating and Aa2 enhanced rating to St. Louis Public Schools' (MI) $7.01 million 2010 Refunding Bonds (Unlimited Tax General Obligation).

RATING RATIONALE

The 2010 Refunding Bonds are secured by the district's general obligation unlimited tax pledge and proceeds will refund a portion of the district's outstanding general obligation debt for an expected net present value savings. The A2 underlying rating reflects the district's modestly-sized tax base, narrow financial reserves, and above average debt position.

The Aa2 enhanced rating is based on the credit enhancement provided by the State of Michigan's School Bond Qualification and Loan Program. Under the program, the state has a constitutional obligation to provide a school district with sufficient funds to make timely debt service payments, if necessary. Fundamental to the Aa2 rating with stable outlook are the program's sound mechanics to ensure timely payments, which include a provision for independent third party notification to the state in the event of debt service insufficiency, and the strength of the state's general obligations, currently rated Aa2 with stable outlook. For additional information regarding Moody's action on the State of Michigan's rating and outlook, please refer to Moody's Credit Update report, dated April 6, 2010.

Program mechanics require the school district to transfer the debt service payment to the paying agent five business days prior to the due date. If payment is not made within this time frame, the paying agent must notify the school district of the insufficiency within the next business day. Should the school district fail to transfer the necessary funds, the Michigan Department of Treasury is notified of the deficiency by the paying agent three business days prior to the debt service payment date, at which time the state treasurer must make a loan from the State's School Loan Revolving Fund (SLRF) to ensure timely debt service payment. The Michigan SLRF was established to provide loans to school districts to moderate the local tax burden for debt service on qualified bonds, prevent a default, and cure a default. The state may issue bonds or notes without voter approval to capitalize the fund.

MODEST FINANCIAL POSITION EXPECTED TO NARROW IN FISCAL 2010

We believe that the district's modest financial position will narrow further yet remain sufficient over the near term as management works to restore structural balance in the General Fund. The district added to General Fund reserves for three years beginning in fiscal 2007 through conservative budgeting and expenditure control, resulting in a fiscal year 2009 General Fund balance of $684,000 (6.7% of General Fund revenues). Midway through the district's fiscal year 2010, the State of Michigan announced plans to cut current year state school aid by $165 per pupil. Although expenditure reductions were made, district officials expect to report a draw on General Fund reserves of approximately $209,000 when audited financial results are complete, reducing the General Fund balance to $474,000 (4.7% of General Fund revenues). In fiscal 2011, the district is committed to closing its budget gap through reducing staff and teaching positions, negotiated savings in labor contracts and possibly privatization of select services in order to offset expected declines in revenues. Currently, management expects to report balanced operations in the General Fund at the end of the fiscal year.

Typical of Michigan school districts, state aid accounts for the majority of General Fund revenues (79% in fiscal 2009). Enrollment, a key determinate of state revenue sharing under Proposal A, has declined on average 0.7% annually from 2006 through 2010 and is expected to stabilize over the mid-term. We note the uncertain future of state aid funding will likely continue to challenge districts throughout the state as the State of Michigan contends with its own budgetary pressures.

MODESTLY-SIZED CENTRAL MICHIGAN TAX BASE

The district covers 87 square miles located in Gratiot, Midland (rated Aa3), and Isabella counties (rated A1). Recent calculations of the district's full market valuation reflect a modestly-sized $439 million tax base. Average annual growth in district's taxable valuation since 2006 was 2.3% which includes a modest decline of 1% from 2009 to 2010. Going forward, we expect minimal tax base growth for this primarily residential and agricultural district as the surrounding area, like much of the state, continues to struggle with declining market valuations.

The district's tax base is diverse with its top 10 taxpayers comprising a moderate 9.5% of the total taxable valuation in 2010. The district's top taxpayer, Consumers Energy, a utility company, comprised a minimal 2% of the 2010 taxable valuation. Limited employment opportunities and the difficulties facing Michigan's economy are evidenced by the elevated regional unemployment rate of 13% in August 2010, which is higher than the national rate of 9.5% and the state rate of 12.9%, for the same time period. Wealth indices are significantly below national medians, with per capita income at 68% and median family income at 84% of national medians.

ABOVE AVERAGE DEBT POSITION WITH LIMITED FUTURE BORROWING NEEDS

We expect the district's debt position will remain manageable due to limited future borrowing needs of the district. The district's direct debt burden is above average at 3.3% of 2010 full valuation. Principal amortization is average with 69% retired in 10 years. Officials report no plans to issue additional debt at this time. All of the district's outstanding debt is fixed rate and the district is not a party to any interest rate swap agreements.

WHAT COULD CHANGE THE RATING-UP:

-Significant expansion and diversification of the district's tax base and a substantially improved demographic profile

-Sustained structural balance within the district's General Fund bolstering reserves

WHAT COULD CHANGE THE RATING-DOWN:

-Substantial deterioration in the district's financial reserves below similarly rated entities

-Significant increase in the district's debt burden.

KEY STATISTICS:

2010-2011 enrollment: 1,195 (0.7% average annual decrease since 2006)

2000 Population: 10,151 (33% increase since 1990)

2010 Full market valuation: $439,000

Estimated full value per capita: $90,319

Per capita income as % of U.S. (1999): 68.4%

Median family income as % of U.S. (1999): 84%

FY2009 General Fund balance: $684,000 (6.7% of General Fund revenues)

Direct debt burden: 3.3%

Overall debt burden: 3.6%

Long-term general obligation debt outstanding: $12.67 million

The principal methodology used in rating St. Louis Public Schools, MI 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's 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.

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

Elizabeth Foos
Analyst
Public Finance Group
Moody's Investors Service

Soo Yun Chun
Backup Analyst
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 INITIAL A2 UNDERLYING RATING AND Aa2 ENHANCED RATING TO ST. LOUIS PUBLIC SCHOOL'S (MI) 2010 REFUNDING BONDS (GOULT)
No Related Data.
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