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MOODY'S DOWNGRADES SOUTHWEST LOCAL SCHOOL DISTRICT'S (OH) LONG-TERM GOULT RATING TO A2 FROM Aa3 IN CONJUNCTION WITH SALE OF $3.0 MILLION GOLT BONDS; RATING PLACED UNDER REVIEW FOR POTENTIAL FURTHER DOWNGRADE

11 Mar 2011

Aa2 ENHANCED (OSDCE) RATING AND A2 UNDERLYING RATING ASSIGNED TO $3 MILLION GOLT QUALIFIED SCHOOL CONSTRUCTION BONDS, SERIES 2011

Primary & Secondary Education
OH

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

School Energy Conservation Improvement Bonds, Series 2011 (Qualified School Construction Bonds - Federally Taxable)

A2

Aa2

  Sale Amount

$3,000,000

  Expected Sale Date

03/16/11

  Rating Description

General Obligation Limited Tax

 

Opinion

NEW YORK, Mar 11, 2011 -- Moody's Investors Service has assigned the Ohio School District Credit Enhancement (OSDCE) program's Aa2 enhanced rating with negative outlook and an A2 underlying rating to Southwest Local School District's (Hamilton County, Ohio), $3.0 million Qualified School Construction Bonds, Series 2011 (Federal Taxable - Direct Payment). Concurrently, Moody's has downgraded to A2 from Aa3 the district's long-term general obligation rating, affecting approximately $18.1 million of post-sale general obligation unlimited and limited tax debt. The district's underlying rating has also been placed under review for potential downgrade.

SUMMARY RATINGS RATIONALE

The bonds are secured by the district's general obligation limited tax pledge, subject to the ten mill limitation. Proceeds will finance various energy conservation projects primarily in the district's high school and activities center buildings. The district expects to pay debt service payments from its General Fund with an estimated maximum annual debt service payment of approximately $367,000 per year (not including the Qualified School Construction Bond subsidy) and $216,000 per year post-subsidy. Officials expect that savings from the energy conservation projects will be sufficient to cover annual debt service payments, though will use other funds to cover debt service should the expected savings not materialize.

The enhanced rating of Aa2 is notched from the state of Ohio's Aa1 general obligation rating and is also assigned a negative outlook. The enhanced Aa2 rating is based on the programmatic rating and the district's satisfactory coverage of interceptable aid to debt service of approximately 48.8 times maximum annual debt service on the current offering and compliance with program requirements for timing of debt service payments. The downgrade to the A2 underlying rating reflects the district's severely weakened financial operations, which have resulted in a near depletion of reserves, and lack of an immediate plan to rebuild reserves. The A2 rating additionally incorporates the district's moderately-sized tax base favorably located outside Cincinnati (Aa1/stable outlook) and average debt burden. The placement of the rating under review for potential downgrade reflects the need to evaluate financial operations after state aid has been determined for fiscal 2012 and the district's board has met to decide on proposed expenditure reductions for fiscal 2012, given the district's very narrow cash reserve levels. The lack of rating distinction between the general obligation unlimited and limited tax debt reflects the state requirement that Ohio school districts use all available revenues, including available property tax millage under the ten mill limitation statutory code, for the payment of debt service prior to any other uses.

STRENGTHS

-Moderately-sized tax base favorably located outside Cincinnati with land available for commercial development

-Significant expenditure reductions planned to right-size costs with available resources

CHALLENGES

-Operating deficits posted for four of the last five years, resulting in a substantial draw down of the district's cash balance

-Possible reduction in state funding in fiscal 2012 beyond projected 10% reduction

- Lack of an immediate plan to rebuild cash reserves to levels sufficient to provide a budgetary cushion

DETAILED CREDIT DISCUSSION

OHIO SCHOOL DISTRICT CREDIT ENHANCEMENT PROGRAM CHARACTERIZED BY STRONG PROGRAM MECHANICS

The OSDCE programmatic rating is based on Moody's assessment of the overall mechanics of the program, as defined in the statute as of July 16, 2008, and rated one notch below the state's GO rating (Aa1, negative outlook). The OSDCE program demonstrates strong state commitment and program history; it is established in the Ohio Revised Code and implemented in accordance with Ohio Administrative Code. Available funds for the intercept include the remaining aid appropriated for the district for the remainder of the state's fiscal year and aid in future years may continue to be intercepted, if necessary, until the debt service shortfall is fully paid. State oversight of the program includes review by the State Office of Budget and Management and Department of Education. The legislation and approval applications specify that the agreement is irrevocable once entered into, as long as there is debt service outstanding. While the program has never been utilized, the state has demonstrated its commitment to school capital financings; and the oversight criteria ensures that there will be adequate education aid to repay bondholders, if necessary. The State of Ohio has historically passed budgets on time or has made provisions for continuation budgets. Based on these provisions, Moody's believes the OSDCE program exhibits strong state commitment.

The timing mechanisms of the program are also strong, requiring a third party fiscal agent to notify the state to intercept state education aid if debt service is not received within 10 days prior to the date debt service is due. Once the Department of Education confirms that the district will be unable to meet debt service payments within three days prior to the debt service payment date, it must deposit the intercepted aid by 2 PM on the day before debt service is due. As the OSDCE program demonstrates the above characteristics, Moody's analysis concludes that program mechanics are strong and is expected to continue to be rated one notch lower than the State of Ohio's GO rating.

The Aa2 rating and negative outlook also considers Moody's analysis of the sufficiency of interceptable revenues for all enhanced debt issued by Southwest Local School District and the role of the independent fiduciary. Debt service coverage is satisfactory with the estimated FY2011 state foundation aid providing approximately 48.8 times coverage of maximum annual debt service. The Paying Agent will be Bank of New York Mellon Trust Company and the Paying Agent Agreement is expected to be signed in accordance with the administrative code requirements. The administrative code also specifies that any solvency loans required by districts under fiscal emergency are not to be included in the coverage calculation and that any state aid payments required for enhancement debt shall be made before any reduction in state aid is made for reimbursement of a solvency assistance advance.

PRESSURED FINANCIAL OPERATIONS RESULTING FROM A DRAW DOWN OF RESERVES

The A2 rating reflects the substantial narrowing of the district's liquidity since fiscal 2006, with the district nearly exhausting its available reserves over the past five fiscal years due to annual operating deficits. We believe the district's financial operations will continue to remain pressured given its narrow cash position, possible additional reductions in state aid beyond what is projected for fiscal 2012, and the district's lack of plans to go to voters for additional property or income tax revenues. The district's cash balance has fallen from $4.8 million, or a solid 18.3%, at the beginning of fiscal 2006 to $107,645 at the close of fiscal 2010, a very narrow 0.4% of receipts. The draw on General Fund reserves continued over this time period despite the district's passage of a 0.75% income tax in 2006, which was expected to help stabilize the district's finances. Receipts from the income tax were not fully realized until fiscal 2010 due to timing of collections, and in the interim, expenditures increased by nearly $1.7 million or 5.9%.

On a preliminary cash-basis for the current fiscal year, the district is projecting balanced operations and a year-end fiscal 2011 cash balance of $100,000, or a limited 0.3% of receipts. The district is currently reviewing expenditure reductions to eliminate a nearly $2.0 million budget deficit projected for fiscal 2012. The board, which will vote on the proposed cuts at its April 2011 meeting, is considering closing Hooven elementary school, laying off 15 to 20 employees and privatizing custodial services. The district is also projecting to realize savings from early retirements and will reduce proposed expenditures by approximately $450,000 due to receiving a waiver from the State of Ohio for providing all day kindergarten in fiscal years 2012 and 2013. Savings from the proposed reductions, along with the waiver for all day kindergarten, are projected to result in a $1.0 million cash balance for fiscal 2012, or a still narrow 3.2% of receipts. In its five-year forecast, the district included a 10% reduction to the aid it receives from the state for fiscal 2012. The state has not yet approved its budget for the biennium, which may include school aid reductions exceeding the district's projected 10% amount, an act that would exert additional pressure on the district's already narrow financial position and may result in a decrease of the projected cash basis balance for fiscal 2012. State aid is the district's largest operating revenue source, at 41.6% of 2010 revenues, followed by property taxes at 29.8%. The district is currently at the 20 mill floor for its property tax levy and does not have plans to go back to voters for additional millage in the near to medium term. Instead, the district is focused on making expenditure reductions to maintain a positive cash balance. We note that it may be challenging for the district to maintain a balanced operating budget and rebuild its operating reserves without additional revenues for the General Fund. It is critical for the district to identify a plan to rebuild reserve levels sufficient to offset potential budgetary pressures. We will continue to monitor the district's financial position, as the preservation of a positive cash balance will be a crucial factor in the district's maintenance of overall credit quality.

MODERATELY SIZED DISTRICT LOCATED NEAR CINCINNATI

Located 25 miles west of Cincinnati along the I-74 corridor which connects Cincinnati and Indianapolis (Aaa/stable outlook), the mostly residential district serves the City of Harrison as well as Harrison, Whitewater and Crosby townships. The district's full valuation stands at an average $1.6 billion and has experienced an average annual increase of 3.3% over the past five years, primarily as a result of an increase in real estate assessments. Going forward, the district is awaiting a final outcome on a property tax appeal by Duke Energy Ohio (senior unsecured debt rated Baa1/positive outlook), which comprises 3% of the district's tax base. Favorably, the district has removed the disputed amount from its five-year forecast. District income levels approximate state averages, with per capita income and median family income at 91.0% and 101.8% of state levels, respectively. While the district has experienced new residential development recently, enrollment has fallen by 435 students or 11.0% since 2003, at a modest average annual pace of 1.4% per year. Management expects this trend to reverse itself and is projecting a modest increase in enrollment of 155 students by the 2020/2021 school year. Given the steady increase in full valuation over the past five years, it is expected that the district's tax base will continue to experience modest increases in the near to medium term.

MANAGEABLE DEBT PROFILE

The district's debt profile is likely to remain manageable. Current overall debt levels are 1.7% of full valuation, with direct debt at 1.2% of full valuation. Direct debt is amortized at just over 58.5% in the next ten years. Going forward, the district is expecting to go to voters to request authorization to levy GOULT bonds in 2012 as it begins a construction and consolidation plan for its remaining elementary school buildings. The district is not party to any variable rate debt or interest rate swaps at this time.

Outlook

The district was placed on watchlist for review of the rating due to uncertainty on the magnitude of potential state aid reductions for fiscal 2012 and the tentative nature of the district's proposed expenditure reductions, on which the board will vote in April 2011.

What could change the rating UP:

-Restoration of General Fund reserves to satisfactory levels and achievement of an adequate liquidity position

-Balanced to surplus General Fund operations with limited reliance upon non-recurring revenue enhancements or expenditure reductions

What could change the rating DOWN:

-Continued operating deficits yielding further declines in reserve levels to a deficit cash position

-Continued material declines in enrollment placing additional operating pressures on the General Fund

KEY STATISTICS:

Population (2000 census): 21,246

2010 Estimated full valuation: $1.6 billion

Average annual growth (2005-2010): 3.3%

Estimated full value per capita: $72,780

Median family income (2000): $50,938 (101.8% of state and US)

Per capita income (2000): $19,112 (91% of state and 88.5% of US)

FY2010 General Fund balance (GAAP basis): -$241,000 (-0.8% of revenues)

FY2010 General Fund balance (cash basis): $108,000 (0.4% of receipts)

Debt burden: 1.7% (Direct: 1.2%)

Estimated principal payout (10 years): 58.5%

Post-sale GOULT and GOLT debt outstanding: $18.1 million

PRINCIPAL METHDOLOGY USED

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, 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

Genevieve Nolan
Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
Backup Analyst
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 DOWNGRADES SOUTHWEST LOCAL SCHOOL DISTRICT'S (OH) LONG-TERM GOULT RATING TO A2 FROM Aa3 IN CONJUNCTION WITH SALE OF $3.0 MILLION GOLT BONDS; RATING PLACED UNDER REVIEW FOR POTENTIAL FURTHER DOWNGRADE
No Related Data.
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