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MOODY'S ASSIGNS INITIAL Aa3 RATING TO STILLWATER INDEPENDENT SCHOOL DISTRICT'S (MN) $10.5 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2011A

11 May 2011

AFFIRMS UNDERLYING Aa2 RATING ON $58.2 MILLION OUTSTANDING GO DEBT

Primary & Secondary Education
MN

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

Certificates of Participation, Series 2011A

Aa2

Aa3

  Sale Amount

$10,470,000

  Expected Sale Date

05/17/11

  Rating Description

Certificates of Participation

 

Opinion

NEW YORK, May 11, 2011 -- Moody's Investors Service has assigned an initial Aa3 rating to Stillwater Independent School District No. 834's (MN) $10.5 million Certificates of Participation, Series 2011A. Concurrently, Moody's has affirmed the Aa2 underlying rating on the district's outstanding $58.2 million long-term general obligation debt.

SUMMARY RATINGS RATIONALE

The certificates are secured by lease payments made by the district that are subject to annual appropriations pursuant to a lease purchase agreement, related ground lease, and trust indenture. Proceeds of the certificates will be used to construct a new Early Childhood Family Learning Center on the district's junior high school campus. Assignment of the Aa3 rating to the current issue reflects the risk of annual non-appropriation, the availability of a dedicated though limited lease levy for capital needs, the essentiality of the financed project, satisfactory legal provisions, and the general obligation credit characteristics of the district. Affirmation of the district's Aa2 general obligation rating is based on the district's large tax base with recent declines in valuations, stable financial operations with plans to use General Fund reserves, and a modest debt profile characterized by rapid with principal amortization.

STRENGTHS

- Strong resident demographic profile

- Dedicated lease levy for current issue

- Referendum approved excess operating levy

CHALLENGES

- Declining enrollment, a key component of state aid

- Minnesota school district's vulnerability to state budgetary pressures

DETAILED CREDIT DISCUSSION

SATISFACTORY LEGAL PROVISIONS; DEDICATED LEVY FOR LEASE PAYMENTS

The district and the trustee, U.S. Bank, NA (long-term rating Aa2) have entered into a lease agreement in which the district pledges to make lease rental payments, subject to annual appropriation, equivalent to debt service. Under the terms of the lease agreement, the district is required to make annual payments to the trustee at least five days prior to August 1 and February 1, when debt service payments are due. The lease payments are to be included in the district's annual operating budget, and are unconditional for the year in which they are appropriated. Favorably, the district has access to a state approved lease levy, which allows the district to levy up to $150 per pupil for capital needs. The district expects to utilize the lease levy sufficient to cover the annual debt service payments, which are expected to average $829,000 annually from 2013 to 2031. The trustee is assigned a leasehold interest in the financed project and has the right to take possession of the project or to re-let either upon non-renewal of the lease or default. We consider the project financed (Early Childhood Family Learning Center) to be essential for the district to provide state mandated special education services.

LARGE TAXBASE LOCATED EAST OF ST. PAUL WITH RECENT DECLINES IN VALUATION

Located approximately 18 miles northeast of the Minneapolis-St. Paul metropolitan area, the district encompasses 158 square miles including, among several other municipalities, the cities of Bayport (GO rated A1), Grant and Stillwater (GO rated Aa2). Previously, the district's $7.9 billion tax base experienced double digit growth through 2007. The growth in the district's full valuation was driven by a combination of appreciation, new residential development, and some commercial development. More recently however, reflecting the national economic downturn, the district's indicated market value began declining with a 1.8% decrease in 2008, 2.1% in 2009, 6.1% in 2010, and an additional decline of 6.8% for 2011. Officials report the decline is due to depreciation of residential and commercial values and expect this trend to continue in the near term. Reflective of previous tax base growth, population grew as well, increasing 23.4% between the 1990 Census and the 2000 Census and an additional 19.8% between 2000 and 2011. While overall growth has slowed, the district is conveniently located just east of St. Paul (GO rated Aa1/positive) with access to major metropolitan employers which will help support future growth. Officials report the district's largest taxpayers and employers remain stable. Washington County's (GO rated Aaa) unemployment rate of 6.7% is lower than the state's of 7.3% and the nation's rate of 9.2% for March 2011. Socioeconomic indices are well above the state averages, with per capita income and median family income at 131% and 141.8% of state averages, respectively.

Enrollment has been slightly decreasing at a five year average annual decline of 1.0%. Based on conservative assumptions within the district's trend line projection model, officials expect stable to slightly declining enrollment in the near to mid-term. There is a fairly significant presence of private schools that compete for district enrollment, but officials report open enrollment trends have been stable over time.

STABLE FINANCIAL OPERATIONS DESPITE PLANNED DRAWS UPON GENERAL FUND RESERVES

We expect the district's financial operations to remain stable despite planned draws upon reserves. The district more than tripled its General Fund reserves from $5.9 million (7.9% of revenues) in fiscal 2005 to $21.8 million (26.4% of revenues) at the close of fiscal 2009. Given pressures at the state aid level, the district intentionally built up reserve levels to help offset any cuts in state aid. The state held per pupil funding flat and delayed aid payments in fiscal 2010 so that school districts would receive only 73% of a district's annual state aid received in the current fiscal year, with the remaining 27% to be received in the subsequent fiscal year. In response to delayed revenues and flat per pupil funding, the district originally planned to use reserves in fiscal 2010 down to $19.4 million in order to maintain programs. Notably, due to conservative budgeting and higher enrollment than budgeted, the district closed fiscal 2010 with an operating surplus of $802,000, increasing General Fund reserves to $22.6 million, or a healthy 27.5% of General Fund revenues. As state aid pressures continue, the district plans to use reserves in fiscal 2011 in order prevent program cuts and introduce reading and math intervention programs. For fiscal 2011, state aid is further delayed so that the district will receive only 70% in the current fiscal year, with 30% to be received in fiscal 2012. The district has budgeted to use approximately $6 million of fund balance in 2011, reducing the General Fund reserve to $16.6 million (or approximately 20.2% of General Fund revenues). Officials plan to use reserves again in fiscal 2012 to mitigate program cuts and continue funding reading and math intervention programs. The district is using reserves in order to bring its undesignated General Fund balance down to 5%, per its formal policy. The district has one excess operating levy approved by voters, for a total of $927 per pupil. Approved in November, 2007, the excess operating levy is approved for six years and expected to bring in approximately $10 million in revenue annually. While the district plans to draw upon reserves, we expect financial operations will remain healthy given the history of conservative budgeting and positive operating results.

BELOW AVERAGE DEBT BURDEN WITH RAPID AMORTIZATION

Moody's expects the district's debt profile to remain manageable given no plans for additional borrowing, and rapid principal amortization. The district's overall and direct debt burdens are low at 2.1% and 0.9%, respectively. The rate of principal retirement is rapid with at 89.8% retired in ten years. Officials report no formal plans for additional debt in the next two years.

KEY STATISTICS

2011 Estimated population: 61,033 (19.8% increase from 2000)

2000 Population: 50,951 (23.4% increase from 1990)

Fall 2010 enrollment: 8,574 (-1.0% five year average annual decrease)

2011 Full valuation: $7.9 billion

2011 Full valuation per capita: $138,820

2000 Median family income: $80,638 (141.8% of state; 161.1% of US)

2000 Per capita income: $30,395 (131.0% of state; 140.8% of US)

Washington County unemployment rate (March 2011): 6.7% (7.3% state, 9.2% US)

Overall debt burden: 2.1% (0.9% direct)

Payout of principal (10 years): 89.8%

Fiscal 2010 General Fund balance: $22.6 million (27.5% of General Fund revenues)

Fiscal 2010 Undesignated General Fund balance: $16.7 million (20.3% of General Fund revenues)

Post-sale Certificates of Participation outstanding: $10.5 million

General obligation debt outstanding: $58.2 million

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004.

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

Kathryn Gregory
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 INITIAL Aa3 RATING TO STILLWATER INDEPENDENT SCHOOL DISTRICT'S (MN) $10.5 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2011A
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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