Fitch Rates Clawson Public Schools, MI's ULTGOs 'AA' SBLF/'A' Underlying; Outlook Stable

Fitch Ratings assigns the program rating of 'AA' to the following Clawson Public Schools, MI's (the district) bonds:

--Approximately $9,980,000 school building and site bonds (general obligation - unlimited tax), series 2014.

The 'AA' rating is based upon qualification for the Michigan School Bond Loan Fund (SBLF), whose bond guarantee program is rated 'AA' by Fitch.

The bonds are expected to price the week of April 21. Proceeds will be used to fund school district capital improvements.

In addition, Fitch assigns an 'A' underlying rating to the series 2014 bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the district's full faith and credit and unlimited pledge of ad valorem taxes. The 2014 bonds are also secured by the state of Michigan's SBLF guarantee.

KEY RATING DRIVERS

AVERAGE WEALTH, LIMITED ECONOMY: Wealth indicators are average and the local economy is limited; however, residents participate in the robust Oakland County economy. Taxable assessed value (TAV) declines have abated and local housing appears to be picking up.

PRESSURED FINANCES; BUDGET CUTS ANTICIPATED: The district maintained its financial stability though the recession despite cuts in state aid funding; however, in 2013 unanticipated costs reduced fund balance significantly. Fund balance is projected to decline further for 2014 under enrollment pressure.

HIGH DEBT AND LONG-TERM LIABILITIES: The district's debt burden is high and the district is exposed to the state's underfunded pension plan despite additional funding from the state for this purpose. Carrying costs for debt service, pension and other post-employment benefits (OPEB) were moderate in 2013 but are projected to increase.

RATING SENSITIVITIES

STATE CREDIT QUALITY: The enhanced rating is sensitive to changes in the state of Michigan credit quality and the SBLF program, on which the 'AA' rating is based.

FINANCIAL PROFILE KEY: The underlying 'A' rating is sensitive to material changes in enrollment and the district's ability to execute its cost reduction plan as outlined in the 2015 projected budget.

CREDIT PROFILE

The district is located in Oakland County in southeast Michigan and encompasses approximately 2.3 square miles. The district includes all of the city of Clawson and a small portion of the city of Royal Oak ('AA'/Outlook Stable). Enrollment has grown 20% since 2005, to 1,801 in 2014; however, since 2011 the district has experienced marginal drops in enrollment from increased competition. District population is stable at approximately 12,000.

LIMITED ECONOMY; TAV HAS STABILIZED

The district economy is limited, with the district as leading employer. However, district residents have access to employment opportunities in the robust Oakland County economy. Long-term challenges remain for southeast Michigan as it continues diversification away from the automotive industry.

The district's tax base has increased marginally, by 0.7%, for the first time after steep peak-to-trough losses of 24.3% since 2009. Market value per capita is below average at $53,000. However, the local housing market is performing well, with a 17.7% increase in Zillow's home value index over the past year. Wealth levels are approximately average. Per capita money income in 2011 was equal to 116% of the state and 106% of the national average, whereas median household income was 104% and 96% of the national average.

The Oakland County unemployment rate is slightly elevated at 6.7%, below the state (7.7%) and above the national (6.5%) averages. An above average 32.3% of city residents report a bachelor's degree, versus the national average of 28.2%.

PRESSURED OPERATING PROFILE; DEFICIT PROJECTED FOR 2014

The district maintained its stable financial profile from 2009 to 2012 with 8% to 10% fund balances despite flat to declining state aid. The district's adjustments have been minor so far, with budgetary balance being managed by attrition, minimal pay increases, and small retirement incentive packages.

The district's finances were pressured by a number of small budgetary expenditure overages in 2013, leading to a net general fund operating deficit of $802,000 or 3.6% of spending. Unrestricted general fund balance was $1.3 million or a modest 5.6% of spending. Similarly, the district is projecting further use of fund balance in 2014 driven by marginal enrollment declines, leaving the district with a thin total fund balance of $724,000 or 3.2% of spending. Unreserved fund balance is likely to be around this level, based on recent year-end balances.

The district's revenue structure is inflexible, largely limited to per-pupil state aid funding. Fitch expects that the district will continue to operate in a competitive enrollment environment, as 33% of its enrollees are school-of-choice students. Highlighting this risk: changes in state funding incentives drove some enrollment pressure in 2013 and 2014 as other nearby districts began offering all-day kindergarten, formerly a competitive advantage for the district.

CUTS PROJECTED TO RESTORE BALANCE IN 2015 AND AFTER

Management has taken steps to construct a more conservative budget for 2015 in response to prior year expenditure overages and misestimates of revenues. The district assumes conservatively an additional $100 per pupil, roughly in line with the governor's budget request, offset by a 52 pupil enrollment decline in 2015 for an overall increase in state funding of 2.4%. Additionally, the district is not assuming further best practice or performance-based funding in its multiyear projections, although it expects to qualify for those, if available.

The district has additionally developed a plan of expenditure cuts for 2015, which Fitch believes is achievable. The district will reduce staff by six for 2015. The teachers' union contract has been open since August 2013, and the current negotiation targets a reduction in compensation, additional non-healthcare benefit contributions, and freezing of lane changes. The district is engaged in non-binding fact-finding, after which the board has the authority to impose a contract. The district has additional expenditure flexibility in class sizes and privatization of services.

In concert with its cost cutting plan, the board has recently committed to a minimum 5% fund balance, which management projects to restore in 2015 after these cuts and contract adjustments.

The district is projecting fund balances of 6.5% in 2015, increasing to 9.2% in 2018 through a series of annual surpluses. Considerable execution risk remains. The district's ability to conservatively budget, cut expenditures, and attract students will remain key in restoring fund balance levels and maintaining its underlying 'A' rating.

HIGH DEBT AND LONG TERM LIABILITIES

The district's debt burden is high at 9.6% of market value and $5,047 on a per capita basis after the current issue. Amortization is rapid at 73.4% in 10 years. The district does not anticipate further new money debt in the coming five years.

The district participates in Michigan Public School Employees' Retirement System (MPERS), a cost-sharing multiple employer teacher's plan, which is underfunded at an 61.3% or a Fitch-estimated 55.2% (assuming a 7% rate of return). Additionally, the state pension plan has been underfunding its actuarial required contribution (ARC) since 2010, funding the ARC at 83.4% in 2012. Fitch thinks that the underfunded status of the pension plan represents a long-term risk, increases for which will likely represent increased future budgetary pressure for the district. However, the state's program to stabilize local rates may shield the district from budgetary pressures.

The district's OPEB costs are a minute portion of the budget at $14,000 in 2013.

Cost of carry of debt, pension, and OPEB was moderate at 17% in 2013, but Fitch projects that the cost will increase thereafter, with high year-on-year pension increases and additional debt service, to an estimated 23.1% in 2015. Additional state aid supporting pension rate stability somewhat mitigates this dramatic increase.

'AA' PROGRAM RATING

For further information on Michigan's School Bond Loan Fund Program, see the press release dated July 17, 2013, which is also available 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, Zillow, and 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);
--'Fitch Upgrades Michigan School Bond Loan Fund Program Rating to 'AA'; Outlook Stable' (July 17, 2013).
--'Rating Guidelines for State Credit Enhancement Programs', (April 18, 2013).

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=827235
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