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MOODY'S UPGRADES TO Aa2 FROM Aa3 THE UNDERLYING RATING FOR HOPKINS ISD NO. 270 (MN) AFFECTING $152.1M IN GOULT DEBT

15 Mar 2011

Aa2 UNDERLYING RATING AND Aa2 ENHANCED RATING WITH STABLE OUTLOOK ASSIGNED TO $29.4M GO ALTERNATIVE FACILITIES BONDS, SERIES 2011A AND $3.0M GO SCHOOL BUILDING BONDS, SERIES 2011B

Primary & Secondary Education
MN

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Alternative Facilities Bonds, Series 2011A

Aa2

Aa2

  Sale Amount

$29,410,000

  Expected Sale Date

03/17/11

  Rating Description

General Obligation Unlimited Tax (MSDE)

 

General Obligation School Bonds, Series 2011B

Aa2

Aa2

  Sale Amount

$3,000,000

  Expected Sale Date

03/17/11

  Rating Description

General Obligation Unlimited Tax (MSDE)

 

Opinion

NEW YORK, Mar 15, 2011 -- Moody's Investors Service has assigned a Aa2 underlying rating and a Aa2 enhanced (MSDE) rating with stable outlook to Hopkins Independent School District No. 270's (MN) $29.4 million General Obligation Alternative Facilities Bonds, Series 2011A and $3.0 million General Obligation School Building Bonds, Series 2011B. Concurrently, Moody's has upgraded the district's underlying rating, affecting $152.1 million in post-sale GOULT debt.

STRENGTHS:

- Strong financial management policies with conservative budgeting practices

- Financial flexibility afforded district through voter approved excess operating levy and increased capital projects levy

- Recent history of sizeable General Fund operating surpluses leading to increased General Fund reserve from -$3.9M in fiscal 2006 to $17.1M in fiscal 2010

CHALLENGES:

- Potential changes to state aid funding formula and timing of state aid payments

- Declining enrollment

- Recent declines in full valuation

SUMMARY RATINGS RATIONALE

The bonds are secured by the district's general obligation property tax pledge. Proceeds of the bonds will fund facility maintenance projects including roofing, window, and HVAC replacement at district schools. The affirmation and upgrade to Aa2 underlying rating reflects the district's emergence from Statutory Operating Debt (SOD) status and significantly improved financial operations, declining enrollment, wealthy suburban Minneapolis tax base that benefits from a significant commercial presence, and a debt burden that is expected to remain manageable despite future borrowing plans.

The enhanced Aa2 rating and stable outlook are due to the additional security provided by the State of Minnesota's School District Credit Enhancement Program (MSDE). Under the MSDE loan program, established and designed by the State of Minnesota, the bonds are secured by the state's pledge of an unlimited appropriation from its General Fund (the state's general obligation debt is rated Aa1 with a stable outlook) should the district be unable to meet debt service requirements. The appropriation mechanism allows for continuing unlimited advances from the state's General Fund to avert default for qualified school districts. District repayment is either from state aid withholding or a required special school district levy outside normal levy limits. Key program components also include third-party notification of pending deficiency. Under Minnesota statutes, if the district believes it is unable to make a timely debt service payment, it must notify the Department of Education at least 15 working days prior to the due date. The Commissioner, after consultation with the district and the paying agent, and the verification of information, will notify the Commissioner of Finance who issues a warrant and authorization for direct payment to the paying agent. Should a district fail to notify the state of an impending non-payment of debt covered by the program, the paying agent will undertake notification. The agent is to notify the State directly, three days prior to the payment date of the needed amounts. State funds equal to the request are then transferred directly to the paying agent. If the State makes a payment on behalf of a district, the district must submit a plan to the Commissioner of Education specifying the steps the district intends to take to resolve current and future funding problems.

DETAILED CREDIT DISCUSSION

SIGNIFICANTLY IMPROVED FINANCIAL OPERATIONS WITH GROWING GENERAL FUND RESERVES DESPITE DECLINING ENROLLMENT

We expect the district's recent trend of improving financial results to continue based on the strength of management, the district's willingness to make budgetary adjustments and growing General Fund reserves. The past three fiscal years are a marked departure from financial performance posted earlier in the decade. The district's General Fund balance was a negative $3.1 million (-3.7% of revenues) in fiscal 2005 and grew to a much healthier positive $16.8 million (19.8% of revenues) in fiscal 2010. After posting significant operating deficits and a negative General Fund balance in fiscal years 2004 through 2006, the state classified the district as being in Statutory Operating Debt (SOD) at the close of fiscal 2005. The negative $3.1 million fund balance was a result of planned draw downs to avoid reducing educational programs coupled with declining enrollment. In accordance with state statutes, management submitted a special operation plan to emerge from SOD by June 30, 2008.

Favorably, the district was able to emerge from SOD status under direction from a new management team at the end of fiscal 2007, a full year earlier than anticipated. Significant expenditure reductions and revenue enhancements were implemented to help the district return to healthy financial operations. The district reduced over $6 million in expenditures through fiscal 2008 including the closing of an elementary school, an increase in class sizes, elimination of 40 staff positions and reductions in transportation and administrative services. In addition to these expenditure cuts, operations improved with the support of new local revenues. District voters approved a renewal and an increase in the per pupil excess operating levy, which became effective in fiscal 2007. The levy increase generated an additional $800,000 in fiscal 2007 and is scheduled to increase an average of $40 per pupil, per year until it expires in 2016. As a result, the district has posted significant annual operating surpluses. In fiscal 2010, the district again posted a multi-million dollar operating surplus and ended fiscal 2010 with a General Fund balance of $16.8 million, or a strong 19.8% of revenues. District voters authorized a ten-year increase to the capital projects levy in November 2010. The levy had been generating $3.5 million annually and will increase to $6.5 million in fiscal 2012.

While the district's financial position has improved markedly and is expected to remain stable, it is facing additional challenges in the current fiscal year, largely related to general economic trends and budget pressures at the state level. State aid, which is largely based on enrollment, is the district's primary operating source, comprising 61.2% of the district's General Fund revenues in fiscal 2010. The district's enrollment has declined an average of 2.4% per year since 2006, negatively impacting the amount of total state revenues received by the district. Favorably, the declines in enrollment have not been as precipitous as originally budgeted. To mitigate declining enrollment, the district participates in open enrollment which nets approximately 500 students annually, stabilizing the negative trends. Declining enrollment trends are expected to continue, although the district has begun a marketing campaign and program reevaluation to attract and retain students in the district. In addition to declining enrollment, fiscal 2011 state aid payments to school districts were delayed such that 70% of a district's annual state aid is received in the current year, with the remaining 30% to be received in the subsequent fiscal year. In fiscal 2010, this proportion was 73% and 27%, and in previous fiscal years, the proportion was 90% and 10%. Many Minnesota school districts utilize cash-flow borrowing to bridge the gap between the receipt of revenues and expenditures. Reflecting the district's improved financial position, the cash flow borrowing has declined in recent years. The district borrowed a high of $16.2 million in cash-flow notes in fiscal 2006 and reduced the amount borrowed to $2.9 million in fiscal 2008. Due to higher General Fund reserves, the district did not utilize cash-flow borrowing in fiscal 2009 and 2010. The district reported that they may resort to cash-flow borrowing in fiscal 2011 due to the additional delay of state aid payments.

In response to state aid pressures and declining enrollment, officials conservatively budget revenues and expenditures. The district originally budgeted for balanced operations in fiscal 2011, but anticipates ending fiscal 2011 with a $2.8 million operating surplus, which would increase the General Fund reserve to $19.6 million, or a stronger 23.3% of revenues. The district has designated a portion of its General Fund reserve for compensated absences and expects to fully fund this liability by the end of fiscal 2011. The district's preliminary fiscal 2012 budget conservatively includes a 3% reduction in state aid and 1% decline in enrollment for the fiscal 2012 budget, thus projects a modest $583,000 deficit. The district adopted a formal General Fund policy in February 2007 stating the district will maintain an unreserved, undesignated fund balance of at least 6% of expenditures. The district has exceeded this policy beginning since fiscal 2008 and expects to retain reserves similar to current levels. Further demonstrating management's commitment to maintaining structurally balanced operations, the district also adopted a long-term strategic plan that incorporates financial and enrollment goals and program efficiency. Despite facing current state aid revenue uncertainties and declining enrollment, we expect the district's finances will remain healthy and continue to improve over the long-term as the administration and board have demonstrated in its recent history of structurally balanced operations and increasing reserve levels.

WEALTHY AND MATURE SUBURBAN MINNEAPOLIS TAX BASE WITH SIGNIFICANT COMMERCIAL PRESENCE

The district borders the western boundary of Minneapolis (GO rated Aaa/stable outlook) in Hennepin County (Aaa/stable outlook) and primarily serves the cities of Hopkins (Aa2), Golden Valley (Aaa), and Minnetonka (Aaa). While the district's $9.7 billion tax base grew at an annual average rate of 8.5% from 2002 to 2007; taxable value growth slowed to 0.2% in 2008 and declined by 2.9% in 2009, reflective of the national recession.

A diverse mix of corporations provides a degree of stability to the tax base. Approximately 42% of the district's assessed valuation is classified as commercial or industrial, as several large company headquarters are located in the district including General Mills Inc. (senior unsecured Baa1/stable outlook), Cargill Inc. (senior unsecured A2/stable outlook), and Allianz Life Insurance Co. of North America (insurance financial strength A2/stable outlook). Despite reductions in operations and headcount in other locations, operations are reportedly stable at the aforementioned top taxpayers and employers. Hennepin County's unemployment rate of 6.1% in December 2010 is lower than the state average of 6.8% and the national rate of 9.1%. Wealth levels exceed state medians, with per capita income and median family income levels at 158% and 127.1% of state, respectively.

DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE

We expect the district's debt burden will remain manageable despite moderate borrowing plans. The district's direct and overall debt burdens are slightly above average at 1.6% and 2.9%, respectively. Principal amortization is slower than average, but still within an acceptable time frame, with 58.5% of all debt retired in ten years. Minnesota school districts benefit from the state's statutory requirement to levy 105% of annual debt service due on tax-backed general obligation debt. The district maintains a ten-year facility improvement plan which is supported by an Alternative Facilities levy. The Alternative Facilities levy generates $3.5 million annually which helps the district finance capital projects. Management plans to issue debt in 2013 to address deferred maintenance needs and may also enter into a $6.5 million lease purchase agreement for a new telephone system. All of district's outstanding debt is in fixed rate mode, and the district is not a party to any swap agreements.

What could change the rating - UP

- Preservation of General Fund balance at adequate levels over the near to medium term

- Improvement of tax base valuations

- Positive enrollment growth

What could change the rating - DOWN

- Significant structural imbalance in the General Fund leading to material declines in fund balance and liquidity

- Deterioration of the district's tax base and demographic profile

- Negative multi-year enrollment trends

KEY STATISTICS

2000 Census population: 70,236

2009 Full valuation: $9.7 billion

2009 Estimated full valuation per capita: $138,412

Overall debt burden: 2.9% (1.6% direct)

Principal retirement (10 years): 58.5%

Fiscal 2010 General Fund balance: $17.1 million (19.8% of General Fund revenues)

2000 Per capita income: $36,649 (158.0% of MN average; 169.8% of US average)

2000 Median family income: $72,287 (127.1% of MN average; 144.4% of US average)

2000 Median home value: $174,900 (142.9% of MN average; 146.2% of US average)

Annual enrollment trend (past five years): -2.4%

Post-sale general obligation debt outstanding: $152.1 million

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

Soo Yun Chun
Backup Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
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 UPGRADES TO Aa2 FROM Aa3 THE UNDERLYING RATING FOR HOPKINS ISD NO. 270 (MN) AFFECTING $152.1M IN GOULT DEBT
No Related Data.
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