- Category: Financial Fundamentals
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NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Forest Hills Public Schools, MI (the district) ratings:
--$4.1 million refunding bonds series 1999 at AA+.
The Rating Outlook is Stable.
The bonds are full faith and credit unlimited tax general obligations (GO) of the district.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: Management has actively controlled expenditures to maintain structural balance in light of state revenue pressures and property tax revenue constraints under the Headlee Limit.
STABLE FINANCIAL RESERVES: Conservative budgeting is a key credit strength supporting healthy reserves.
HIGH DEBT AND CARRYING COSTS: Elevated debt service costs are somewhat offset by rapid amortization and limited near-term capital needs. Pension and other post-employment benefits (OPEB) absorb a moderate but growing share of governmental spending.
ABOVE AVERAGE SOCIOECONOMIC INDICATORS: The district benefits from an affluent economic base with limited exposure to the auto industry. The strong healthcare sector in the region provides a stabilizing presence.
SOUND FINANCIAL FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including strong financial management practices and healthy fund balance levels. The Stable Outlook reflects Fitchs expectation that such shifts are unlikely.
The district serves a 68-square-mile region in the eastern suburbs of Grand Rapids in Kent County including the affluent communities of Ada, Cascade, and Grand Rapids Townships. The 2013 population of 47,569 has increased by 23% since 2000; enrollment has remained stable at approximately 10,100 students with modest increases in recent years.
POSITIVE SOCIOECONOMIC PROFILE
The districts largely residential tax base experienced modest declines in taxable assessed value (TAV) during the housing correction after many years of consistent growth. Tax base declines total 5.7% between the fiscal 2009 peak and fiscal 2013. Losses have largely been reversed by 1.6% growth in fiscal 2014 and further growth of 2.3% in fiscal 2015, which the district expects to continue in future years. Fitch views managements assumptions as reasonable given positive trends in homes sales and median sale prices within the district according to Zillow.
The district is home to Amways headquarters and has low taxpayer concentration with the top 10 taxpayers constituting less than 8% of total TAV. Although there is some manufacturing concentration in the area, there is limited exposure to the auto industry, and the considerable healthcare presence in the region provides a level of stability.
Local economic health is exhibited by high resident wealth and employment levels. The county posted strong employment growth in June 2014 of 6.7% over the prior year. Unemployment fell to 5.6%, below state and national averages of 7.9% and 6.3%, respectively. However, given the districts demographics, its unemployment rate is likely much lower than the countys. The districts per capita money income is 170% and 155% of state and national averages, respectively. Educational attainment is also exceptional, with residents holding bachelors and advanced degrees at twice the state and national averages.
CONSISTENTLY HEALTHY FINANCIAL FUNDAMENTALS
The district closed fiscal 2013 with a marginal general fund deficit equal to 0.6% of spending, decreasing its unrestricted general fund balance to $13.5 million or a sound 13.4% of general fund spending. The unassigned fund balance is equal to 11.3% of spending, which exceeds the districts 10% policy minimum. The districts fiscal 2013 final amended budget called for the use of $3 million of general fund balance, but the actual draw down was considerably lower due to conservative budgeting and well-managed employee attrition practices.
The districts final amended budget for fiscal 2014 called for the use of $2.3 million in fund balance. The district projects reserve use to be much lower at approximately $1 million. The districts total fund balance is expected to decrease to approximately $13 million or 12.5% of spending, slightly below the prior year.
State aid funding comprises the majority of the districts general fund revenue, at approximately 70.5% in fiscal 2013. Per pupil funding decreased during the downturn but has stabilized and begun to rebound. Funding increased to $8,034 per pupil in fiscal 2014, a modest increase of less than 1% over the prior year. Management expects fiscal 2015 aid per pupil to increase by a similar margin with budgeted enrollment growth of 50 students. The adopted fiscal 2015 budget is balanced without the use of reserves and management does not report any major variances to date. Fitch views the districts estimates as reasonable given historically conservative budgeting practices and favorable results.
HIGH DEBT AND CARRYING COSTS
Debt levels are high at $5,098 per capita but more moderate at 4% of market value, indicative of the districts strong market value per resident. Amortization is very rapid with 80% of principal retired in 10 years. The district issued $25 million in school building and site bonds in May 2014 pursuant to a $45 million voted authorization from November 2013, which received strong voter support of 76%. Proceeds will fund capital improvements to existing facilities throughout the district. Management expects to issue the remainder of the bond authorization to fund future phases of their capital improvement plan currently under development. Timing is unknown, although the district does not intend to issue the remaining debt for at least another year.
The district participates in the Michigan Public School Employees Retirement System (MPSERS), which also manages the districts OPEB obligations. As of Sept. 30, 2013, MPSERS reported a funded ratio of 61.3%, or a low 55.2% based on the 7% investment rate of return used by Fitch. MPSERS has been underfunding its actuarially calculated annual required contribution (ARC) since 2010; the ARC was funded at 70.6% in fiscal 2013.
Fitch views the underfunded status of the pension plan as a long-term risk, increases for which will likely present future budgetary pressure for the district. Carrying costs for debt service, pension and OPEB are elevated at 28.7% of fiscal 2013 governmental fund spending, up from 20.6% in fiscal 2010. The increase was largely driven by a 70% rise in pension costs between 2010 and 2013, reaching 11.4% of governmental fund spending from 6.7%.
The high fixed-cost burden remains driven by rapidly amortizing debt (17.4% of governmental fund spending in fiscal 2013) which is expected to increase as the district begins amortizing the 2014 GO issue. Fitch believes retiree costs will remain a source of pressure given the challenged funding status of MPSERS, although cost escalation could moderate to the extent plan reforms are maintained.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in Fitchs Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates.
Applicable Criteria and Related Research:
--Tax-Supported Rating Criteria (Aug. 14, 2012);
--US Local Government Tax-Supported Rating Criteria (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
US Local Government Tax-Supported Rating Criteria