TEXT - Fitch affirms South Carolina's Richland Cty SD No. 2
Nov 21 - Fitch Ratings affirms the following rating of Richland County School District No. 2, South Carolina's (the district) general obligation (GO) refunding bonds: --$29.2 million, series 2012B at 'AA+', based on the South Carolina School District Credit Enhancement program. Fitch also affirms the following ratings on the district's outstanding GO debt: --$471 million at an 'AA' underlying rating (including the series 2012 B bonds); --$2 million, series 2010B (tax-exempt bonds), at 'F1+'. The Rating Outlook is Stable. SECURITY The bonds are secured by an irrevocable pledge of the district's full faith and credit and unlimited taxing authority. The bonds are enhanced by South Carolina's obligation to intercept state school aid payments to make timely debt service payments on the bonds, in accordance with Article X of the state's Constitution. KEY RATING DRIVERS STATE CREDIT ENHANCEMENT: The 'AA+' rating is based on protections provided by the South Carolina School Credit Enhancement Program, which reflects the strength of the state's statutory provisions requiring the State Treasurer to forward general fund moneys to holders of school district bonds which would otherwise default. The program provides sound coverage of approximately 2.1 times (x) maximum annual debt service (MADS). STRONG FINANCIAL PROFILE: The underlying rating of 'AA' is based on the district's history of conservative financial management and strong budgetary controls that have consistently resulted in surplus operating results and sound reserve levels. ABOVE-AVERAGE DEBT BURDEN: Overall debt levels are above average and expected to remain so given continued enrollment growth and the demand for increased debt to fund school construction. However, rapid amortization of outstanding principal helps to offset this concern. STABLE REGIONAL ECONOMY: The local economy is anchored by the state capital in Columbia and Fort Jackson, as well as a significant healthcare and higher education presence. Economic indicators surpass those of the state. SHORT-TERM RATING: The 'F1+' rating reflects the general creditworthiness of the district and short-term maturity (May 1, 2013) of the series 2010B bonds. CREDIT PROFILE SUPERIOR FINANCIAL MANAGEMENT The district has achieved surplus operating results every fiscal year since 2003 as a result of its strong fiscal stewardship, which is the hallmark of this credit. Conservative budgetary controls have enabled the district to remain structurally balanced despite changing state aid levels and budgetary pressure from rapid enrollment growth. Expenditure cuts to date have been moderate, and Fitch believes the district has adequate flexibility to cut spending further. Reserves at the end of fiscal 2012 marked an 11-year high, with an unrestricted fund balance of $30.1 million or a healthy 15.1% of spending, which is just above the district's unassigned fund balance policy of 7%-15% of budgeted expenditures. Growth in state aid due to conservative enrollment budgeting led to fiscal 2012's modest operating surplus (after transfers) of $1.6 million (0.8% of spending). IMPACT OF ACT 388 The school district's ability to increase local property tax revenues, which account for approximately 35% to 40% of general fund revenues, is limited as a result of the passage of South Carolina's Property Tax Relief Act 338 in 2006. The Richland County Council, which has final approval of the district's budget, approved the maximum increase in the millage rate permissible under Act 388 for fiscal 2011, an increase of 8 mills or 3.2%, as well as an increase of 11 mills for fiscal 2012. Management anticipates similar support from the county council in the future. Act 388 further restricts growth in the valuation of real property upon reassessment, and imposes a new homestead exemption equal to 100% of the fair market value of owner-occupied residential property for ad valorem taxes levied for school operating purposes. The state imposed a 1% sales tax to replace revenue that would have been collected on owner-occupied residential property. Nonetheless, Fitch notes that reduced financial margins may be realized if state aid does not keep pace with the district's growing needs. FISCAL 2013 BUDGET The district's fiscal 2013 budget is 5.9% higher than fiscal 2012's. This increase is driven by the commencement of operations at a new high school and a state-mandated 2% pay increase for district employees. The budget includes a millage rate increase of 9.6 mills, which is below the 13 mill Act 388 cap. The district's tax burden, which will total 349.4 mills per $1000 assessed value (AV), is high for the region. However, the district has a history of strong taxpayer support, and the tax burden has not inhibited growth or relocation to the district. ELEVATED DEBT LEVELS OFFSET BY RAPID PRINCIPAL AMORTIZATION Overall net debt of the district equaled a moderate $4,314 per capita and an above average 6% of market value (MV). Debt service expenditures in fiscal 2012 represented 19.9% of debt service and general fund spending, which Fitch considers high. This risk is moderated by an aggressive debt amortization schedule, with nearly 80% of outstanding and proposed principal scheduled to mature within 10 years. The district does not have exposure to variable rate debt, short-term debt, or derivative products. The school board recently adopted its 10-year facilities plan which includes the construction of four new schools and a new district office, as well as renovations and upgrades to existing facilities. The total cost of the plan is $260.9 million (a moderate 3% of MV) and was revised downward in 2011 to compensate for a lower student enrollment growth rate. Fitch will monitor the district's ability to accurately gauge its capital needs and avoid over-building. The district funds school construction with GO issuances authorized via referenda and funds remaining capital expenses with non-referendum authorized GO debt. This spring, the district plans to finance the construction of two elementary schools through a $52 million issuance, which will exhaust the $306 million GO bond referendum approved by voters in 2008. Fitch includes this anticipated issuance in its debt ratio analysis. ABOVE-AVERAGE FIXED COST BURDEN The district contributed $19.5 million and $6.4 million toward state pension and other post-employment benefit (OPEB) plans, respectively in fiscal 2012 for a moderate 12.9% of spending. The district is legally required to make annual contributions to the state pension plans, which is a weak 65.5% funded, based on an actuarially determined rate and to make annual contributions to the state OPEB plan based on a pay-as-you-go amount. Fitch notes that the relatively large fixed debt and employee benefit costs, which accounted for approximately 30% of general fund and debt service fund spending in fiscal 2012, may somewhat limit the district's financial flexibility. SOUND ECONOMY ROOTED IN GOVERNMENT The district is located in northeastern Richland County, immediately northeast of the capital city of Columbia. Given its proximity to the state capital, a significant portion of the county's workforce is employed by the state government. Long-term workforce stability is additionally provided by proximity to Fort Jackson, the U.S. Army's largest training installation, and the main campus of the University of South Carolina. The county is also a regional health center with four primary acute care hospitals, which offer a broad range of medical services and include an advanced cardiac care facility operated by Palmetto Health and a Veteran's Administration facility. Economic indicators for the county compare positively to those of the state. The county's unemployment rate (8.7% as of September 2012) is slightly below the nation's and represents year-over-year improvement (9.9% as of September 2011) due to employment growth. Per capita income levels are above those of the state and slightly below those of the nation. The county's tax base has proven relatively resilient to recessionary pressures. Taxable value increased marginally in fiscal 2012 (1.2%) and has grown by $1 billion or 25% since fiscal 2007. For the first quarter of calendar 2012, housing trends for the metropolitan area are favorable. County-wide foreclosure rates are moderately low relative to those of the state. SUSTAINED ENROLLMENT GROWTH With a 2012 enrollment of 25,988 students, the district has averaged annual enrollment gains of 2.2% since 2006. Management attributes the growth to the district's solid academic reputation, its prime location at the confluence of several interstate highways, and balance of commercial and residential developments. From 2000 to 2010, the district averaged annual growth of approximately 1,000 students a year. Though enrollment growth has since slowed, district management projects growth of 600 students in fiscal 2013. STATE CREDIT ENHANCEMENT Under Article X, Section 15, Paragraph 4 of the state Constitution, the county treasurer must notify the State Treasurer 15 days prior to the due date of any payment of principal or interest on school district general obligation bonds if the county treasurer does not have the deposit sum required to make the payment. If on the third business day prior to the due date, the country treasurer still does not have the funds on hand to effect such payments, the State Treasurer is directed to withhold moneys from state appropriations and effect payment of principal or of interest on such bonds from such appropriations. For more information, please see Fitch's press release 'Fitch Affirms South Carolina's School District Credit Enhancement Program at 'AA+'; Outlook Stable' dated Aug. 20, 2010, available at 'www.fitchratings.com'.