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Rating Action:

MOODY'S DOWNGRADES TO A1 FROM Aa3 THE UNDERLYING RATING ON DULUTH ISD NO. 709'S (MN) OUTSTANDING GO DEBT AND FULL-TERM COPS IN CONJUNCTION WITH NEW SALE; NEGATIVE OUTLOOK ASSIGNED

23 Nov 2011

ASSIGNS MIG 1 (MSDE) ENHANCED RATING TO $22.7 MILLION GENERAL OBLIGATION TAX AND AID ANTICIPATION CERTIFICATES OF INDEBTEDNESS, SERIES 2011B

New York, November 23, 2011 -- Moody's Rating

Issue: General Obligation Aid Anticipation Certificates of Indebtedness, Series 2011B; Enhanced Rating: MIG 1; Sale Amount: $22,700,000; Expected Sale Date: 12/06/2011; Rating Description: General Obligation

OPINION

Moody's Investors Service has downgraded to A1 from Aa3 the underlying rating on Duluth Independent School District No. 709's (MN) outstanding general obligation and full-term certificates of participation (COPs) debt. Concurrently, Moody's has assigned an enhanced MIG 1 rating to $22.7 million General Obligation Tax and Aid Anticipation Certificates of Indebtedness, Series 2011B. Moody's has also downgraded the rating on the district's outstanding COPs subject to annual appropriation to A2 from A1. Post-sale, the district will have $86.4 million in general obligation bonds, $185.5 million in full-term COPs, and $37 million in COPs subject to annual appropriation outstanding. A negative outlook has been assigned.

STRENGTHS

-Enhancement provided by the State of Minnesota (GO rated Aa1/negative)

-Regional economic center for northeastern Minnesota with institutional stability in health care and higher education sectors

WEAKNESSES

-Declining enrollment trends; dependence on state aid

-Consecutive years of General Fund operating deficits

-Reliance on one-time revenues for operations and debt service

-High debt burden due to extensive capital improvements per long-term Master Facilities Plan

SUMMARY RATINGS RATIONALE

The current certificates are secured by the district's general obligation unlimited tax pledge though debt service is expected to be paid from anticipated tax and state aid revenues to be received for 2012. Proceeds of the current certificates will be used to meet current expenses of the district and cover cash flow deficits. The downgrade to the A1 general obligation rating reflects declining enrollment trends; steadily narrowing General Fund reserves following six years of operating deficits; and high debt levels that are driven by the district's sizeable master facilities plan. The rating also incorporates the location in Duluth (GO rated Aa2/stable outlook), a regional economic center in northeastern Minnesota that is home to both a significant Great Lakes port and the second largest campus of the University of Minnesota. The district's Series 2008B, 2009A, 2010B and 2010C full-term COPs are rated on parity with its general obligation rating as the rental payments are funded from a separate, statutorily authorized lease levy and are not subject to annual appropriation. The district's A2 rating on the Series 2009B, 2010A, and 2010D COPs are rated one-notch below the district's underlying general obligation rating due to the risk of annual non-appropriation. Debt service on the bonds and COPs is additionally secured by the State of Minnesota's School District Credit Enhancement (MSDE) program.

The negative outlook reflects the narrowing liquidity of General Fund reserves and reliance on one-time revenues that have not been fully realized, further pressuring financial operations. Financial operations will likely remain pressured due to continued reliance on one-time revenues for operations and debt service, in addition to already pressured revenue streams.

Outlook:

The outlook on Duluth I.S.D. No. 709 is negative, representing our belief that the district's already narrow reserves may continue to deteriorate and further limit the district's financial flexibility. The outlook further reflects the continued reliance on one-time revenues and potential pressure on liquidity, as well as the rolling of cash flow notes.

What could change the rating up (or removal of negative outlook):

-Material improvement of operations and restoration of reserve levels to previous levels

-Stable to increasing enrollment leading to stabilized revenue streams

-Reduction in reliance on uncertain one-time revenue sources to cover debt service payments

What could change the rating down:

-Significant state aid reductions placing further stress on already pressured revenues

-Continued operating deficits and deterioration of General Fund reserves

-Further declines in liquidity that lead to inability to meet debt service payments

PRINCIPAL METHODOLOGY

The principal methodologies used in this rating were General Obligation Bonds Issued by U.S. Local Governments published in October 2009, and State Aid Intercept Programs and Financings published in February 2008. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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Soo Yun Chun
Associate Analyst
Public Finance Group
Moody's FIS Domestic Sales Office - Chicago IL

JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Henrietta Chang
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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MOODY'S DOWNGRADES TO A1 FROM Aa3 THE UNDERLYING RATING ON DULUTH ISD NO. 709'S (MN) OUTSTANDING GO DEBT AND FULL-TERM COPS IN CONJUNCTION WITH NEW SALE; NEGATIVE OUTLOOK ASSIGNED
No Related Data.
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