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RPT-Fitch affirms Toledo City Schools (OH) ULTGO bonds at 'A-'; outlook negative
March 20, 2013 / 1:13 PM / 5 years ago

RPT-Fitch affirms Toledo City Schools (OH) ULTGO bonds at 'A-'; outlook negative

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March 20 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Toledo City Schools, Ohio’s (the district) general obligation unlimited tax (ULTGO) bonds as follows: --$26.3 million ULTGO bonds series 2009 at ‘A-'; The Rating Outlook is Negative. SECURITY The bonds are a voted general obligation of the district, secured by an unlimited ad valorem tax levy outside the ten-mill limitation. KEY RATING DRIVERS FURTHER CREDIT DETERIORATION POSSIBLE: The Negative Outlook reflects the potential for credit deterioration if the district is unable to realize recurring revenue solutions and/or additional spending cuts. Projected results for fiscal 2012 and 2013 are positive but budgetary challenges continue. LIMITED FINANCIAL FLEXIBILITY: Reductions in state funding combined with multiple years of declines in property tax revenues have left the district with diminished financial flexibility. The near term outlook for state and local revenues appears stable, but the district faces budgetary challenges in 2014 and beyond. BALANCED OPERATIONS LARGELY DEPEND ON VOTERS: The district’s revenue raising ability is largely dependent on voter approval from constituents who have repeatedly voted down revenue raising initiatives. TRANSFORMATION PLAN GENERATES SAVINGS: The recently implemented transformation plan for the district yielded expenditure reductions of over $8 million in 2012 and appears to be minimizing enrollment declines. The district expects to implement additional revenue and expense solutions following the completion of a performance audit in 2013. BELOW AVERAGE ECONOMIC INDICATORS: Elevated unemployment, low wealth indices, and a high poverty rate reflect the depressed condition of the area economy. Recent job growth and the expansion of automotive manufacturing within the city are indicative of the potential for improvement but overall recovery will be slow. RATING SENSITIVITIES INABILITY TO RESTORE FINANCIAL FLEXIBILITY: The district’s financial operations largely hinge on the approval of a renewal operating millage in 2013. If the ballot measure is defeated, the district will need to make additional expenditure reductions in order to maintain balanced operations. Even if the measure is approved, the district will need additional revenue and expense solutions to restore financial reserves over the longer term. CREDIT PROFILE IMPROVING BUDGETARY BALANCE, CONTINUED LIMITED FINANCIAL FLEXIBILITY The general fund balance on an unrestricted GAAP basis is projected to improve in 2012 but remain negative. Overall financial reserves remain low, leaving little margin for unexpected revenue shortfalls or spending needs. After several years of large general fund net deficits through 2011, the district implemented a comprehensive transformation plan in 2012. The plan generated significant wage and benefit cost savings resulting in an unaudited 2012 general fund surplus of $9.6 million (3.2% of expenditures). The unrestricted general fund balance is projected to improve to ($1.16) million. State funding and property tax revenues, 69% and 27% of total general fund revenues respectively, stabilized in 2012 and 2013. Coupled with recurring expenditure savings from wage and benefits concessions and staff reductions, continued positive performance is projected for fiscal 2013 but the district faces budgetary challenges in 2014 and beyond. Based on the district’s current 5-year forecast, the immediate challenge is the approval of a renewal levy for fiscal 2014 and beyond plus the likely need for additional revenue and expense initiatives. Improved budgetary balance and surplus results improved the district’s weak cash position and eliminated the need for short term borrowing in fiscal 2012 and 2013. DEPENDENCE ON VOTER INITIATIVES Management’s past attempts, including in November 2012, to raise additional revenues through ballot initiatives have failed, triggering cuts to school personnel and programs. The district expects to seek voter approval in August or November 2013 for the renewal of a 6.50 mill levy that expires at year-end and may seek approval for new levy monies as well. Renewal levy initiatives have historically been successful and the 2013 approval is assumed in the district’s multi-year projections. Failure of the renewal levy would be a significant budget challenge for the district and likely result in a rating downgrade. Further, failure to obtain new levy revenues (which Fitch believes will be more challenging) or significant expenditure reductions will pressure the district’s ability to maintain budgetary balance and restore financial reserves. TRANSFORMATION PLAN The major goals of the plan include reducing district operations, increasing the graduation rate, and building strong learning communities. Large declines in enrollment have plagued the district in the past. Management is optimistic that the introduction of neighborhood schools for grades k-8 along with the other programs offered under the transformation plan will better serve the district and provide for better student retention. Declining enrollment has had a direct effect on the district’s revenues as state aid is largely dependent on enrollment numbers. The outlook for state funding appears stable to modestly positive for the near term. LOCAL ECONOMY REMAINS WEAK WITH SOME SIGNS OF IMPROVEMENT The local economy is driven mostly by manufacturing with a concentration in the automotive industry complemented by the healthcare and university sectors. The city of Toledo reported unemployment of 8.2% in December 2012 which is down from a high 12.6% average in 2009 but remains higher than both the state and the nation. Recent economic activity includes a $500 million investment and second shift at the Toledo Chrysler plant and the opening of a new $250 million casino which should provide for additional employment opportunities for the area going forward. Wealth levels are below average both on a median household income basis and on a per capita personal income basis and 2010 poverty rates were nearly double those of the nation. Revaluation in 2012 revealed that the district’s taxable assessed value (TAV) has declined 36% from its peak in 2007. Further TAV declines are expected to be modest following revaluation as they are somewhat mitigated by the addition of the casino and other local commercial developments. DEBT, PENSION AND OTHER OBLIGATIONS ARE MANAGEABLE The district’s overall debt burden is low on a per capita basis at $1,496 but more moderate when compared to the tax base, at 4.5% of full value. Principal amortization is slow with only 34% of total principal retired within ten years offset in part by the district’s limited future capital needs. Debt service costs should continue to be manageable going forward as the district has no plans for additional debt. The district contributes to two State-sponsored defined benefit pension plans; both plans are funded at low levels. The district contributes the full required amount in each year. Costs to the general fund are not overly burdensome and have declined over the past two years given the significant staffing cuts. Other post-employment benefits (OPEB) are provided through two state run programs and the costs to the district are very manageable. Total carrying costs for debt service, pensions and OPEB are modest at 8.4% of total governmental funds excluding capital funds, due in part to slow amortization and pension plan actuarial underfunding.

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