TEXT - Fitch affirms Michigan's Lincoln Park School District bonds
Feb 5 - Fitch Ratings has affirmed Lincoln Park School District (the district), MI's underlying rating on $26.4 million unlimited tax general obligation bonds (ULTGO) at 'BBB+'. The Rating Outlook is Negative. The enhanced rating, based on the State of Michigan School Bond Loan Fund Program, is 'AA-' with a Positive Outlook. SECURITY The bonds are secured by an unlimited ad valorem tax on all taxable property within the district. SENSITIVITY/RATING DRIVERS STRESSED ECONOMY: The local economy remains stressed after 10 consecutive years of decreased employment, a contracting labor force, below average wealth levels, and regional economic concentration in automobile manufacturing. DOWNWARD TRENDING TAX BASE: Taxable value (TV) declined sharply in fiscal 2012, marking three years of significant declines. IMPROVED BUT WEAK RESERVE LEVELS: The district demonstrated positive operations in fiscal 2012 and anticipates continued improvement in fiscal 2013 following a sharp decline in fund balance levels the prior three years. However, reserve levels are still modest, and the improvement is due in part to factors that may not recur. ENROLLMENT DECLINES ABATE: The district has experienced notable enrollment growth for two consecutive years after several years of decline, resulting in additional state funding. Fitch believes it is too soon to determine whether the increased enrollment, which was the major reason for financial improvement, is sustainable. STATE AID RELIANCE: State aid makes up a large portion of district revenues, leaving the district vulnerable to future cuts by the state but less exposed to local economic conditions. DEFERRED MAINTENANCE PRESSURES: Budget balancing pressures have forced the district to limit funding for a growing list of capital projects. WHAT COULD TRIGGER A RATING ACTION LACK OF SUSTAINED IMPROVEMENTS: Failure to continue the financial improvement demonstrated in fiscal 2012 would lead Fitch to reconsider the district's rating. CREDIT PROFILE Lincoln Park School District encompasses the city of Lincoln Park, which is located in southwest Wayne County about 12 miles from Detroit. RESERVE LEVELS RECOVERING Deficit spending from fiscal 2009 through fiscal 2011 reduced the unrestricted general fund balance to a low $83,387 or 0.2% of spending. Fiscal years 2010 and 2011 recorded general fund deficits of $1.7 million (4.5% of spending) and $0.8 million (2.3%), respectively, as declining revenues outpaced limited expenditure reductions. Fiscal 2012 showed notable improvement, with a $1.7 million surplus increasing unrestricted fund balance to a still modest $1.7 million or 4.8% of spending. The improvement resulted largely from a 224 student (4.9%) increase in enrollment as the district adopted an open enrollment policy. This reversed a recent trend of steep enrollment declines. This increased enrollment more than offset a reduction in state aid per pupil, and, combined with several one-time payments from the state, yielded a $1.8 million increase in state aid. Over $1.2 million of the state aid growth will be maintained if enrollment levels are sustained and the district continues to achieve best practices goals. State aid makes up a very high 85% of general fund revenues. The district also benefitted from reduced healthcare costs from new plans and increased employee contributions that will continue beyond fiscal 2012. The district is anticipating further improvement in fiscal 2013, with projected fund balance growth of $800,000 to $900,000 after a balanced budget. In prior years management's estimates have been optimistic, but Fitch believes this surplus is achievable. The budget assumed a 75 student decrease in enrollment, but instead there has been a 59 student increase, again resulting in increases in state aid. Additionally, required contributions to the state-run pension plan were lower than budgeted due to statutory changes, saving approximately $500,000 in fiscal 2013. The district will likely face increased pension payments in the future to improve its funding level. STRESSED ECONOMY AND TAX BASE The local economy remains stressed. Lincoln Park's employment and labor force have declined annually since 2002. The unemployment rate of 8.9% in October 2012 is well below past highs and the elevated levels for the county and metropolitan area, but the reduction largely reflects a contracting labor force rather than improving employment. Wealth levels in the city are below average with per capita and median household income at 77% and 86%, respectively, of the state average. The district's tax base is not concentrated. However, TV declined by a sharp 16.4% from 2009 to 2012. Management anticipates an 8% decline in TV next year. MODERATE DEBT BURDEN, SIZABLE CAPITAL NEEDS The district's overall debt ratios are manageable at 3.3% of market value. Outstanding debt amortizes rapidly, with 84% of principal retired within 10 years. District officials stated that capital needs are extensive,estimated at approximately $100 million (compared to $26 million in debt currently outstanding). However, the district does not plan on issuing additional debt over the next few years to address those needs until the local economy stabilizes. Instead, the district will rely on very limited funding from a voter approved property tax that expires in 2014 to support capital improvement projects. The property tax generated only $800,000 in fiscal 2012, indicating that this source can fund only a small amount of total needs. Fitch believes this significant capital underfunding is a credit weakness. The district participates in the Michigan Public School Employees' Retirement System (MPSERS) for pension and other post-employment health benefits. Funding has declined in recent years to 64% as of Sept. 30, 2010 using Fitch's 7% return assumption. Contribution rates, which are determined as a percentage of payroll, have trended upwards from 20.66% to 24.46%, but a projected additional increase to 27.37% for fiscal 2013 was reduced by the state to 25.36%. The district contributed $6.7 million to MPSERS in fiscal 2012, or 12.3% of spending. Total carrying costs for MSPERS and debt service are a moderate 17.3%.