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MOODY'S DOWNGRADES POCONO MOUNTAIN SCHOOL DISTRICT'S (PA) UNDERLYING GENERAL OBLIGATION UNLIMITED TAX RATING TO Baa1 FROM A2 AND LIMITED TAX RATING TO Baa2 FROM A3; OUTLOOK IS NEGATIVE

09 Sep 2011

ASSIGNS UNDERLYING Baa1 AND ENHANCED Aa2 RATING TO G.O. UNLIMITED TAX BONDS, SERIES 2011, BOTH RATINGS HAVE NEGATIVE OUTLOOKS

Primary & Secondary Education
PA

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Notes, Series 2011

Baa1

Aa2

  Sale Amount

$10,000,000

  Expected Sale Date

09/13/11

  Rating Description

General Obligation Unlimited Tax

 

Opinion

NEW YORK, Sep 9, 2011 -- Moody's Investors Service has downgraded to Baa1 from A2 the Pocono Mountain School District's (PA) general obligation, unlimited tax rating, affecting $215 million in outstanding debt. At this time, Moody's has also downgraded to Baa2 from A3 the district's general obligation, limited tax rating, affecting $83.4 million in outstanding debt. The outlook on both ratings remains negative. The district's limited tax debt is subject to Special Session Act 1 property tax limitations.

Moody's has assigned a Baa1 underlying rating with a negative outlook and an enhanced Aa2 rating with negative outlook to the district's General Obligation Refunding Bonds (Unlimited Tax) Series 2011. All of the district's previously issued debt maintains the Aa3 enhanced rating with a negative outlook based on the Act 150 state intercept.

SUMMARY RATINGS RATIONALE

The downgrade reflects the district's consistent inability to meet financial projections, which has driven the district further into fiscal distress despite recent efforts to control expenditures. The district's current recovery plan depends heavily on its ability to increase the tax levy outside of the legal index over multiple years and does not anticipate the General Fund balance returning to a positive position until at least 2016. The ratings incorporate Moody's expectation that the projected fiscal 2011 year-end results reflect the low point in the overall fiscal position and it will begin to rebuild its liquidity and reserve position, although this process will take multiple years. The rating also reflects the district's large tax base with average wealth levels and elevated debt burden.

The negative outlook reflects continued downward pressure on both ratings, given that the district is expected to be challenged in the near-term to return to balanced financial operations and rebuild reserves. District officials anticipate fiscal 2011 will result in a significant operating deficit (approximately $6.8 million) and any negative departure from these projections would place additional strain on the district's credit quality.

The Aa2 rating with negative outlook reflects Moody's rating on the Pennsylvania School District Fiscal Agent Agreement Intercept Program, which carries the negative outlook assigned to the Commonwealth of Pennsylvania. Pursuant the School Code (Section 6-633), the state is authorized to intercept aid appropriated in the current fiscal year. The program is further enhanced by a Fiscal Agent's Agreement, which requires the fiscal agent to notify the Secretary of Education if the district has not made sinking fund payments 15 days prior to debt service due dates. Pursuant to a Memorandum of Understanding (MOU) among: the Secretary of Education; the Labor, Education and Community Services Comptroller, and the State Treasurer, the timing for state aid intercept would require the transfer of appropriated funds to the fiscal agent in amounts required for debt service. For more information on Moody's intercept program rating methodology, please refer to the update report regarding the program dates March 14, 2008.

STRENGTHS

- Adequate interceptable revenues

- Relatively stable tax base

CHALLENGES

- Significant decline in state aid receipts could weaken debt service coverage

- Large accumulated reserve deficit

DETAILED CREDIT DISCUSSION

All of the district's debt is secured by a general obligation pledge, with approximately 72% of the outstanding debt secured by an unlimited tax pledge and the balance supported by a limited tax pledge. The current $10 million General Obligation Note, Series of 2011 is refunding portions of the district's Series 2004 and 2005 bonds. The district expects to achieve a net present value savings of approximately $807,000 without extension of maturity. The district will take $8 million in debt service savings during fiscal 2012, resulting in an increase in annual debt service in subsequent years. Approximately half of the fiscal 2012 debt service savings will be used to support capital projects and the balance will support debt costs within the current budget.

INTERCEPT PROGRAM PROVIDES ADDITIONAL BONDHOLDER SECURITY; STRONG MECHANICS AND REVENUE SUFFICIENCY

The Aa2 rating with negative outlook reflects our current assessment of the Pennsylvania School District Fiscal Agent Agreement Intercept Program. The program provides for an intercept of state aid due in the current fiscal year in the event of a threatened payment failure by the district, and reflects the strong credit profile of the Commonwealth itself, whose general obligation rating is Aa1/negative outlook. Pursuant the School Code (Section 6-633), the state is authorized to intercept aid appropriated in the current fiscal year. The program is further enhanced by a Fiscal Agent's Agreement (Paying Agent Agreement), which requires the fiscal agent to notify the Secretary of Education if the district has not made sinking fund payments 15 days prior to debt service due dates. Pursuant to a Memorandum of Understanding (MOU) among the Secretary of Education, the Labor, Education and Community Services Comptroller, and the State Treasurer, appropriated state aid is transferred to the paying agent in amounts required for debt service. After the current issue, the district will have approximately $299.8 million in direct debt outstanding, of which only the current $10 million Series of 2011 benefits from the program. Based on fiscal 2012 appropriated state aid, the district's overall coverage for all debt is approximately 2 times. Moody's believes that the district could sustain additional moderate state aid declines that continue to support this rating. For more information on Moody's intercept program rating methodology, please refer to the update report regarding the program dated March 14, 2008.

AGGRESSIVE BUDGETARY PRACTICES LEAD TO LARGER ACCUMULATED DEFICIT IN FISCAL 2011

Moody's believes the district will be challenged over the medium-term to return to and maintain balanced operations that result in positive reserve levels given past reliance on fund balance and non-recurring revenues to offset aggressive budgeting of economically sensitive revenues, state aid, and expenditure growth. The district realized significant expenditure increases since 2003 (approximately 70%) as a result of workforce growth and new district facilities which were not offset by sufficient increases in revenue. Prior to the current fiscal year, property tax increases were typically below the allowable index set by Act 1, limiting the district's ability to capture growth within its tax base. Multiple years of significant operating deficits drove the district's General Fund balance position to a negative $3.5 million, or -1.8% of General Fund revenues, in 2010 from a stronger $11.1 million, or 8.5% of General Fund revenues, in 2005. Importantly, following a modest operating surplus in fiscal 2010, management anticipates fiscal 2011 will result in a large operating deficit partially driven by a structurally imbalanced budget. This additional decline further limits the district's financial flexibility as liquidity has declined substantially, leaving the district unable to accommodate budgetary fluctuations, any additional slow-down in the economy or declines in state aid.

Following four consecutive deficits, fiscal 2010 ended with a modest 169,000 surplus despite the inclusion of a $1.7 million budgetary reserve in the original budget. The budgetary reserve offset state aid and stimulus funds underperforming budget and a $3 million unbudgeted swap termination payment. The original budget increased by 3.4%, or $6.1 million (budget to budget) and was offset by a 9.7% increase in the property tax. Operations were primarily supported by property taxes (67%) and state aid (24%) in fiscal 2010.

Management currently projects the fiscal year will end with a significant $6.8 million operating deficit, leaving the district with constrained ability to respond to unbudgeted fluctuations in the current fiscal year. Total General Fund balance is expected to decline to a more negative $9.98 million, or -5.2%. The fiscal 2011 budget increased by 4.3%, or $8.1 million, and included a $4 million appropriation of reserves, despite the deficit fund balance position, and did not include a budgetary reserve as in the past two budgets. The district did raise the tax levy in excess of the allowable index set by Act 1. Although the district settled several of its challenges of the tax assessment of some of its largest taxpayers, the additional revenue was unable to offset the original appropriation of reserves and return the fund balance to a positive position.

The fiscal 2012 budget was the first year in at least the last 6 years that expenditures declined compared to the previous year (3.7%). In addition, the budget included a $913,000 expenditure contingency reserve and included a 5.68% property tax increase. The district took advantage of several tax exemptions, including the exemptions related to pensions and children with disabilities. The budget decline reflects the district's negotiations with various unions to freeze salaries for the first part of the year and a 0.26% growth in the second half. Total salary related expenditure reductions was approximately $6.8 million. Management has also assembled a multi-year plan that projects fund balance returning to a positive position no earlier than 2016. The plan also assumes annual one-mill increases in the property tax rate, which is likely to be outside of the allowable index in most years; the intent of the increase is to replenish fund balance. Although Moody's recognizes that this is a step towards a return to an improved financial position, the results may be difficult to achieve given the current economic environment.

LIQUIDITY POSITION DECLINES; REQUIRES INCREASED CASH FLOW BORROWING

Fiscal 2011 operating results have added to pressure to the district's liquidity, requiring the district to borrow a larger Tax Anticipation Note. Liquidity declines over several years resulted in a year-end net cash position of 4.9% of General Fund revenue in 2010, down from 15.8% in 2005, fiscal year-end results are expected to decline to 1.6% of General Fund revenue in 2011. As a result, the district increased their cash flow borrowing to $20.7 million (10.7% of General Fund revenue) for fiscal 2011 from $15 million in 2009, and the note was required for the entire fiscal year rather than six months, reflecting that the district is experiencing consistent liquidity pressure throughout the year

SIZABLE TAX BASE WITH CONTINUED GROWTH

Moody's believes the district's $6.1 billion tax base continues to maintain medium to long-term growth potential, driven by residential and commercial developments, albeit at a slower rate given the weak real estate market. Although the population grew by a significant 61.7% between 1990 and 2000, assessed valuation has been growing at a slower rate, averaging about 2.7% annually in the past five years. Assessed valuation growth is anticipated to continue at these moderate rates in the near term, given available land on which to build and the desirability of the Pocono Mountain resort area. Located in Monroe County (G.O. rated Aa2), about 30 miles southeast of Scranton and five minutes north of Interstate-80, this growing rural school district is predominantly residential (78% of assessed valuation) with the presence of resort facilities. Mount Airy Lodge, which opened to the public in fall of 2007, is a gaming facility (slot machines) with a hotel and a golf course and is the second largest taxpayer within the district. The second phase of the development is anticipated to include ancillary businesses around the casino. Full valuation increased at an average rate of 9.0% between 2004 and 2009, but has slowed in recent years, capturing market value appreciation. The district is traditionally a seasonal community, reflected in the disparity between wealth indices and full value per capita, although district management reports ongoing conversion of vacation homes to permanent residences. While per capita income is below the state median (93.3%) and median family income is on par (103.0%), the full value per capita is average at $94,460.

ABOVE AVERAGE DEBT BURDEN

Moody's expects the district's debt burden to remain above average due to the buildup of student enrollment and population growth over the last decade, although this has slowed and enrollment is now declining. As a result of an influx of residents from New York (G.O. rated Aa2/stable outlook) and New Jersey (G.O. rated Aa2/negative outlook), attracted by the region's relatively affordable housing, the district had experienced a boom in student enrollments leading up until 2008. As a result, the district had been a frequent issuer of debt since the late-1980s due to continuing facility demands. The direct debt burden is above the state median at 4.6% of full valuation, increasing to a high 5.4% after accounting for overlapping underlying municipalities and Monroe County debt. State school construction aid provides a modest degree of relief, decreasing overall debt burden to a still-above average 4.9%. The district has a remaining $41.7 million in authorized debt, but does not plan to issue this debt in the near term. In fiscal 2010, debt service was an above average 12.5% of General Fund expenditures, and is expected to remain at similar levels in going forward. Amortization of principal is slow with 58.4% retired within 10 years.

On July 8, 2009, the district terminated all of its existing floating-to-fixed swap agreements with Aaa-rated Royal Bank of Canada ("RBC"). The district's Series 2004 Notes, 2006 Notes and 2008 Notes currently have a combined notional $63.7 million in variable rate General Obligation debt through the Emmaus Pool. US Bank provides the Letter of Credit supporting both the Emmaus Pool's 1989 Bond Pool and its 2000A Bond Pool. The district's has approximately $41.8 million in the 1989 Bond Pool (expires 6/15/2014) and the remaining $20.8 million in the 2000A Bond Pool (expires 3/15/2013).

WHAT COULD MOVE THE RATING - UP (REMOVE THE NEGATIVE OUTLOOK)

-- Audited results indicating a trend of stabilized financial operations

-- Elimination of the accumulated General Fund balance deficit

-- Growth of reserves, in line with budgetary expansion

-- Improved liquidity position

WHAT COULD MOVE THE RATING - DOWN

-- Continued trend of operating deficits

-- Failure to grow reserves in step with budgetary expansion

-- Failure to execute financial recovery plans

-- Further deterioration of liquidity and reserve levels

KEY STATISTICS

2000 Population: 51,219

2010 Full valuation: $6.1 billion

2010 Full value per capita: $94,460

Direct debt burden: 4.6%

Adjusted debt burden: 4.9%

Payout of principal (10 years): 58.4%

FY09 General Fund balance: - $3.4 million (-1.9% of General Fund revenues)

FY09 Unreserved Undesignated General Fund balance: - $4.3 million (-2.4% of General Fund revenues)

FY10 General Fund balance: - $2.5 million (-1.8% of General Fund revenues)

FY10 Unreserved Undesignated General Fund balance: - $3.8 million (-2% of General Fund revenues)

1999 Per Capita Income (as % of PA and US): $19,483 (93.3% and 90.3%)

1999 Median Family Income (as % of PA and US): $50,676 (103% and 101.3%)

1999 Median family housing (as % of state): $119,500 (123.2%)

Post-sale G.O. debt outstanding: $299.8 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Jessica A. Lamendola
Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Backup Analyst
Public Finance Group
Moody's Investors Service

Naomi Richman
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
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New York, NY 10007
USA

MOODY'S DOWNGRADES POCONO MOUNTAIN SCHOOL DISTRICT'S (PA) UNDERLYING GENERAL OBLIGATION UNLIMITED TAX RATING TO Baa1 FROM A2 AND LIMITED TAX RATING TO Baa2 FROM A3; OUTLOOK IS NEGATIVE
No Related Data.
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