TEXT-Fitch rates Minneapolis Special School District 1 GOs 'AA'
Nov 20 - Fitch Ratings assigns an 'AA' rating to the following Minneapolis Special School District No. 1, Minnesota (the district) general obligation (GO) bonds: --$22.26 million GO school building bonds, series 2012A; --$19.41 million GO alternative facilities bonds, series 2012B; --$10.95 million GO refunding bonds, series 2012C; --$10.41 million GO refunding bonds, series 2012D; --$17.03 million GO refunding bonds, taxable series 2012E. The 'AA' rating is based on the district's participation in the Minnesota School District Credit Enhancement Program (the program). Fitch also assigns an 'AA' underlying rating to the series 2012A, 2012B, 2012C, 2012D and 2012E bonds. The bonds are expected to sell via competitive sale on or about Nov. 27. Proceeds are being used for various capital improvement projects and to refund outstanding GO bonds. In addition, Fitch affirms the underlying rating on the following district obligations: --Approximately $197 million of outstanding district GO bonds at 'AA' --Approximately $125 million of full term COPs at 'AA'; --Approximately $40 million of outstanding series 2010A and 2010B COPs at 'AA-'. The Rating Outlook is Stable. SECURITY The GO bonds are backed by a pledge of the full faith and credit and unlimited taxing power of the district. The full term COPs are secured by district lease payments that come from a separate unlimited property tax levy and are not subject to appropriation. Both the GO bonds and full term COPs are backed by the program, which provides timely debt service payments in the event the district notifies the state that it is unable to meet debt service requirements on the GO bonds or COPs. The series 2010A and 2010B COPs are a special limited obligation of the district payable solely from rental payments made by the district under the terms of the lease purchase agreement between the trustee and the district. The district has covenanted in the lease to include in its annual budget for each fiscal year moneys sufficient to pay all rental payments. While the covenant is absolute and unconditional, there is no legal obligation to actually appropriate such amounts. The lease is not subject to abatement. KEY RATING DRIVERS RATING BASED ON STATE PROGRAM: The GO bonds and full term COPs benefit from the state's school district credit enhancement program rated 'AA', reflecting the provision that the state of Minnesota (rated 'AA+' by Fitch) will make payments to the trustee for debt service upon notification of the district that funds are insufficient to make debt service payments. The program benefits from the state's annual appropriation of funds to the state department of education from the state general fund for this purpose. HEALTHY LOCAL ECONOMY: The 'AA' underlying rating on the GO bonds and full term COPs reflects the district's large and diverse economic base, coterminous with the city of Minneapolis. There is no rating distinction between the GO bonds and the full term COPs because the full term COPs are not subject to annual appropriation. STRONG RESERVE LEVELS: Historically growing reserve levels and prudent, conservative management provide strong financial flexibility. The district was successful in the passage of an increase to its local property tax levy in November 2008. Reserve levels are budgeted to decline significantly in the current fiscal year, but given the bulk of the decline is for one-time capital items there is limited concern as to ongoing reserve declines. STATE FUNDING CHALLENGES: The district is highly dependent on funding from the state. Delays in state aid payments create long-term budgetary uncertainty and reduce liquidity. APPROPRIATION COPS RATIONALE: The 'AA-' rating on the appropriation COPs is based on the district's absolute and unconditional covenant to budget and appropriate lease rental payments. WHAT COULD TRIGGER A RATING ACTION RATING LEVEL RELATIONSHIP CHANGES: The GO bonds and the full term COPs are rated based on the higher of the state program rating and the district's underlying rating, which are currently the same. The appropriation COPs are rated solely based on the district's underlying rating as they are not supported by the state program. CREDIT PROFILE DISTRICT BENEFITS FROM BROAD LOCAL ECONOMY The district is coterminous with the city of Minneapolis (rated 'AAA' by Fitch) whose diverse and broad economic base has shown resilience during the ongoing recessionary environment. The employment base benefits from the strong presence of health care, financial institutions, higher education, and government, all of which have helped moderate unemployment rates. September 2012 unemployment equaled 5.6%, well below the national rate of 7.6% and slightly above the state rate of 5.3%. While the city experienced solid tax base growth for many years, the tax base contracted in recent years. The commercial tax base primarily located in the city's central business district (CBD) is supported by a diverse group of businesses and is home to numerous corporate headquarters including Target. ENROLLMENT GROWING AFTER YEARS OF DECLINE The district serves over 33,000 students. After several years of severe enrollment declines, the district has had growth in fiscals 2012 and 2013 and projects further growth over the next ten years, though enrollment will remain well below past highs. The district is evaluating its facilities to match these trends. Capital investment by the district focuses on rehabilitation of older buildings and consolidation of facilities, including the recent opening of a state-of-the-art administration building. FUND BALANCE GROWTH HELPS DISTRICT MANAGE FUTURE CHALLENGES After a period of budget cuts and school facility closures, the district received voter approval for new operating levies in November 2008. The approximately $60 million of renewed and additional revenues are being used to fund the maintenance of class sizes, new books and technology enhancements to improve academic performance, as well as provide increased investment in math and early literacy programs. The district has had substantial fund balance growth, with consecutive net surpluses since fiscal 2004. The district's financial performance continued to remain strong in fiscal 2011, with the unrestricted general fund balance (the sum of committed, assigned and unassigned as per GASB 54) growing to $126.6 million, or 25.1% of total spending. For fiscal year 2012, the district expects another surplus of approximately $6 million. Fitch believes the district will face financial pressures in fiscal 2013 and beyond. The primary stress on the district's finance comes from the state, from which the district receives almost 60% of its revenue. The state shifted its funding formula such that 70% of a year's budgeted funding is received in the current year, with 30% deferred to the following year; previously the ratio was 90/10. In 2011, the state further exacerbated this issue by changing the ratio to 60/40. This has resulted in a significant decline in the district's liquidity levels, though it does not anticipate needing to do short-term cash flow borrowing. The state's improved financial performance recently allowed it to reverse some of this shift to approximately 64/36, and increasing enrollment will generate some growth in state per-pupil funding, but this only partially mitigates the challenges the district faces. These challenges are reflected in the district's fiscal year 2013 budget, which includes a $41 million decline in fund balance. However, much of the budgeted drawdown ($26 million) is for one-time capital projects. Consequently, Fitch views the district's budgetary challenges as manageable and does not expect material deterioration in fund balance, if any, in future years. MODERATE DEBT BURDEN The district's overall debt burden (including debt of the city, county and other overlapping governments) is moderate at $2,196 per capita and 2.5% of estimated market property value. Principal amortization is rapid with 79% maturing in 10 years, and debt service is manageable at 12% of spending. District employees participate in the state's retirement plans, namely the Teachers Retirement Fund and the Public Employees Retirement Fund, with payments set by the state. Pension contributions paid in fiscal 2011 for the plans totaled $27.9 million, or 5.5% of total general fund expenditures. The district's unfunded actuarial accrued liability for other post-employment benefits is modest at $83 million. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012); --'Fitch Downgrades Minnesota GO's to 'AA+'; Outlook Stable' (July 7, 2011). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria
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