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Rating Update:

MOODY'S DOWNGRADES WILLIAMSTON COMMUNITY SCHOOL DISTRICT'S (MI) UNDERLYING GO RATING TO A2 FROM A1 AND ASSIGNS NEGATIVE OUTLOOK

19 May 2011

A2 RATING AND NEGATIVE OUTLOOK APPLY TO $36.8 MILLION IN OUTSTANDING GO DEBT

Primary & Secondary Education
MI

Opinion

NEW YORK, May 19, 2011 -- Moody's Investors Service has downgraded to A2 from A1 the underlying rating on Williamston Community School District's (MI) general obligation unlimited tax debt. Moody's has also assigned a negative outlook. The A2 rating and negative outlook apply to $36.8 million of outstanding general obligation debt.

SUMMARY RATINGS RATIONALE

The outstanding bonds are secured by the district's general obligation unlimited tax pledge. The downgrade to the A2 rating reflects the district's historically narrow General Fund reserve levels; declining trends in student enrollment; modestly-sized, depreciating tax base in the greater Lansing metro area; and above average debt burden. The negative outlook reflects overall revenue and expenditure pressures that are expected to continue given uncertainty regarding future state funding levels.

STRENGTHS

- Socioeconomic characteristics above state and national medians

-Available access to employment centers in southeast Michigan and the greater Lansing metro area

CHALLENGES

- Narrow General Fund reserve levels to be further pressured by anticipated state aid per-pupil reductions

- Stagnate to declining enrollment trends

- Moderate decreases in the district's full value expected to continue in the near-term

- Above average debt profile with continued reliance on the State of Michigan Revolving Loan Fund

Detailed Credit Discussion

NARROW FINANCIAL OPERATIONS FACED WITH ADDITIONAL PRESSURES FROM STATE CUTS

We expect the district's financial position will remain pressured in the near-term due to falling revenues stemming from student enrollment declines and state aid reductions. Starting in fiscal 2006, the district has exhibited a trend of operating deficits over the last five years. The deficits are a reflection of the stagnant or reduced state aid funding that has adversely impacted the financial position of the district. In fiscal 2009, the district ended with a General Fund Balance of $649,000, or 4% of General Fund revenues. While the district has implemented several cost cutting measures over the years, the district was forced to make additional mid-year cuts following a $165 per pupil reduction in state funding effective for fiscal 2010. Although officials report taking measures such as streamlining bus operations, not filling vacant positions, freezing salaries, contracting out services and non-union personnel, and reinstating retired teachers to reduce their benefits liability, another operating deficit of $68,000 was recorded in fiscal 2010, bringing the General Fund balance to $581,000, or a narrow 3.6% of General Fund revenues. The district is anticipating a balanced operating budget for fiscal 2011. Preliminary budget expectations for fiscal 2012 suggests a possible operating shortfall of up to $2.3 million depending on enrollment counts and the Governor's proposed budget for per-pupil foundation allowance cuts for each Michigan school district. District officials have already identified $1 million in expenditure reductions moving forward that would not significantly impact programming. With the future of state aid still uncertain, officials report looking to their unions, which have historically been supportive, and making several appropriation adjustments, to offset the remaining budget gap and to begin increasing General Fund reserve levels in the near future.

Like many Michigan school districts, the district relies heavily on state aid to fund operations. Approximately 75.6% of the district's current General Fund revenues are from state sources with local revenues making up just 9.8%. We expect the reduction of federal revenues, which were used to offset recent state aid cuts, as stimulus stabilization funding diminishes. Additionally we note the uncertain future of state aid funding as the State of Michigan (GO rated Aa2/stable outlook) deals with its own budgetary pressures. Enrollment has averaged a 1.2% decline annually over the past five years further stressing operating revenues. Management has begun planning the necessary steps to offset the district's relatively sizable budget imbalance for fiscal 2012. Management's ability to offset potential revenue shortfalls and sustain the district's reserve balance will be important in maintaining the district's credit profile. We will continue to monitor the district's performance in light of these pressures.

MODESTLY-SIZED TAX BASE IN INGHAM COUNTY

The district is located in Ingham County (GOLT rated Aa2) and benefits from access to employment centers in southeastern Michigan and the greater Lansing (GOLT rated Aa2) metro area. The district's $1 billion tax base experienced a trend of significant growth in the earlier part of the last decade yet that trend has stalled due to the weakening of the state's housing market and overall economy. Full value growth has averaged an annual increase of 1.7% between 2005 and 2010 which includes a decline of 2.8% and 3.0% in 2009 and 2010 respectively. We anticipate the district's full value to decease modestly in the near-term before rebounding as the region begins to recover from the recent economic recession. Officials report no known changes in the top ten taxpayers, which accounted for a modest 6.4% of total assessed value in 2010. Wealth levels are above the state and national medians, with per capita income and median family income at 123.5% and 133.9% of the state medians, respectively. The county's March 2011 unemployment rate of 9.1% was lower than the state's rate of 11% and slightly lower than the nation's of 9.2% during the same time period.

ABOVE AVERAGE DEBT BURDEN WITH NO PLANNED FUTURE BORROWING

The district had a total of $36.8 million in outstanding general obligation debt as of June 30, 2010. District management reports that no additional issuances are anticipated in the near to medium-term. We anticipate the district's above average direct debt burden of 5.2% of full value, and overall debt burden of 6.4% of full value, will remain manageable with ongoing reliance on the State of Michigan's School Loan Revolving Fund expected. Debt repayment is slightly below average at 60.9% of principal retired in 10 years. The district's debt profile is not exposed to any variable rate or swap agreements.

Outlook

The negative outlook on the district's general obligation rating reflects uncertainty regarding state revenue streams and potential expenditure pressures that will likely continue to stress the district's already limited financial flexibility.

What Could Make The Rating Go Up (or Remove the Negative Outlook)

- Significant growth in financial reserves

- Significant growth in taxable valuation

What Could Make The Rating Go Down

- Continued deterioration of already narrow financial reserves

- Continued deterioration in the district's tax base and economy

- Continued declines in enrollment resulting in significant decreases in state funding

Key Statistics

Fall 2011 enrollment: 1,869 (1.2% average annual decrease since 2006)

2009 Population (estimated): 9,628 (0.8% decrease since 2000)

2010 Full value: $1.02 billion (1.7% average annual increase since 2005)

2000 Per capita income (as % of state): 123.5%

2000 Median family income (as % of state): 133.9%

2010 Full value per capita: $106,321

Fiscal 2010 General Fund (GAAP) balance: $581,000 (3.6% of General Fund revenues)

Net direct debt burden: 5.2%

Overall debt burden: 6.4%

Principal amortization (10 years): 60.9%

Outstanding general obligation debt: $36.8 million

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, 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

Andrew T. Van Dyck Dobos
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

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


Moody's Investors Service
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MOODY'S DOWNGRADES WILLIAMSTON COMMUNITY SCHOOL DISTRICT'S (MI) UNDERLYING GO RATING TO A2 FROM A1 AND ASSIGNS NEGATIVE OUTLOOK
No Related Data.
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