OREANDA-NEWS.

Fitch Ratings has affirmed the following Mechanicsburg Exempted Village School District, OH ratings at 'AA-':

--$6.3 million ULTGO bonds series 2012

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

The series 2012 bonds also qualify for the Ohio School District Credit Enhancement Program, which is rated 'AA' by Fitch.

SECURITY

The bonds are payable from the levy of an ad valorem tax on all taxable property within the district without limitation as to rate or amount.

KEY RATING DRIVERS

The 'AA-' rating is indicative of the district's strong cost control measures, limited revenue raising ability, moderate long-term liability burden. Positive operating surpluses have left the district with very strong capacity to react to future downturns.

Economic Resource Base

The school district serves a rural community about 35 miles outside of Columbus that has seen 14% population growth in the past 10 years. Enrollment trends have also been positive with the total student body increasing 6.5% over the same period. Many residents of the district are employed at a Honda plant in nearby Marysville, which manufactures all Honda Accords sold in North America.

Revenue Framework: 'bbb' factor assessment

The district exhibits revenue growth in line with the level of inflation, reflective of state aid trends. Ohio school districts have limited legal ability to independently raise revenues but have some flexibility to raise fees, charges, and other locally-controlled revenues.

Expenditure Framework: 'aa' factor assessment

Flexibility of main expenditure items is solid and the natural pace of spending growth is above expected revenue growth.

Long-Term Liability Burden: 'aa' factor assessment

The district's long-term liability burden is moderate in relation to the economic resource base.

Operating Performance: 'aa' factor assessment

The district budgets using conservative revenue assumptions and strict expenditure controls. It proactively works to maintain a level of financial cushion that will offset the risk of the need for voter-approval for new tax levies, although it remains reliant on voter approval for renewal levies.

RATING SENSITIVITIES

Enrollment Changes: Enrollment declines and increases in charter school competition may decrease state aid available for district operations and negatively pressure the credit.

Strong Fiscal Management: The rating is dependent on the maintenance of strong fiscal management, including maintenance of sufficient reserves to provide financial resilience throughout the economic cycle.

CREDIT PROFILE

The district serves a rural area approximately 35 miles northwest of Columbus that includes the village of Mechanicsburg, OH and two small townships near the village. Enrollment trends have been positive with the total student body increasing 6.5% over the past 10 years.

County income levels are below average, although employment has been stable and unemployment rates remain below state and national levels. Taxable assessed value (TAV) grew significantly in fiscal 2014 due to revaluation but is expected to remain flat in the near term due to stagnant economic performance.

Revenue Framework

State aid comprises 55% of general fund revenues. Fixed rate property and income tax revenues comprise 20% and 16% of general fund revenues, respectively, and are levied on both a continuing and renewal (every 5 to 10 years) basis. Continuing levies comprise 24% of total revenues. Income and property tax renewal levies comprise 12% of revenues, adding greater risk to operations during economic declines when voters may be disinclined to reapprove them.

Ohio school districts operate within a restrictive revenue environment. Historical revenue growth has been above the rate of inflation, but it is influenced by voter approval of new tax levies. However, reliance on state aid links the district's growth prospects to those of the state, which Fitch expects to be in line with inflation, and changes in enrollment. The district expects state aid to grow at a faster pace of 4.8% in fiscal 2017, driven by open-enrollment which allows for the attraction of new students from surrounding communities.

Management expects ad valorem revenue to remain flat in the near term. Fixed rate mills capture new construction and are sensitive to assessed value reductions but not AV growth.

The district's five-year cash-basis forecast conservatively projects income tax to increase 3.3% in 2017 followed by a 1% decrease in 2018, with expectations for flat performance thereafter. Fitch believes the forecast is reasonable due to recent income tax gains attributed to a growing small business community.

The ability to raise new operating revenues without voter approval is limited to increases in fees, charges, and other locally-controlled revenues. Total revenue from these sources are nominal.

The property tax levy 'inside mills' may be adjusted by the county, without voter approval, up to 10 mills. Income and property tax 'outside millage' requires voter approval.

Expenditure Framework

The largest expenditure item is instruction, which includes teachers' salaries, accounting for 63% of total general fund spending.

Fitch expects the pace of spending growth would be above the expected pace of revenue growth in the absence of policy action.

The district's expenditure flexibility is solid. Fiscal 2015 carrying costs for debt, pension, and other post-employment benefits (OPEB) are manageable at 11.7% of government spending.

The student-teacher ratio is 18:1, which is below the 25:1 state maximum. This indicates that district has some instruction related expenditure flexibility.

Long-Term Liability Burden

The combined burden of overall debt and unfunded pension liabilities is moderate at 9.9% of personal income and 39% of debt is scheduled to be retired within the next 10 years. Management has long-term plans to upgrade an athletic facility, which would require debt issuance. However, there are no concrete plans as they are currently in preliminary discussions with potential financial partners. Pension liabilities are expected to remain sizable.

Mechanicsburg EVSD provides pension benefits and OPEB through two state sponsored defined benefit pension plans, the Ohio School Employees Retirement System (SERS) and the Ohio State Teacher Retirement System (STRS). When both plans are combined, they reported assets to liabilities ratio of 74.2%, assuming a 7.75% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated assets to liabilities ratio is 68.6%.

Operating Performance

The district has attained very strong gap-closing ability over the last few fiscal years, which should allow it to manage through economic downturns while maintaining an adequate level of financial flexibility. Fitch believes the district's reserves and inherent budget flexibility will provide sufficient cushion, given expected modest revenue volatility, throughout a normal economic cycle.

Fitch believes the district will continue to produce operating surpluses because of newly implemented budgeting policies that carefully monitor expenditures.

Prior to fiscal 2013, management budgeted liberally and routinely ran operating deficits. New management has taken a conservative approach to budgeting and has built financial resilience through strict expenditure management and general fund balance growth. Fitch believes the new approach has been institutionalized and the risk of reverting back to sizeable deficits is limited.

Management is taking advantage of the current economic recovery by building general fund reserves. In prior years management routinely exhausted reserves before seeking out voter approved tax levies. Management has worked to slow this cycle by establishing new policies and procedures, including the approval of two renewal tax levies with extended 10-year terms, expiring in 2024 and 2025. The district anticipates that the continued growth of reserves, combined with strict expenditure management, will limit reliance on voter supported tax levies for operations during times of economic stress, but Fitch believes this remains a vulnerability.

Reliance on renewal levies exposes the district to the risk of losing a significant portion of its operating revenue at once.