News Column

Fitch Rates Salina USD No. 305, (KS) GO Bonds 'AA'; Outlook Stable

May 15, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns the following rating for Salina Unified School District No. 305, Kansas' (the district) general obligation (GO) unlimited tax bonds:

--$117.3 million GO refunding and improvement bonds, series 2014 'AA'.

The bonds are scheduled for negotiated sale during the week of May 19. Proceeds from the sale of the bonds will be used to fund significant capital improvements at district facilities and refund a portion of the district's outstanding ULT debt for debt service savings.

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district and are secured by its unlimited ad valorem tax pledge.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial profile is a positive credit factor characterized by large reserve levels, and a consistent record of conservative budgeting practices.

STABLE AND DIVERSE ECONOMY: The regional economy is anchored in diverse manufacturing, retail and agriculture which continue to demonstrate low unemployment. Slightly below average income levels are growing faster than state and national averages.

STABLE ENROLLMENT, HIGH RELIANCE ON STATE FUNDING: District population is expected to continue to grow at a modest, manageable rate, while enrollment appears to have stabilized after mild declines. Enrollment stability and very modest growth would temper budgetary risks posed by high reliance on enrollment-based state funding for operations.

ELEVATED DEBT BURDEN: The district's overall debt levels are high, although this sizable new money issuance is expected to meet the district's capital needs for the next decade and beyond. The district has no pension or post-employment benefit obligations. Fitch believes the debt load is manageable due to the district's moderate carrying costs and favorable economic prospects.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the district's healthy financial profile. Maintenance of solid reserves and economic stability are key credit consideration.

CREDIT PROFILE

The district, while fairly small, is the tenth largest school district in the state. K-12 enrollment of 7,305 for 2014 is down from a peak of 7,431 in 2010. The district is located in central Kansas, approximately 175 miles west of Kansas City and 90 miles north of Wichita and encompasses 93 square miles including the City of Salina. The area benefits from excellent interstate access and has developed as a regional trade center with manufacturing and distribution. District population growth has been positive over the past decade at just under 50,000 in 2013 growing at a rate slightly slower than state and national averages.

SOLID FINANCIAL RESERVES MAINTAINED

Annual positive general fund operating margins have resulted in the accumulation of solid overall reserves despite the challenges posed by state imposed limitations which preclude the district from carrying reserves within the general fund. Conservative budgeting of enrollment coupled with close expenditure management has enabled the district to maintain surplus general fund operating margins. Annual year-end surpluses have been transferred to various other funds including contingency, capital outlay and special education.

The collective amount of these funds has consistently been well over 10% and provides significant liquidity and cushion against potential state funding changes. Cash balances at July 1, 2013 in the contingency and special education reserves totaled $8.1 million or 21% of the district's $43.6 million budget. The sizable reserves somewhat mitigate the district's weak financial reporting method and high dependence on state funding, over 70% for 2013. The district reports on a modified accrual, regulatory basis of accounting which is not compliant with GASB standards. Fitch expects stable enrollment trends and conservative budgeting will enable the district to maintain continued sizable reserves.

The district levies local taxes at 30% of general fund expenditures for its annual local option budget (the maximum without voter approval) and six (of eight maximum) mills for capital outlay. Instructional salaries and benefits are the primary expenditures which the district has been able to successfully manage given modest recent enrollment declines. The district is self-insured for healthcare and consistently maintains an actuarially determined reserve of around $10 million.

MODERATE DEBT BURDEN

The district's overall debt profile is mixed but overall moderate. Net debt is high at 7.2% of fiscal 2014 market value and $4,449 per capita. Amortization is about average at 44% in ten years, no expected additional debt. Carrying charges are low at 7% in 2015. These amounts do not include any state funding of district debt.

In April 2014 district voters strongly approved $110 million of new GO debt to fund significant district facility renovations including $75 million for the two high schools, additional classrooms for full-day kindergarten programs, safety and security and other improvements. Under state school funding formula, the district expects state aid to cover approximately 29% of annual debt service. The state funding amounts are subject to legislative change but existing funding rates for outstanding debt have been historically maintained.

These renovations are expected to satisfy the district's capital needs for the next decade and beyond which, coupled with a lack of post-employment benefits obligations, will keep district carrying costs low. District pension liabilities are limited to its participation in the state pension plan administered by the Kansas Public Employees Retirement System (KPRS). The state currently makes all employer contributions on behalf of the district. However, given KPERS plan funding rate and ratios remain low, district budgets are susceptible to future funding changes by the state.

STABLE ENROLLMENT AND TAX BASE

The Salina regional economy proved very resilient during the recent economic downturn largely based on its diverse manufacturing and distribution oriented economy. Population and enrollment trends have been overall flat over the past decade and are expected to be very modestly positive.

The district's tax base has been flat since 2008 with improved building permit activity in 2013 and 2014 expected to generate modest growth. The tax base is a moderate $62,000 per capita, and grew 0.2% over the previous year. Leading taxpayers are diverse with the top ten comprising under 10% of taxable value and include several utilities, a large food preparation/distribution facility, a hospital and several retail stores. Leading local employers include manufacturing, healthcare and retail firms.

City and county unemployment rates remained well below state and national averages through the recent downturn with city at 5.3% in February 2014, below the state (5.5%) and US (6.7%). Wealth and income levels (per capita money income) of the district population are notably lower than the state (at 90%) and nation (86%) but have been growing at a rate twice as fast as both.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830343

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Bernhard Fischer, +1-212-908-9167

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Stephen Friday, +1-212-908-0384

Associate Director

or

Committee Chairperson

Amy Laskey, +1-212-908-0568

Managing Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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