Fitch Affirms Lincoln Park School District, MI's Underlying ULTGO Bonds at 'BBB+'; Outlook to Stable

Fitch Ratings has affirmed the underlying rating on the Lincoln Park School District (the district), MI's $24.8 million unlimited tax general obligation bonds (ULTGO) at 'BBB+'.

The Rating Outlook is revised to Stable from Negative.

The enhanced rating, based on the State of Michigan School Bond Loan Fund Program, is 'AA' with a Stable Outlook.

SECURITY

The bonds are secured by an unlimited ad valorem tax on all taxable property within the district.

KEY RATING DRIVERS

IMPROVEMENTS IN STATE AID: State aid, which represents a large portion of district revenues, has recently increased but not back to pre-recession levels.

STABILIZING ENROLLMENT LEVELS: After falling steadily in the early 2000s, annual enrollment levels over the last several years have remained flat or increased.

IMPROVED BUT STILL WEAK RESERVE LEVELS: The district continues to recover from very low fiscal 2011 reserve levels. Stabilizing enrollment, improvements in state aid, and greater expenditure control have all helped rebuild reserve levels.

STRESSED ECONOMY: The local economy remains stressed given long term declines in employment, below average wealth levels, and declining population.

DOWNWARD TRENDING TAX BASE: Taxable value (TV) continues to decline sharply for the fourth consecutive year.

MANAGEABLE LONG-TERM LIABILITIES: Carrying costs are moderate and are expected to remain affordable. Capital needs do not appear to be onerous.

RATING SENSITIVITIES

STATE AID AND ENROLLMENT LEVELS: Fitch's Stable Outlook on the district's rating includes an expectation of positive results for the district finances in fiscal 2014. Dependence on state aid apportionment leaves the district vulnerable to future cuts by the state but less exposed to local economic conditions. Volatile enrollment is another credit risk that may impede long term financial recovery.

CREDIT PROFILE

Lincoln Park School District encompasses the city of Lincoln Park (the city), which is located in southwest Wayne County about 12 miles from Detroit. Enrollment is slightly fewer than 5,000 students.

RECOVERING RESERVE LEVELS DRIVEN BY IMPROVING FINANCES

State cuts to K-12 education and declining enrollment levels were key drivers of multiyear deficit spending that eventually reduced unrestricted general fund balance to less than 1% of spending in fiscal 2011. Prudent expenditure cuts and conservative budgeting led to a $1.7 million operating surplus in fiscal 2012, which grew ending unrestricted fund balance to a still modest $1.7 million or 4.8% of spending.

The district projected positive operations in fiscal 2013, but unexpected expenditures led to a $569 thousand deficit (1.5% of spending). Nevertheless, unrestricted fiscal 2013 general fund reserves grew slightly, to $1.8 million, due to the correction of a previous auditor error.

The district expects to operate at a surplus in fiscal 2014 and become compliant with its new internal policy to maintain reserves over 5% of spending. Fitch believes this is probable given a $530 thousand increase in state aid apportionment and an additional $550 thousand arising from greater than budgeted enrollment. Health benefit costs, which have been unpredictable in the past, will now be subject to a hard cap.

State aid represents over 80% of the district's annual revenues; thus, stable to improving state aid is essential for continued financial recovery. The uncertainty surrounding state aid for K-12 education beyond fiscal 2014 is a credit risk that is built into Fitch's 'BBB+' rating for the district.

STABILIZING ENROLLMENT LEVELS, BUT VULNERABILITY REMAINS

Maintaining enrollment levels is important for the continued recovery of district finances as well because state aid is allocated on a per pupil basis. Enrollment declined by a total of 15.9% between fiscal 2002 and fiscal 2011, but the district's decision to enact open enrollment has increased or maintained enrollment levels in each of the last several years. After bottoming out at 4,573 students in fiscal 2011, fiscal 2014 enrollment has recovered to a projected 4,872 students.

Enrollment is volatile and unpredictable year to year as area students can attend schools in other districts with ease. Historically, student outflow from the district has significantly exceeded inflow. Fitch views the lack of significant improvement in net flow despite the district's recent enactment of open enrollment with concern.

STRESSED ECONOMY AND TAX BASE

The local economy is part of the greater Detroit area and remains stressed. The city's unemployment rate of 8.3% in August 2013 is well below past highs but the reduction largely reflects a long term contraction of the labor force rather than improving employment. City wealth levels are below average with per capita and median household income at 77% and 86%, respectively, of the state average, and 70% and 80%, respectively, of the national average.

The district's tax base is not concentrated. However, TV has declined a total of 31.4% from fiscal 2008 to fiscal 2013, with annual declines of 9.5%, 10.1%, 9.6%, and 6.9% in 2010, 2011, 2012, and 2013, respectively. Fitch expects further TV declines but at a lower rate.

MANAGEABLE LONG TERM LIABILITIES

Overall debt ratios are a low $1,084 per capita and a moderate 3.7% of market value. Outstanding debt amortizes rapidly, with 84% of principal retired within 10 years. At the moment, the district does not have a list of all required capital needs, but capital needs in general seem manageable.

The district participates in the Michigan Public School Employees' Retirement System (MPSERS) for pension and other post-employment health benefits. The funded ratio has declined in recent years to 64.7% as of Sept. 30, 2011. The funded ratio is an estimated 58% using a 7% return assumption. Total carrying costs for MSPERS and debt service are a moderate 17.1% of total governmental spending.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Zillow.

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

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=814110

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