TEXT - Fitch affirms Ohio's Mohawk Local School District GOs
Jan 29 - Fitch Ratings affirms its rating on the following Mohawk Local School District (LSD), Ohio (the district) bonds at 'AA-': --$500,000 unlimited tax general obligation (ULTGO) various purpose bonds series 2004. The Rating Outlook is Stable. SECURITY The bonds are a general obligation of the district, secured by a voter-approved debt millage that is adjusted without limitation to yield sufficient revenue to pay debt service. SENSITIVITY/RATING DRIVERS STABLE OPERATIONS; LIMITED FINANCIAL FLEXIBILITY: The district has maintained its year-end cash balances through expenditure reductions and careful cost management over the past two fiscal years. The district has little revenue-raising flexibility. STATE-AID DEPENDENT: State aid represents a majority of the district's resources and has been a stable source over the past two years. The implications of a new state funding formula are uncertain at present. VOTER SUPPORT FOR RENEWAL LEVIES: District voters have consistently supported pentennial renewal of the district's income tax levy; however, voters have rejected additional tax levies, limiting financial flexibility. AGRICULTURAL ECONOMY: The district's economy is rural and limited, dominated by agriculture. LOW DEBT & OPEB PRE-FUNDING CREDIT POSITIVES: The district's debt ratios are below average and the forward funding of other post-employment benefits (OPEB) via the state plan are credit positives. CREDIT PROFILE Mohawk Local School District is located approximately 60 miles southeast of Toledo and serves sections of Wyandot, Seneca, and Crawford counties. The district serves approximately 930 students in the current school year and is projecting stable enrollment. STABLE FINANCIAL OPERATIONS; LIMITED FINANCIAL FLEXIBILITY District financial operations have been largely stable over the past five years, with four years of operating surpluses having built up an adequate unrestricted fund balance of $945,000 or 11% of spending in fiscal 2012. The district had one operating deficit in fiscal 2011 ($173,000 or 2% of spending) which was driven by technology purchases made with grant money deemed ineligible for this purpose. The district has consistently pursued expenditure savings since 2007, reducing total full-time equivalents by 34.5 through fiscal 2013, with an approximate savings in aggregate of $2.3 million. Headcount is thin at 84 full-time and 24 part-time employees in 2013 and management anticipates the need to increase headcount by one special education teacher in fiscal 2014. Other expenditure initiatives have included adjusting purchased services for savings and achieving union concessions on health insurance plans including increasing the amount employees pay for health insurance. Fitch believes that further expenditure adjustments will be challenging for the district given the extensive actions already implemented. DISTRICT DEPENDS ON STATE FUNDING The district relies heavily on state aid, receiving approximately 52% of general fund operating revenues from the state. The Ohio legislature repealed the Evidence Based Model funding formula and the state currently has in place a temporary funding formula in anticipation of a permanent system to be devised at a later, unspecified date. A bridge funding formula provision for fiscal years 2012 and 2013 guarantees each school district operating funds equal to the amount of state operating funding (excluding state fiscal stabilization money) the district received in fiscal 2011 under the Evidence Based Model. It is uncertain how the anticipated new formula will impact financial operations of rural districts like Mohawk. VOTERS SUPPORT RENEWAL MILLAGES The district imposes a 1% income tax which is renewable every five years and is budgeted to provide approximately $1.2 million or 14% of general fund spending in fiscal 2013. Voters have shown consistent support for the renewal of the district's income tax levy since 1996; however, proposed new money property and income tax levies have been consistently voted down in recent years, limiting the district's budgetary flexibility. Fitch notes that the district is at its state-guaranteed revenue floor of 20 mills of property taxes for operations, obviating renewal risk typically associated with Ohio property tax revenue. Additionally, the district has some ability to adjust its unvoted millages administratively for capital uses or debt, which would provide some financial flexibility. The district's five-year financial forecast, which Fitch believes includes conservative and reasonable assumptions, does not show an operational deficit until fiscal 2017. Fitch notes that this deficit is driven by the renewal of the district's income tax levy in 2015, the collection of which ends in 2016 and is therefore not included for the full 2017 fiscal year. If renewed, receipt of the income tax levy would remove this projected deficit. LIMITED ECONOMY The district's economy is limited and predominantly agricultural. Most district workers are employed outside of the district. Regionally, the largest employers are Vaughn Industries LLC, an electrical contractor, (approximately 425 employees), County of Wyandot (400), and Wyandot Memorial Hospital (200). District unemployment data are unavailable. Unemployment in Wyandot County in October 2012 was 6.1%, below state (6.3%) and national (7.5%) averages. Median household income is above state (120%) and national (110%) averages. Positively, assessed value has grown almost 15% since 2008 and is $117 million for fiscal 2012, largely driven by state changes in valuation of farmland. LOW DEBT BURDEN IS CREDIT POSITIVE The district's overall debt profile is a credit positive, with low debt ratios on a per capita ($1,028) and percent-of-market value (1.9%) basis. The district's debt service cost in fiscal 2013 is $437,000 or a low 4.7% of general and debt service fund spending. Amortization is average at 49% in 10 years. STABLE PENSION AND OPEB COSTS The district participates in two state-run cost-sharing multiple-employer pension and post-retirement healthcare benefits plans. The teachers' plan is somewhat underfunded at 53% (using a 7% discount rate). The state made adjustments to retirement system plan designs in September 2012 which Fitch believes may benefit plan funding. The district is required to make contributions with rates established by the state and has annually met the contribution, although this has not always equaled the actuarially required contribution. The state is forward-funding its OPEB liability, a notable credit positive. Costs for both benefit classes are $770,000 or 8.7% of 2013 budgeted spending. The district's overall carrying costs for debt service, pension, and OPEB in 2013 do not represent a significant source of budgetary pressure at 13.4% of general and debt service fund spending.