TEXT - Fitch affirms South Carolina's Richland Cty SD No. 2

Wed Nov 21, 2012 12:25pm EST

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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'.
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