TEXT - Fitch revises Maine Muni Bond Bank rating outlook
Dec 11 - Fitch Ratings takes the following rating action on Maine Municipal Bond Bank's (the bond bank) qualified school construction bonds (QSCBs): --$8.06 million Taxable Direct Payment QSCBs (Maine School Administrative District No. 61), series 2011, affirmed at 'AA-'; The Rating Outlook is revised to Negative from Stable. SECURITY The bond bank pledges its full faith and credit for payment of debt service on the bonds. The bond bank has entered into a loan agreement with the Maine School Administrative District No. 61 (the district) such that the district will make annual payments to the bond bank in amounts equal to the bond bank debt service. Payments to district are derived from its four member towns, whose payment obligations for debt service are several but not joint general obligations of each town. Any missed payment under the loan agreement between the district and the bond bank may trigger the interception of available state aid pursuant to state statute. KEY RATING DRIVERS RATING RELIES ON STATE CREDIT QUALITY: The change in Rating Outlook reflects the Negative Outlook on the state's 'AA+' general obligation (GO) rating. STATE AID INTERCEPT PROVISION: The state has a statutory obligation to intercept school district aid in the event of a missed payment under the loan agreement. Fitch believes there is sufficient time to cure a default between loan payments and debt service payments. However, the lack of detailed mechanisms limits the value of the credit enhancement provided by the intercept to two notches below the state's general GO rating. SATISFACTORY COVERAGE: Interceptable state aid to the district provides coverage of maximum annual debt service (MADS) of approximately 1.38 times per the fiscal 2013 budget (net of federal and state subsidies). STABLE MEMBER TOWNS: The member towns have sound financial positions and state mandates compel their funding of the district's budget. However, given the towns' small and limited economies their credit quality does not enhance the rating above the level afforded by the state aid intercept. LIMITED FINANCIAL FLEXIBILITY: The district is constrained due to the inability to levy taxes and Maine statutes that limit the extent of the district's reserves. WHAT COULD TRIGGER A RATING ACTION CHANGE IN MAINE'S GO RATING: A change in the state's GO rating or Outlook would likely result in a comparable change to these bonds given the limitations of the member towns' credit quality. CHANGE IN STATE LAW: Changes in statutes, regulations, or administrative procedures governing the state aid intercept mechanism could trigger a rating action. CREDIT PROFILE STABLE, LIMITED LOCAL ECONOMY The district is located 35 miles outside of Portland in the lake region of southwestern Maine. The district's member towns are Casco, Bridgton, Naples, and Sebago, in a residential area with a combined estimated population of 14,500. The local economy is based mainly in tourism; however, the health care sector (Bridgton Hospital) lends some diversity to the narrow economy. Wealth levels are mixed for the member towns but were average when compared to the state. Unemployment data for the member towns was not available; however Cumberland County (in which all towns are located) experienced a rate of 5.6% in September 2012 which was well below both the state and national rates. DISTRICT FUNDING District funding responsibility is allocated amongst the member towns proportionately based on their property valuation which combined totaled $2.7 billion in fiscal 2012. Due to the residential nature of the district there is low taxpayer concentration and tax collections are moderate to strong. Assessed values declined marginally in fiscal 2011 and 2012 after a 4 year period of sizeable growth and going forward AV is expected to be stable based on IHS Global Insights reports of stabilization of home prices within the Portland area. Each of the member towns has sound financial operations with solid reserve fund levels, very low debt ratios and moderate taxpayer collection rates. STATE INTERCEPT MECHANISM Pursuant to Maine Revised Statutes, Chapter 30-A, Part 2, Subpart 9, Chapter 225, Subchapter 3, Section 6014 (governmental unit intercept), upon written notice to the state treasurer from the bond bank that a governmental unit has not paid or is in default on any obligation then held or owned by the bond bank, the state treasurer will withhold any funds or money due or payable to the governmental unit until the amounts due to the bond bank is satisfied or arrangements satisfactory to the bond bank have been reached. Payments under the loan agreements are due to the bond bank 30 days prior to the interest payment due dates on the bonds, allowing time to cure a loan payment default prior to the debt service payment date. The lack of detailed intercept mechanisms includes the optional nature of the bond bank's notice to the state treasurer and the bond bank's ability to forgo the intercept if alternative arrangements are satisfactory. In Fitch's opinion, the non-mandatory intercept mechanisms create potential uncertainty and additional risk. Only debt issued through the bond bank benefits from the state aid intercept provision, which has never been employed. STABLE DISTRICT OPERATIONS The district maintains sound financial operations and derives 89% of its general fund revenues from the assessments charged to its member towns. Remaining funding comes from state education aid. Past declines in revenues due to significant state aid cuts have stabilized and state aid is expected to increase in 2013 due to a change in formula. Fiscal 2012 unrestricted general fund balance was $1.09 million or 4% of spending. State statute limits the district's fund balance to 3% of expenses and any excess is required to be carried forward to meet the district's needs in the next year or over a period not to exceed three years. The marginal fund balance provides limited liquidity, but the district does have the ability to adjust expenses mid-year if necessary to meet a shortfall in revenues. The school board, comprised of individuals from each of the member towns, is responsible for preparing the annual school budget and such budget is subject to approval by the district voters. According to the district, it has typically passed its budget on the first try. There is no indication that any member town has ever missed a payment of its full assessment CARRYING COSTS ARE MANAGEABLE The district's overall debt ratios, including the bonds, are low with debt per capita at $1,654 and 0.65% of taxable value. Amortization rates are above-average with 75% of debt maturing in 10 years. Debt service in 2012 was a manageable 6% of expenditures. The district's pension liabilities are limited since a majority of its employees participate in the Maine's Public Employees Retirement System for which the state currently makes contributions on behalf of the district. No retirement benefits are offered outside of the state pension plan. BOND BANK GO PLEDGE The 2011 bonds were the first issuance of bonds under the bond bank's General Bond Resolution of Taxable Direct Payment Qualified School Construction Bonds. Legal provisions are sound, including district payment of gross debt service, irrespective of receipt by the bond bank of the federal interest subsidy payments. The bond bank, an instrumentality of the state, has pledged its full faith and credit towards payment of the bonds and currently maintains $13 million in discretionary funds (not pledged to bondholders) which may be used at the bond bank's discretion for any purposes including support of any of the bond bank's other outstanding bond resolutions. Fitch puts limited value on the bond bank's GO pledge since it has no taxing power and no dedicated reserves.
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