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MOODY'S DOWNGRADES TO A2 FROM A1 THE UNDERLYING RATING ON SUTTONS BAY SCHOOL DISTRICT'S (MI) OUTSTANDING RATED GOULT DEBT, AFFECTING $6.8 MILLION

24 Feb 2011

A2 UNDERLYING AND Aa2 ENHANCED RATINGS ASSIGNED TO $1.7 MILLION 2011 SCHOOL IMPROVEMENT AND EQUIPMENT BONDS (GENERAL OBLIGATION - UNLIMITED TAX)

Primary & Secondary Education
MI

Moody's Rating

ISSUE

RATING

2011 School Improvement and Equipment Bonds

A2

  Sale Amount

$1,700,000

  Expected Sale Date

02/28/11

  Rating Description

General Obligation Unlimited Tax

 

Opinion

NEW YORK, Feb 24, 2011 -- Moody's Investors Service has assigned an A2 underlying rating and Aa2 enhanced rating with stable outlook to Suttons Bay School District's (MI) $1.7 million 2011 School Improvement and Equipment Bonds (General Obligation - Unlimited Tax). Concurrently, Moody's has downgrade to A2 from A1 the underlying rating on the district's outstanding rated general obligation debt, totaling $6.795 million, including the current offering.

SUMMARY RATING RATIONALE

The bonds are secured by the district's general obligation unlimited tax pledge. Proceeds of the bonds will fund the purchase and installation of technology upgrades for the district's classrooms as well as a the purchase of a special education school bus. The A2 underlying rating reflects district's narrow financial profile and recent declines in enrollment, modestly sized tax base with recent declines, and manageable debt profile.

The Aa2 enhanced rating is based on the credit enhancement provided by the State of Michigan's School Bond Qualification Loan Program. Under this program, the state has a constitutional obligation to provide a school district with sufficient funds to make timely debt service payments, if necessary. Fundamental to the Aa2 rating with stable outlook is the program's sound mechanics to ensure timely payments, which include a provision for independent third party notification to the state in the event of debt service insufficiency, and the strength of the state's general obligations, currently rated Aa2 with stable outlook. For additional information regarding Moody's action on the State of Michigan's rating and outlook, please refer to Moody's Credit Update report, dated April 6, 2010.

Program mechanics require the school district to transfer the debt service payment to the paying agent five business days prior to the due date. If payment is not made within this time frame, the paying agent must notify the school district of the insufficiency within the next business day. Should the school district fail to transfer the necessary funds, the Michigan Department of Treasury is notified of the deficiency by the paying agent three business days prior to the debt service payment date, at which time the state treasurer must make a loan from the State's School Loan Revolving Fund (SLRF) to ensure timely debt service payment. The Michigan SLRF was established to provide loans to school districts to moderate the local tax burden for debt service on qualified bonds, prevent a default, and cure a default. The state may issue bonds or notes without voter approval to capitalize the fund.

STRENGTHS:

- Moderately-sized tax base

- Above average residential income indices

CHALLENGES:

- Declining enrollment

- Limited financial flexibility

DETAILED CREDIT DISCUSSION

STATE AID CUTS AND DECLINES IN ENROLLMENT PRESSURES ALREADY NARROW FINANCIAL PROFILE

We expect the district's financial position will remain narrow and continue to experience stress due to the ongoing revenue declines stemming from falling student enrollment and state aid reductions. The district ended fiscal 2009 with an operating deficit of $162,000, drawing down the General Fund balance to $689,000, or a narrow 8.3% of revenues. Fiscal 2010 ended with an operating deficit of $558,000, mostly due to state aid reductions of approximately $165 per pupil and a General Fund balance of $132,000, or a very narrow 1.7% of revenues. In response to state aid reductions and declining enrollment, officials reduced operating expenditures by consolidating classrooms, closing the middle school building, not replacing nine retiring teachers, laying off two staff members and eliminating transportation costs (except for those associated with Special Education students). While the district reduced expenditures by approximately $1 million from fiscal 2010 to fiscal 2011, management anticipates ending fiscal 2011 with an operating deficit of roughly $100,000, leaving minimal funds available in the General Fund reserve. Moody's notes that additional cuts may have to be made despite recent efforts to curtail expenditure growth, as the district manages through the impact of reduced state funding.

Characteristic of many Michigan school districts, the district received approximately 40% of its funding from state aid revenues in fiscal 2010. Moody's notes the uncertain future of state aid funding as the State of Michigan (GO rated Aa2/stable outlook) deals with its own budgetary pressures. Enrollment, a key determinant to state aid revenues, has averaged a substantial 5.6% decline annually over the past five years further stressing operating revenues. While demographic trends show an expected additional decline to 721 student by the 2015/2016 school year, management reported that the unofficial 2011 spring count totaled only two students fewer than the fall count, whereas the district has typically lost 30 students during the school year mainly due to a sizeable migrant worker population. In addition, the district is in its second year of a pilot virtual learning program that is expected to contribute to overall enrollment counts. During the first year, the district enrolled 25 students and has 49 students currently enrolled with more than 40 students on the program's waiting list. The district is currently awaiting approval from the State of Michigan's Board of Education on formalizing the program.

MODESTLY SIZED TAX BASE IN NORTHWEST MICHIGAN

The district is located in the northwest portion of the lower peninsula in Leelanau County (GOLT rated Aa3). Over the last five years, the district's full value has grown by an average rate of 2.5% annually to $1.2 billion in tax year 2010. While full value increased through tax year 2008, in 2009 and 2010, the district's full value declined by 2.8% and 3.8%, respectively. The district's full value per capita remains above average at $199,569 in part reflecting a measure of seasonality within the tax base. Resident income levels are above the state and national averages with the per capita income and median family income at 109% and 108.2% respectively, of the state. As of December 2010, the unemployment rate in Leelanau County was 10.5%, below the state average of 10.6% and above the US average of 9.1% during the same time period.

LOWER THAN AVERAGE DEBT BURDEN WITH RAPID PRINCIPAL AMORTIZATION

The district's total outstanding debt is $9.3 million. With no future issuances planned, we anticipate the district's direct debt burden and overall debt burden of 0.8% and 1.2%, respectively, to remain manageable in the near term. Principal retirement is rapid with 100% retired in 10 years.

WHAT COULD MOVE THE RATING UP:

- Significant growth in financial reserves

- Significant growth in taxable valuation

- Stabilized enrollment trends

WHAT COULD MOVE THE RATING DOWN:

- Increase in the district's debt burden

- Deterioration in the district's tax base and economy

- Continued deterioration of financial reserves

KEY STATISTICS:

2010/2011 Enrollment: 721

Enrollment Trend: 5.6% average annual decline since 2005/2006

Fiscal year 2010 Full valuation: $1.16 billion

Full value per capita: $199,569

Per Capita Income: $24,154 (109% of MI and 111.9% of US)

Median Family Income: $57,829 (108.2% of MI and 115.6% of US)

FY 2010 General Fund balance: $132,000 (1.7% of General Fund revenues)

Direct Debt burden: 0.8%

Net Debt burden: 1.2%

Principal Amortization (10 years): 100%

PRINCIPAL METHODOLOGY 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

Kathryn Gregory
Analyst
Public Finance Group
Moody's Investors Service

Elizabeth Foos
Backup Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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Research Clients: (212) 553-1653


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MOODY'S DOWNGRADES TO A2 FROM A1 THE UNDERLYING RATING ON SUTTONS BAY SCHOOL DISTRICT'S (MI) OUTSTANDING RATED GOULT DEBT, AFFECTING $6.8 MILLION
No Related Data.
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