Jan 31 - Fitch Ratings takes the following rating action on Allen East Local School District, Ohio (the district): --$1.08 million ULTGO bonds, series 2004, affirmed at 'AA-'; --$5.87 million ULTGO bonds, series 2007, affirmed at 'AA-'. 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 HEALTHY RESERVE LEVELS: Prudent cost management has resulted in several years of positive operations and increasing and strong reserve levels. DEPENDENT REVENUE BASE; DEMONSTRATED VOTER SUPPORT: The district relies heavily on state aid which has been relatively stable. Credit implications associated with impending changes to the state school funding formula are uncertain at this time. The bulk of remaining revenues are supported by continuous property tax levies and Fitch views positively the strong voter support for levy renewals. LIMITED RURAL ECONOMY: The district's economy is predominantly agricultural but the surrounding area is more diverse in nature offering employment opportunities. MANAGEABLE LONG-TERM LIABILITIES: Below average carrying costs and modest debt burden are somewhat offset by below average amortization. CREDIT PROFILE Allen East Local School District serves a rural area in Allen County, located in west central Ohio, 80 miles from Toledo and 65 miles from Dayton. The district's current enrollment and population of approximately 1,147 and 5,840, respectively, has remained fairly stable since 2000. FUTURE STATE FUNDING UNCERTAIN District finances rely heavily on state funding, comprising approximately 61% of operating revenues. Although state funding was guaranteed at 2011 levels for 2012 and 2013 under a bridge formula, future funding is uncertain as the governor plans to implement a new school funding formula in 2014. STRONG VOTER SUPPORT FOR RENEWAL LEVIES Property tax accounts for 28% of total operating revenues with the majority of levies not requiring voter renewal. Historically, voter support for renewal levies has been very strong. In November 2012, voters renewed by 60% a five-year 3.1 mill emergency levy that generates approximately $330,000 (4% of general fund revenues) on an annual basis. This levy has been successfully renewed since 1994. The other renewal levy, which provides $160,000 (1.9%) annually, expires in 2014 and has been successfully renewed since 1989. Given the district's conservative budgeting practices and strong reserve level no new tax levies have been needed in the past several years and none are being contemplated at this time. STABLE FINANCIAL OPERATIONS LEADS TO HEALTHY RESERVE LEVELS The district has a strong history of keeping within budget and has had only one year of deficit spending, which was planned, in the past 15 years. The district uses a cash basis of accounting, which is not unusual for small Ohio school districts. For the fiscal year-end June 30, 2012, the district recorded a general fund operating surplus after transfers of $260,000 or 3.2% of general fund spending. The unrestricted fund balance totaled $3.9 million or a very healthy 48.4% of expenditures. Reserves have not been below 38% since at least 2008. Year-to-date results for fiscal 2013 are tracking to budget. Additionally, the district has flexibility to reduce expenditures. To date, there have been no staff reductions with costs controlled through attrition, consolidation, and favorable contract terms. The October 2012 five-year (2013-2017) forecast, which Fitch views as conservative and does not include renewal levies, projects balanced operations through 2013 with a small $75,000 deficit in 2014 increasing to a $747,175 deficit in 2017. Cash balances remain positive through the projected period totaling $2.2 million in fiscal year 2017 or 24% of projected expenditures. The successful renewal in November 2012 of an expiring levy eliminates (2014 and 2015) and greatly reduces (in 2016 and 2017) projected deficits. Fitch believes the district will continue to report balanced operations and stable to increased reserve levels given strong budgetary controls and some financial flexibility. While Fitch remains concerned regarding future state funding, the district is well positioned to absorb some potential financial strain if it proves unfavorable. LIMITED DISTRICT ECONOMY; STABLE AND DIVERSE SURROUNDING AREA The district economy is predominantly agricultural. The surrounding area is more diverse with two hospitals, Proctor and Gamble and Ford Motor among the major employers. Ford maintained employment levels through the recession and Proctor and Gamble continues to add employees. County unemployment rates have historically been above state and national levels but are showing positive trends. As of October 2012, the county recorded an unemployment rate of 6.6%, slightly above the 6.3% state rate but below the7.5% national rate and down from 9% a year earlier. County employment increased by 3.6% over the same time period, outperforming both the state and national growth rates. Median household income is above state (105%) and slightly below (96%) national averages. Positively, assessed value has grown 15% over the last six years due primarily to higher revaluation of agricultural land. MANAGEABLE LONG-TERM LIABILITIES The district's overall debt levels are mixed with below average debt per capita of $1,308 and moderate debt to full value of 2.4%. Levels should remain stable as no future borrowing is planned. Debt retirement is back-loaded, in part due to outstanding capital appreciation bonds, resulting in well below average amortization rates (28% retired in 10 years) but low debt service costs (5.6% of total 2012 government fund expenditures). The district contributes to the School Employees Retirement System and the State Teachers Retirement System, both multiple-employer defined pension plans. The district is required to make contributions in accordance with rates established by the state and has annually met the contribution, although this has not always equaled the actuarially required contribution (ARC). Total carrying costs for debt service, pension payment (which moderately underfunds the ARC) and other post-employment benefits are below-average and manageable at 12.7% of spending.