Fitch Ratings assigns the following ratings to Monroe County Industrial Development Authority, NY (IDA) bonds:
--$45,235,000 school facility revenue bonds (Rochester schools modernization project), series 2015 at 'AA'.
The bonds are expected to be sold through negotiated sale on Jan. 22.
The bonds are being issued to finance the renovation and/or equipping of certain public school facilities for use by the Rochester City School District.
In addition, Fitch affirms the following ratings:
--Approximately $224 million of outstanding school facility bonds (Rochester schools modernization project), series 2012A, 2012B, and 2013 at 'AA'.
The Rating Outlook on the bonds is Stable.
SECURITY
The bonds are secured solely by state aid revenues annually appropriated to the district by the state of New York and remitted to the district from the period Dec. 1 through March 31 (the collection period).
In the event that the district fails to appropriate state aid sufficient to cover debt service payments by Nov. 10, state aid sufficient to cover the subsequent principal and two interest payments will be intercepted and forwarded to the trustee. As intercepted state aid is not subject to appropriation by the district, this provision effectively removes the risk to bondholders of non-appropriation by the district.
KEY RATING DRIVERS
RATING BASED ON STATE INTERCEPT: The rating, one notch below the State of New York's 'AA+' general obligation (GO) bond rating, reflects the state aid intercept security for the bonds.
STATE AID SET-ASIDE: Bondholders benefit from remittance of state aid to a depository fund from which debt service is set aside before flowing to the district and, in the event of a failure to appropriate, a state aid intercept structure that provides for pre-default payment.
STRONG COVERAGE: Interceptable state aid provides strong coverage of maximum annual debt service (MADS) on the current issue and on total authorized borrowing. Fitch expects coverage levels to remain strong despite potential decline in the coming years due to the district's extensive capital and borrowing plans, charter school competition and declining enrollment.
RATING SENSITIVITIES
CHANGE IN NEW YORK'S GO RATING: This rating is sensitive to a change in the state's GO rating or Outlook, to which these bonds are linked.
MATERIAL WEAKENING IN COVERAGE LEVELS: The rating assumes continued strong coverage of debt service by interceptable state aid.
CREDIT PROFILE
The New York state legislature enacted Chapter 416 of the Laws of 2007 (Rochester Schools Act), which authorizes the current transaction, to encourage the city and district to renovate its public schools. Capital improvement plans authorized under the Rochester Schools Act called for Phase I renovations of $325 million, with the Series 2015 bonds being the last issue under Phase I. In June 2014 the State Legislature authorized $425 million under Phase II, which the Governor recently signed. The district estimates total modernization costs at approximately $1.3 billion, the remaining sum of which is expected to be financed under the program, subject to state legislative approval.
The school district is governed by an independently elected board of education. The city council approves the district's budget and levies taxes on its behalf but does not otherwise exercise direct control over the district.
STRONG COVERAGE BY STATE AID
State aid is remitted monthly and unevenly and is collected first by a state aid depository fund from which debt service is set aside; the remaining funds are forwarded to the district. In the event of non-appropriation by the district, state aid is intercepted and paid directly to the trustee in advance of debt service payments, the mechanism on which Fitch bases its 'AA' rating.
Approximately 58% of interceptable state aid was remitted during the collection period in fiscal 2014, which covered series 2012 and 2013 MADS and estimated series 2015 MADS by 10.2 (x). Modernization projects are anticipated to be approved for state building aid which has historically covered approximately 90% of project costs, in which case coverage will remain very strong.
State aid to the district has rebounded, up 24% in 2014 from 2010 and projected to increase 3.4% for 2015. This increase is driven by additional foundation and state building aid.
SENIOR LIEN RISKS TO INTERCEPT COVERAGE
State aid may be intercepted if the district is late in making charter school payments and for outstanding state aid revenue anticipation notes (RANs). Both payments have a senior claim to district bonds on state set-asides and intercepted funds. The district does not have RANs outstanding and last borrowed for cash-flow purposes in 2004. Further, the district has approximately $170.4 million in outstanding general obligation debt that is subject to post-default state aid intercept.
RISK OF LATE STATE BUDGET MITIGATED BY COLLECTION PERIOD
Fitch believes that the timing of the collection period for the bonds mitigates risks associated with the possibility of late state budget adoption; the state's fiscal year starts April 1. Historically, the state has been up to four and a half months late in adopting a budget, although the state has been on time in adopting its annual budget for the past three fiscal years. Moreover, the risk of historical and potential delays in state aid payments during times of state budgetary and cash flow pressure is mitigated by the very high coverage levels.
DECLINING DISTRICT ENROLLMENT AND CHARTER SCHOOL COMPETITION
Fitch believes that declining district enrollment and charter school competition may negatively affect the amount of state aid revenue in future. The district has experienced a 14% enrollment decline since 2005, to an estimated 28,401. The district expects further declines next year driven by charter schools.
13 charter schools operate within the district. At this time, there are no new/additional approved charter schools with planned openings in fiscal 2015 or 2016. These independently operated schools were estimated to educate 4,148 pupils (12.7% of projected district and charter enrollees) at Dec. 1, 2014, with enrollment expected to increase by 20% in 2015-16. All charter schools receive state-set per-pupil aid which passes through the district; the district estimates $52.8 million in charter school payments for fiscal 2015 (representing 9.1% of 2014 general fund spending), up 30% year-on-year. Nevertheless, Fitch expects coverage levels to remain solid because coverage is high and new debt will be supported by building aid.
For more information on the state's GO rating, see Fitch's press release 'Fitch Upgrades New York State GO and Related Bonds to 'AA+' Outlook Stable' dated June 20, 2014, available on the Fitch web site at 'www.fitchratings.com'.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Fitch Upgrades New York State GO and Related Bonds at 'AA+' Outlook Stable' (June 20, 2014);
--'Rating Guidelines for State Credit Enhancement Programs', (April 18, 2013).
Applicable Criteria and Related Research:
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880
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
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=965295
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