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MOODY'S ASSIGNS INITIAL A2 UNDERLYING RATING AND Aa3 ENHANCED RATING TO MCKEESPORT AREA SCHOOL DISTRICT'S (PA) $6.4 MILLION GENERAL OBLIGATION BONDS, SERIES OF 2011

14 Jun 2011

Primary & Secondary Education
PA

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Bonds, Series of 2011

A2

Aa3

  Sale Amount

$6,385,000

  Expected Sale Date

06/15/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Jun 14, 2011 -- Moody's Investors Service has assigned a A2 underlying rating and a Aa3 enhanced rating with a negative outlook to McKeesport Area School District's (PA) $6,385,000 million General Obligation Bonds, Series of 2011. The bonds will refund the Series of 2001 bonds currently outstanding in the amount of $6.0 million. The bonds are secured by the district's general obligation unlimited tax pledge pursuant to the Commonwealth of Pennsylvania's Taxpayer Relief Act, also known as Act 1.

RATING RATIONALE

The A2 rating reflects the school district's solid financial position with healthy reserves, small stable tax base and above average debt burden.

Assignment of the Aa3 enhanced rating reflects the additional bond security 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 timing of state aid payments relative to the timing of debt service payments is satisfactory for these bonds.

STRENGTHS

-Healthy reserve levels

-Stable tax base

CHALLENGES

-High debt burden

DETAILED CREDIT DISCUSSION

STABLE FINANCIAL OPERATIONS

McKeesport Area School District's financial position is expected to remain stable, given above average reserve levels and a small but stable tax base. After ending fiscal 2008 and fiscal 2009 with small General Fund deficits (0.7% and 0.1% of expenditures, respectively), the district ended fiscal 2010 with a General Fund surplus of $1.9 million and a General Fund balance of $7.8 million, or 13.5% of revenues. The increase in General Fund balance was due to $4.4 million of unanticipated federal funds that were not included in the budget and favorable variances across all expenditure categories. Additionally, the district maintains a Capital Projects fund which ended fiscal 2010 with a $276,000 balance, increasing the district's available reserves to $8.1 million, or 13.9% of General Fund revenues. In fiscal 2011, budgeted expenditures increased 1.4% over the fiscal 2010 budget and the district appropriated $2.9 million of fund balance in lieu of raising taxes. Current projections are for general fund balance to decline by approximately $1 million to $6.8 million or 11.7% of fiscal 2010 revenues. Property tax collections came in higher than budgeted which led to the district using less appropriated fund balance.

The fiscal 2012 budget includes a projected state aid cut of $4.3 million (11.3% of fiscal 2011 budgeted state revenues) included in the governor's budget proposal. The district will increase property taxes by the Act 1 limit of 1.7% and will appropriate a minimum of $1.5 million of General Fund balance depending on the outcome of the State aid cuts. Additionally, the budget includes planned workforce reductions through attrition and an early retirement incentive. The district's ability to achieve structural balance will be a key rating factor moving forward.

SMALL, STABLE TAX BASE

The district's $805 million tax base is expected to stabilize given modest ongoing residential growth. The district is characterized as a mostly residential community located 15 miles southeast of Pittsburgh (A1/negative). The district has experienced average assessed value growth of -0.4% annually since 2005. Full value growth averaged better at 0.2% annually over the same period, reflecting slight market appreciation. Wealth levels are below state and national averages. Per capita income is $15,364 or 84.1% of the state median of $18,275. Additionally, the poverty level is high 17.8% as compared to the State level of 11.0%.

HIGH DEBT BURDEN

Moody's believes that the district's debt burden will remain manageable, given the lack of future debt plans which will impact the district's financials in the near term. The district issued $34 million in bonds in 1997, the proceeds of which are still in the Debt Service fund due to a change in the original project. In the near term, the district will use these funds either to defease debt or use the proceeds for an elementary school renovation, upon further legal review of the Bond Indenture. In the event the funds are used to refund debt, the district will issue $30 million in additional long term debt in the fall to finance the elementary school renovation. The district will continue to pay debt service and will not issue new debt until this issue is resolved. Ultimately, the debt burden of the district will not increase beyond the current levels in the near term. The Series of 2011 bonds will refund the $6,025,000 outstanding Series of 2001 bonds for a present value savings of $251,000 or 3.9%. The district's direct debt burden of 10.2% of full valuation is well above average. Overall debt burden increases to 15.6% when taking into account the overlapping debt of local municipalities. When state school construction aid is incorporated, the adjusted debt burden falls to 14.4% of full valuation. Amortization is slow at 41.7% in ten years. However, debt service is a manageable 9.9% of fiscal 2010 operating expenditures. The district has no variable rate debt and is not party to any derivative agreements.

What could make the rating go UP:

-Tax base growth

-Reduced debt burden

What could make the rating go DOWN:

-Additional debt issuance

-Decline of reserves

KEY STATISTICS:

2000 Population: 36,567

2010 Full Valuation: $805 million

2010 Full Value Per Capita: $22,006

Direct Debt Burden: 10.2%

Overall Debt Burden: 15.6%

Payout of Principal (10 years): 41.7%

1999 PCI (as % of PA and US): $15,364 (73.6% and 71.2%)

1999 MFI (as % of PA and US): $36,620 (74.5% and 73.2%)

FY10 General Fund Balance: $7.8 million (13.5% of General Fund revenues)

Post-Refunding Debt Outstanding: $82.4 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

Valentina Clark
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 INITIAL A2 UNDERLYING RATING AND Aa3 ENHANCED RATING TO MCKEESPORT AREA SCHOOL DISTRICT'S (PA) $6.4 MILLION GENERAL OBLIGATION BONDS, SERIES OF 2011
No Related Data.
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