Fitch Affirms Forest Hills Public Schools, MI $35.8MM GOs at 'AA+'; Outlook Stable
Fitch Ratings has affirmed the following bonds of Forest Hills Public Schools, MI (the district):
--$35.8 million unlimited tax general obligation (GO) bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are full faith and credit unlimited tax general obligations of the district.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: Management has taken judicious steps to work toward structural balance by actively managing expenditures 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.
SIZEABLE DEBT PROFILE: Above average debt service costs are somewhat offset by rapid amortization and limited near-term capital needs. Pension and other post-employment benefits (OPEB) are moderate but growing
ABOVE AVERAGE SOCIOECONOMIC INDICATORS: The district benefits from an affluent economic base with limited exposure to the auto industry. The strong healthcare sector provides a stabilizing presence.
POSITIVE SOCIOECONOMIC PROFILE
Forest Hills Public Schools (the district) serve 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.
Enrollment, presently 10,167, has grown historically, reflecting the desirability of the community and the district's very strong academic performance and reputation. Fitch views the district's projections for 0.5% average enrollment growth from 2013-2017 as reasonable given historic performance and the district's proven conservative budgeting practices.
The district's largely residential tax base experienced 3.2% and 1.5% declines in taxable assessed value (TAV) in fiscal 2011 and 2012, respectively, indicative of economic pressures after many years of consistent growth. However, market value per capita remains strong at $138,000. The 0.5% decrease in fiscal 2013 has moderated from that of the past two fiscal years, and management expects TAV to level out in fiscal 2014. Fitch views management's assumptions as reasonable given positive trends in homes sales and median sale prices within the district coupled with fewer foreclosures reported in the greater regional area.
The district is home to Amway's headquarters and has low taxpayer concentration. The top 10 taxpayers comprise 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.
The county posted a 2.5% employment growth rate in August 2012 compared to the prior year and unemployment fell to 6.8%, well below state and national averages of 9.2% and 8.2%, respectively. Wealth levels in the county are average, but the district represents a wealthier part of this area and the district's per capita money income is 166% and 153% of state and national averages, respectively.
CONSISTENTLY HEALTHY FINANCIAL FUNDAMENTALS
The district closed fiscal 2011 with a marginal general fund deficit equal to 0.4% of spending, decreasing its unrestricted fund balance (the sum of committed, assigned and unassigned as per GASB 54) to $13.8 million or a sound 13.7% of spending. The unassigned fund balance is equal to 11.5% of spending, which exceeds the 10% policy the district maintains. The district's fiscal 2011 amended mid-year budget called for the use of $4.4 million of general fund balance, but the actual draw down was much less due to conservative budgeting and well-managed employee attrition practices.
The district employed various spending cuts in fiscal 2012 and negotiated significant employee benefit changes, including increased employee contributions, which supported the general fund surplus of $406,832 (unaudited). The district's unrestricted fund balance increased to $14.1 million or 14.2% of spending, slightly higher than the prior year. Employee benefit costs are now less than they were in 2008, underscoring the district's strong financial management and ability to control costs.
The adopted fiscal 2013 budget reflects an operating deficit of approximately $2 million (1.9% of spending). However, similar to fiscal 2012, management's goal is to minimize the operating deficit and anticipates break-even results. Fitch views the district's estimates as reasonable given historical budgeting practices and actual results.
State aid funding comprises the majority of the district's general fund revenue, at approximately 69% in fiscal 2012. Per pupil funding has been decreasing and was $8,203 per pupil in fiscal 2012, a 1% decrease over the prior year. The district anticipates receiving $8,195 per pupil in fiscal 2013. Countering declines in per pupil funding is the district's projected enrollment growth. Based on current enrollment projections, the district anticipates receiving $68.8 million in state per pupil funding in fiscal 2013 compared to approximately $68.4 million in fiscal 2012.
ABOVE AVERAGE DEBT PROFILE
Direct debt levels are high, at $4,270 per capita and more moderate at 3.1% of market value. Amortization is very rapid with 80% of principal retired in 10 years. The district is currently implementing a new capital improvement plan (CIP), after successfully completing its last CIP primarily used for facility upgrades. Management reports a similar focus for the new CIP and no major capital expenditures are anticipated. Future debt issuance is likely but timing is unknown. The district has consistently received strong voter support for bond issues.
The district participates in the Michigan Public School Employees' Retirement System (MSPERS) and consistently makes its required payment. As of Sept. 30, 2010, MSPERS was 78.9% funded, or a still adequate 71% funded using Fitch's more conservative 7% discount rate assumption.
Recently passed pension reform legislation signed by the governor aims to maintain the district's contribution rate at approximately 25% of payroll. Any increase in this rate could pressure district operations as it consumes a larger part of the general fund budget. Carrying costs for debt service, pension and OPEB are elevated at 27.1% of fiscal 2011 general and debt service spending.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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