News Column

Fitch Affirms South Point Local School District, OH ULTGO Underlying Rating at 'AA-'; Outlook Stable

June 6, 2014

NEW DELHI & SYDNEY & SINGAPORE--(BUSINESS WIRE)-- Fitch Ratings has taken the following actions on South Point Local School District, OH's (the district) unlimited tax general obligation (ULTGO) bonds:

--Approximately $7.7 million ULTGO bonds, series 2012 underlying ratings affirmed at 'AA-'.

The Rating Outlook is Stable.

The series 2012 bonds and series 2004 bonds (no underlying Fitch rating) also carry an 'AA' program rating based on enhancement provided by the Ohio School District Credit Enhancement Program. The Rating Outlook for the Ohio School District Credit Enhancement Program is Stable.

SECURITY

The bonds are secured by the levy of an ad valorem tax on all taxable property within the district without limitation as to rate or amount.

The Ohio School District Credit Enhancement Program requires the Ohio Department of Education (ODE) to forward state foundation program payments to the bond registrar if, prior to the bond payment date, the district has not transmitted funds sufficient to cover required debt service payments.

KEY RATING DRIVERS

STABLE AND DIVERSE MSA: As part of a stable and diverse MSA that incorporates parts of Ohio, Kentucky and West Virginia, district residents have numerous employment opportunities in the higher education, healthcare, retail and manufacturing sectors.

DEPENDENT REVENUE STRUCTURE: The district's revenue structure is highly reliant on sources outside management's direct control, including state aid and voter approval for new property tax levies.

CONTINUING LEVIES PROVIDE STABILITY: Property taxes are derived from non-expiring operating levies, providing stability and limiting potential volatility to some degree.

HEALTHY RESERVE LEVELS: Reserve balances are healthy, the result of conservative budgeting and cost controls.

MANAGEABLE DEBT BUDEN: Overall debt burden should remain modest given no future debt plans and a permanent improvement levy which provides funds to maintain the district's facilities.

RATING SENSITIVITIES

VOTER APPROVAL OF FUTURE TAX LEVIES: Voter approval for new tax levies in the medium term will be necessary for balanced operations and maintenance of reserve levels.

CREDIT PROFILE

The district is located in Southeast Ohio in rural Lawrence County and is part of the Huntington, West Virginia - Ashland, Kentucky - Ironton, Ohio MSA. Encompassing 31 square miles and located 125 miles south of Columbus and 10 miles northeast of Ashland, Kentucky, the district sits on the border of Ohio, Kentucky and West Virginia.

District enrollment has generally been stable and currently totals approximately 1,860. Management is projecting continued stable enrollment over the next few years.

LIMITED DISTRICT ECONOMY; STABLE AND DIVERSE MSA

The district has a limited economy, but the MSA economy is diverse and offers employment opportunities in higher education (a dozen institutions are within commuting distance), healthcare, retail and manufacturing. The largest employers in the MSA include St. Mary's Medical Center, Cabell Huntington Hospital, Marshall University and CSX Railroad.

The area economy has historically been strong with below average unemployment rates. The unemployment rates as of April 2014 for Lawrence County and the MSA were 5.6% and 5.9%, respectively, which were slightly above the state rate (5.3%) and comparable to the 5.9% U.S. rate. Year-over-year (April 2013 to April 2014) employment growth in the county and MSA have been strong at 1.8% and 1.6%, respectively, outpacing both state (1%) and national (1.4%) growth rates. Wealth levels in the district are below average with 2011 per capita income at 74% and 68% of the state and national norms, respectively.

HIGHLY DEPENDENT ON STATE FUNDING

The district relies heavily on state aid, receiving approximately 80% of general fund operating revenues from the state. The district's state funding has been fairly stable over the last few years and is not expected to decline given its small, rural, and 'property poor' nature.

CONTINUING LEVIES SUPPORT FINANCIAL STABILITY

Property taxes comprise approximately 19.5% of general fund revenues. These revenues are derived from continuous levies, which Fitch views positively as they provide a measure of stability, as opposed to districts that have expiring levies which are vulnerable to electoral cycles. The district has not had an operating levy on the ballot for several years and is not considering one over the next few years, although by 2017-2018 a new voter approved tax levy will likely be needed to rebuild reserves to adequate levels. Total property tax collections are strong, averaging 102% over the last three years. The tax base is diverse with the top 10 taxpayers comprising 12% of fiscal 2013 taxable assessed value. Additionally, the district has the ability to implement, with voter approval, an income tax of up to 2%, something management is not contemplating.

STRONG FISCAL MANAGEMENT PRODUCES HEALTHY RESERVE LEVELS

The district's tenured management team practices conservative budgeting and has shown a willingness and ability to control expenses. For fiscal 2013 (year-end June 30), the district reported a general fund operating surplus after transfers of $432,000, the third consecutive surplus. The district reported a fiscal 2013 unrestricted general fund balance of $6.6 million or a healthy 42.4% of spending.

FIVE-YEAR FORECAST PROJECTS OPERATING DEFICITS STARTING IN 2014

The May 2014 five-year cash forecast projects operating deficits through 2018. A deficit of roughly $525,000 (3.1% of expenditures) is projected in fiscal 2014, increasing to $2.3 million (15.4% of expenditures) in fiscal 2018. However, adequate ending cash balances and reserves are projected for each year of the forecasted period. Fitch's concern regarding the projected operating deficits is mitigated by management's conservative projections and the proven willingness and ability to reduce expenditures if necessary to balance operations.

MANAGEABLE DEBT POSITION

The district's overall debt burden is modest at 1.8% of market value and $727 per capita. Amortization is slightly below average with 46% retired in 10 years due to a small CAB issue. The district has no plans for additional debt as school facilities are fairly new. Additionally, due to a .5 mill permanent improvement levy passed in 2004, funds are available for maintaining the facility improvements made with the 2004 bond issue.

Pensions and other post-employment benefits (OPEB) are provided through the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS). Both SERS and STRS are state administered, cost-sharing, multiple-employer defined benefit systems. June 30, 2013 funding levels for both plans are low at about 61% for STRS and 60% for SERS, based on a Fitch estimated 7% rate of return rate of return.

The district's combined fiscal year 2013 pension required contributions, OPEB payments, and debt service costs as a percentage of governmental spending are manageable at 12.5%. However, pension related costs could rise over time if STRS moves towards full funding of its actuarially required contribution (ARC). The plan funded only 46% of the ARC in fiscal 2013. The SERS plan has been fully funding its ARC.

STRONG PROGRAM ESSENTIALS

The district's bonds also benefit from participation in the Ohio School District Credit Enhancement Program which is rated `AA' by Fitch. Program requirements are stringent including 2.5x coverage of MADS by unrestricted state foundation aid on proposed bonds and any outstanding obligations covered by the program. Fiscal 2014 estimated state foundation aid to the district is 6.2x MADS, well above the required 2.5x.

For more information on the Ohio School District Credit Enhancement Program, see Fitch's report dated April 26, 2013 at www.fitchratings.com.

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, University Financial Associates, CoreLogic-Case-Shiller Index, IHS Global Insight, Zillow.com and, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 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=833449

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Fitch Ratings

Primary Analyst

Karen Wagner

Director

Fitch Ratings, Inc.

+1 212-908-0230

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Stephen Friday

Associate Director

+1 212-908-0384

or

Committee Chairperson

Amy Laskey

Managing Director

+1 212-908-0568

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com




Source: Fitch Ratings


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