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Rating Action:

Moody's downgrades to Baa1 from A1 the underlying rating on Duluth ISD No. 709's (MN) outstanding GO debt and full-term COPs in conjunction with new sales; outlook remains negative

15 Jun 2012

Assigns Baa1 and enhanced Aa2 ratings $12.8 million Full-term Capital Appreciation Certificates of Participation, Series 2012A and Baa2 rating to $6.3 million Certificates of Participation (subject to appropriation), Series 2012B

New York, June 15, 2012 -- NOTE: On June 18, 2012, the press release was revised as follows: Corrected sub-headline: "Assigns Baa1 and enhanced Aa2 ratings $12.8 million Full-term Capital Appreciation Certificates of Participation, Series 2012A and Baa2 rating to $6.3 million Certificates of Participation (subject to appropriation), Series 2012B"

Moody's Rating

Issue: Full Term Capital Appreciation Certificates of Participation, Series 2012A; Rating: Baa1; Sale Amount: $12,801,327; Expected Sale Date: 6/27/12; Rating Description: Lease Rental: Appropriation

Issue: Certificates of Participation, Series 2012B; Rating: Baa2; Sale Amount: $6,340,000; Expected Sale Date: 6/27/12; Rating Description: Lease Rental: Appropriation

Opinion

Moody's Investors Service has downgraded to Baa1 from A1 the underlying rating on Duluth Independent School District No. 709's (MN) outstanding general obligation and parity rated full-term certificates of participation (COPs) debt. A Baa1 underlying rating and enhanced Aa2 rating with negative outlook has been assigned to the $12.8 million full-term Capital Appreciation Certificates of Participation, Series 2012A. The Series 2012A certificates are rated on parity due to the essential nature of the project financed and dedicated levy available for debt service. Moody's has also downgraded the rating on the district's outstanding COPs subject to annual appropriation to Baa2 from A2. The Baa2 rating applies to the new sale, $6.3 million Certificates of Participation, Series 2012B. The Baa2 rating on is notched once off the general obligation rating due to the risk of annual non-appropriation. Post-sale, the district will have $63.7 million in general obligation bonds, $196.6 million in full-term COPs, and $43.3 million in COPs subject to annual appropriation outstanding. The outlook for all securities remains negative.

SUMMARY RATINGS RATIONALE

Both the Series 2012A and 2012B certificates will finance various improvements to the district's Myers-Wilkins and Congdon Park elementary schools. The Series 2012A certificates are a special obligation of the district, payable from a dedicated levy. The district's full-term COPs, including the Series 2012A currently being issued, 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. Debt service on the 2012A bonds are additionally secured by the State of Minnesota's School District Credit Enhancement (MSDE) program.

The Series 2012B certificates are a special obligation of the district, with debt service payable from all legally available funds of the district. Debt service on the Series 2012B certificates, and outstanding Series 2009B and 2010D COPs, are rated one-notch below the district's underlying general obligation rating due to the risk of annual non-appropriation and that the securities do not benefit from a dedicated levy. The lease ratings also incorporate the general obligation characteristics of the district.

The downgrade to the district's general obligation rating to Baa1 from A1 reflects declining enrollment trends; depletion of General Fund reserves following seven consecutive years of operating deficits; and weakly structured high debt levels with additional unplanned borrowings that deviated from the district's original 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 negative outlook reflects the very narrow liquidity of General Fund reserves and reliance on one-time revenues that have not been fully realized, and excess operating levy that expires in fiscal 2014 that will require voter approval for renewal, further pressuring financial operations. Should land sale proceeds continue to underperform, the district is likely to end with a deficit General Fund balance in fiscal 2013. Furthermore, the district's deteriorated liquidity pressures the district's ability to appropriate for debt service.

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

CHALLENGES

-Declining enrollment trends over the past couple of decades factoring unfavorably in state funding formula

-Depletion of General Fund reserves due to consecutive years of 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 with weak structure

-Significant delays in state aid payments in recent years pressuring ability to cash-flow

Outlook:

The outlook on Duluth I.S.D. No. 709 is negative, representing our belief that the district's already depleted reserves and liquidity may continue to deteriorate. The outlook further reflects the risk the district financial operations may reach a deficit position by fiscal 2013 given generous budgeting assumptions.

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 and/or cash flow borrowing to cover debt service payments

What could change the rating down:

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

-Continued operating deficits and deterioration of General Fund reserves

- Insufficient tax revenues or land sale proceeds to cover debt service payments and operations

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Moody's downgrades to Baa1 from A1 the underlying rating on Duluth ISD No. 709's (MN) outstanding GO debt and full-term COPs in conjunction with new sales; outlook remains negative

No Related Data.
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