Fitch Rates Ottawa USD No. 290, (KS) GO Bonds ‘A+’; Outlook Stable

NEW YORK

Fitch Ratings has assigned the following rating for the Ottawa Unified School District No. 290, Kansas’ (the district) general obligation (GO) unlimited tax bonds:

–$63.16 million GO bonds series 2015-A ‘A+’;

–$1.09 million taxable GO refunding bonds series 2015-B ‘A+’.

The bonds are scheduled for negotiated sale on May 7. 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 ULTGO debt.

The Rating Outlook is Stable.

SECURITY

The bonds are direct obligations of the district and are payable from 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. However, the financial reporting framework is sub-standard.

CYCLICAL BUT IMPROVED LOCAL ECONOMY: The regional economy is anchored in distribution and manufacturing. Increased unemployment rates during the recent downturn have since recovered. Below average income levels are growing slightly slower than state and national averages.

STABLE ENROLLMENT, HIGH RELIANCE ON STATE FUNDING: District population and enrollments are expected to remain stable. Enrollment stability 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 moderately high, although this sizable new money issuance is expected to meet the district’s capital needs for the next decade. The district has no pension or post-employment benefit obligations. The employer share of pensions is paid by the state. Based on this, Fitch believes the debt load is manageable with to the district’s moderate carrying costs, and stable economic prospects and expected significant state funding of debt service.

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 is located in the City of Ottawa in Franklin County approximately 55 miles southwest of the Kansas City, MO metropolitan area. District K-12 enrollment has been stable at around 2,500 for the past decade. The area benefits from excellent interstate access and has developed as a regional trade center with distribution and manufacturing.

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% of general fund spending and provides significant liquidity and cushion against potential state funding changes. Cash balances at July 1, 2014 in the contingency and special education reserves totaled $3 million or 20% of the district’s $15 million budget. The sizable reserves somewhat mitigate the district’s weak financial reporting method, high dependence on state funding (over 80% for fiscal 2014) and small size. 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 sound reserves assuming a stable state funding framework moving forward.

The district levies local taxes at 30% of general fund expenditures for its annual local option budget and eight mills for capital outlay (both at the maximum without voter approval). The district has been able to successfully manage expenses even in years of modest enrollment declines (1.9% from peak in 2010).

MODERATE TO HIGH DEBT BURDEN

The district’s overall debt burden is at 9.5% of fiscal 2014 market value and $6,308 per capita. Amortization is below average at 26% in 10 years, although no additional debt is expected for the next decade. Carrying charges following this issuance are expected to be moderate at approx. 15% of governmental spending. These amounts do not include any state funding of district debt which would reduce annual carrying costs to a low 8%.

The bonds now being offered are for the full GO bond authorization approved by voters in an April 2015 referendum. Proceeds will fund significant district facility improvements including a new elementary school, renovations to the high school, renovations to several other school buildings and mechanical and electrical system repairs and remodeling. Improvements will enhance safety and security, add classrooms to eliminate portable units and allow for modest future enrollment growth. Under the state school funding formula, the district expects state aid to cover approximately 42% of annual debt service. The state funding amounts are subject to legislative change and annual appropriation but existing funding rates for outstanding debt have been historically maintained. The district is restructuring approximately $1 million of outstanding debt (series 2015-B) to smooth overall debt service in an effort to maintain a stable 19.9 total mill levy for debt service for the next 25 years. This is based on annual tax base growth of 5% in 2016 and 1% thereafter which Fitch believes is somewhat high given recent history but based on expiring abatements and current development activity.

These renovations are expected to satisfy the district’s capital needs for at least the next decade, coupled with a lack of post-employment benefits obligations, should keep district carrying costs moderate. The district’s 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 Franklin County economy proved modestly cyclical during the recent economic downturn, with unemployment spiking well above state levels, but has recovered. The local economy is largely based on diverse manufacturing and distribution. Population and enrollment trends have been flat over the past decade and Fitch expects the trend to continue over the near term.

The district’s total tax base valuation has been flat since 2008 and improved current building permit activity and expiring abatements are expected to generate modest growth in the near term. The fiscal 2014 total valuation is a moderate $67,000 per capita, and grew 1.1% over the previous year. Leading taxpayers are moderately concentrated with the top ten comprising just under 20% of taxable value and include several distribution centers (Wal-Mart is the leading taxpayer at 5.9%), several manufacturing firms and several utilities. Local employers are led by two large distribution centers which employ over 1,600 complemented by several manufacturing firms and government sectors employers – hospital, city/county/school district.

County unemployment rates increased during the recent downturn but remained just below national averages during the recent downturn. The county’s unemployment rate, at 5.3% in February 2015, is above the state (4.4%) and below the US (5.8%). Per capita money income for the county, a proxy for the district population, is lower than the state (at 77%) and nation (74%) and has been growing at a slower rate.

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=984226

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Fitch Ratings
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Bernhard Fischer, +1-212-908-9167
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Fitch Ratings, Inc.
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