Nov 20 - Fitch Ratings assigns an 'AA' rating to the following Minneapolis
Special School District No. 1, Minnesota (the district) general obligation (GO)
--$22.26 million GO school building bonds, series 2012A;
--$19.41 million GO alternative facilities bonds, series 2012B;
--$10.95 million GO refunding bonds, series 2012C;
--$10.41 million GO refunding bonds, series 2012D;
--$17.03 million GO refunding bonds, taxable series 2012E.
The 'AA' rating is based on the district's participation in the Minnesota School
District Credit Enhancement Program (the program).
Fitch also assigns an 'AA' underlying rating to the series 2012A, 2012B, 2012C,
2012D and 2012E bonds. The bonds are expected to sell via competitive sale on or
about Nov. 27. Proceeds are being used for various capital improvement projects
and to refund outstanding GO bonds.
In addition, Fitch affirms the underlying rating on the following district
--Approximately $197 million of outstanding district GO bonds at 'AA'
--Approximately $125 million of full term COPs at 'AA';
--Approximately $40 million of outstanding series 2010A and 2010B COPs at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are backed by a pledge of the full faith and credit and unlimited
taxing power of the district. The full term COPs are secured by district lease
payments that come from a separate unlimited property tax levy and are not
subject to appropriation. Both the GO bonds and full term COPs are backed by the
program, which provides timely debt service payments in the event the district
notifies the state that it is unable to meet debt service requirements on the GO
bonds or COPs.
The series 2010A and 2010B COPs are a special limited obligation of the district
payable solely from rental payments made by the district under the terms of the
lease purchase agreement between the trustee and the district. The district has
covenanted in the lease to include in its annual budget for each fiscal year
moneys sufficient to pay all rental payments. While the covenant is absolute and
unconditional, there is no legal obligation to actually appropriate such
amounts. The lease is not subject to abatement.
KEY RATING DRIVERS
RATING BASED ON STATE PROGRAM: The GO bonds and full term COPs benefit from the
state's school district credit enhancement program rated 'AA', reflecting the
provision that the state of Minnesota (rated 'AA+' by Fitch) will make payments
to the trustee for debt service upon notification of the district that funds are
insufficient to make debt service payments. The program benefits from the
state's annual appropriation of funds to the state department of education from
the state general fund for this purpose.
HEALTHY LOCAL ECONOMY: The 'AA' underlying rating on the GO bonds and full term
COPs reflects the district's large and diverse economic base, coterminous with
the city of Minneapolis. There is no rating distinction between the GO bonds and
the full term COPs because the full term COPs are not subject to annual
STRONG RESERVE LEVELS: Historically growing reserve levels and prudent,
conservative management provide strong financial flexibility. The district was
successful in the passage of an increase to its local property tax levy in
November 2008. Reserve levels are budgeted to decline significantly in the
current fiscal year, but given the bulk of the decline is for one-time capital
items there is limited concern as to ongoing reserve declines.
STATE FUNDING CHALLENGES: The district is highly dependent on funding from the
state. Delays in state aid payments create long-term budgetary uncertainty and
APPROPRIATION COPS RATIONALE: The 'AA-' rating on the appropriation COPs is
based on the district's absolute and unconditional covenant to budget and
appropriate lease rental payments.
WHAT COULD TRIGGER A RATING ACTION
RATING LEVEL RELATIONSHIP CHANGES: The GO bonds and the full term COPs are rated
based on the higher of the state program rating and the district's underlying
rating, which are currently the same. The appropriation COPs are rated solely
based on the district's underlying rating as they are not supported by the state
DISTRICT BENEFITS FROM BROAD LOCAL ECONOMY
The district is coterminous with the city of Minneapolis (rated 'AAA' by Fitch)
whose diverse and broad economic base has shown resilience during the ongoing
recessionary environment. The employment base benefits from the strong presence
of health care, financial institutions, higher education, and government, all of
which have helped moderate unemployment rates. September 2012 unemployment
equaled 5.6%, well below the national rate of 7.6% and slightly above the state
rate of 5.3%.
While the city experienced solid tax base growth for many years, the tax base
contracted in recent years. The commercial tax base primarily located in the
city's central business district (CBD) is supported by a diverse group of
businesses and is home to numerous corporate headquarters including Target.
ENROLLMENT GROWING AFTER YEARS OF DECLINE
The district serves over 33,000 students. After several years of severe
enrollment declines, the district has had growth in fiscals 2012 and 2013 and
projects further growth over the next ten years, though enrollment will remain
well below past highs. The district is evaluating its facilities to match these
trends. Capital investment by the district focuses on rehabilitation of older
buildings and consolidation of facilities, including the recent opening of a
state-of-the-art administration building.
FUND BALANCE GROWTH HELPS DISTRICT MANAGE FUTURE CHALLENGES
After a period of budget cuts and school facility closures, the district
received voter approval for new operating levies in November 2008. The
approximately $60 million of renewed and additional revenues are being used to
fund the maintenance of class sizes, new books and technology enhancements to
improve academic performance, as well as provide increased investment in math
and early literacy programs.
The district has had substantial fund balance growth, with consecutive net
surpluses since fiscal 2004. The district's financial performance continued to
remain strong in fiscal 2011, with the unrestricted general fund balance (the
sum of committed, assigned and unassigned as per GASB 54) growing to $126.6
million, or 25.1% of total spending. For fiscal year 2012, the district expects
another surplus of approximately $6 million.
Fitch believes the district will face financial pressures in fiscal 2013 and
beyond. The primary stress on the district's finance comes from the state, from
which the district receives almost 60% of its revenue. The state shifted its
funding formula such that 70% of a year's budgeted funding is received in the
current year, with 30% deferred to the following year; previously the ratio was
90/10. In 2011, the state further exacerbated this issue by changing the ratio
to 60/40. This has resulted in a significant decline in the district's liquidity
levels, though it does not anticipate needing to do short-term cash flow
The state's improved financial performance recently allowed it to reverse some
of this shift to approximately 64/36, and increasing enrollment will generate
some growth in state per-pupil funding, but this only partially mitigates the
challenges the district faces. These challenges are reflected in the district's
fiscal year 2013 budget, which includes a $41 million decline in fund balance.
However, much of the budgeted drawdown ($26 million) is for one-time capital
projects. Consequently, Fitch views the district's budgetary challenges as
manageable and does not expect material deterioration in fund balance, if any,
in future years.
MODERATE DEBT BURDEN
The district's overall debt burden (including debt of the city, county and other
overlapping governments) is moderate at $2,196 per capita and 2.5% of estimated
market property value. Principal amortization is rapid with 79% maturing in 10
years, and debt service is manageable at 12% of spending.
District employees participate in the state's retirement plans, namely the
Teachers Retirement Fund and the Public Employees Retirement Fund, with payments
set by the state. Pension contributions paid in fiscal 2011 for the plans
totaled $27.9 million, or 5.5% of total general fund expenditures. The
district's unfunded actuarial accrued liability for other post-employment
benefits is modest at $83 million.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index,
IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Fitch Downgrades Minnesota GO's to 'AA+'; Outlook Stable' (July 7, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria