OREANDA-NEWS. Fitch Ratings affirms the following ratings for Claymont City School District, OH at 'A+':

--$1.5 million unlimited tax general obligation (ULTGO) school improvement refunding bonds, series 2006;

--Issuer Default Rating.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the school district payable from its unlimited ad valorem taxing power.

KEY RATING DRIVERS

The 'A+' rating is based on the district's strong gap-closing ability driven by solid reserves and strong expenditure flexibility. The rating also reflects the district's moderate revenue growth and limited independent legal ability to increase revenues. The majority of the operating tax levies are permanent, although expenditure growth is expected to outpace projected revenue growth absent future voter-approved tax levies.

Economic Resource Base

The district services the City of Uhrichsville and village of Dennison in Tuscarawas County in eastern Ohio, situated halfway between Columbus, OH and Pittsburgh, PA. The local economy is predominately agricultural. The district population was 11,979 in 2014 and student enrollment has been relatively stable over the past decade with approximately 2,100 students enrolled annually.

Revenue Framework: 'a' factor assessment

Fitch expects the district's natural revenue growth to be in line with the level of inflation, largely due to the district's reliance on state aid. The district has limited ability to independently increase revenues without voter approval.

Expenditure Framework: 'aa' factor assessment

Fitch believes the district has the ability to make expenditure reductions if necessary to maintain stable financial operations; absent reductions, expenditures are projected to increase faster than revenues over the next several years. Carrying costs for debt, pension and other post-employment benefits (OPEB) are low.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is modest at 8.6% of personal income. The district has no future borrowing plans.

Operating Performance: 'a' factor assessment

Financial operations have improved over the past several years as a result of state aid formula changes that have benefitted the district. The district has seen an increasing general fund balance which Fitch believes provides a solid financial cushion in the event of a moderate economic stress.

RATING SENSITIVITIES

Maintenance of Reserves: The 'A+' rating is sensitive to the district's ability to maintain sufficient general fund reserves to offset its moderate vulnerability to revenue declines in the event of moderate economic downturn.

State Aid: The district is vulnerable to significant changes to the state funding formula that would reduce aid.

CREDIT PROFILE

The district, located in Tuscarawas County in eastern Ohio, serves the City of Uhrichsville and Village of Dennison. The district's enrollment of approximately 2,100 has remained fairly stable over the last 10 years and is projected to remain so over the near to medium term. The district's wealth and income levels are below average and county unemployment rates are above the current state rate of 5.4%.

Revenue Framework

Overall revenue growth over the past 10 years has been below the level of inflation. The revenue framework is characterized by strong state support and limited independent legal ability to increase tax rates without voter approval. State aid accounts for approximately three quarters of the district's operating revenue, followed by property taxes which make up approximately 15%.

The district has seen an increase in state aid over the past two years with 7.5% and 10% increases in fiscal 2014 and 2015, respectively. The increase has been driven by the current state funding formula which is weighted towards low property wealth and low income districts. The state aid reliance makes the district vulnerable to changes in the state's funding formula, although minimizes revenue declines due to declines in property tax valuations.

The property tax levy consists of the non-voted, continuous 4.2 mill inside operating tax levy and voter-approved outside levies that total 23.5 mills. All of the levies with the exception of a fixed dollar emergency levy, are continuous. The district's continuing fixed rate outside millage allow for increases due to new construction within the local tax base. However, new construction has historically been insignificant and outside fixed-rate levies do not provide protection against assessed value declines.

The district has the legal ability to increase property taxes through a reclassification process in which the 4.2 mill inside operating levy could be converted into a permanent improvement levy. Under Ohio law, the minimum tax rate for school districts' operating expenses is 20 mills, excluding debt service or permanent improvement levies. If the district converted 4.2 mills of operating levy to the permanent improvement levy to fund capital expenditures, the district has the capacity to implement a replacement operating levy without voter approval. The school board would have the legal ability to increase the operating tax rate to yield approximately $670,000 per year, or approximately 3% of general fund revenues. This action provides a small level of budgetary flexibility and would provide additional funds for pay as you go capital expenditures, and minimizing the district's need to issue future debt.

The district levies a fixed dollar emergency levy that yielded $450,000 or 2% of fiscal 2015 general fund revenue. The emergency levy was originally approved in 1990. The most recent renewal, on May 6, 2014, extended it until May 6, 2020. Voter approval was strong at 65%. The district does not have plans to add any new levies to the ballot in the near future but Fitch believes additional levies will likely be needed over time as continuous levies are likely to provide little if any revenue growth.

Expenditure Framework

Fitch expects the natural pace of expenditure growth to exceed that of revenues, given employee salary and benefit cost increases and modest expected revenue growth.

Salaries and benefits account for 80% of total expenditures and are likely to increase slightly above the rate of inflation based on current staffing levels and historical trends. The district assumes relatively stable staffing levels driven by flat enrollment trends. The staff received a modest 2% salary increase in fiscal 2015 after a five year salary freeze. Fitch believes that the district's forecast is reasonable based on the district labor contracts and enrollment trends.

Expenditure flexibility is solid. Carrying costs for pension, OPEB, and debt service are low at 9.3% of operating expenditures. Management maintains a sound degree of control over the size of the workforce, as student to teacher ratios are very low giving the district the ability to consolidate classroom operations without union approval.

Long-Term Liability Burden

Overall debt and unfunded pension liabilities are low compared to the district's resource base, measuring 8.6% of personal income. Amortization of direct debt is rapid with 100% of outstanding principal paid within 10 years and the district has no additional plans to issue debt. The unfunded pension liability accounts for a significant portion of the district's long-term liability and based on current returns on assets, the net liability is likely to increase in the near term.

The district contributes to the Ohio Employees Retirement System (OHSERS) and the Ohio State Retirement System (OHSTRS). Both of these plans are cost sharing, multiple employer defined benefit plans and the district has 100% of its actuarially based annual required payment for the system in recent years. The ratio of assets to actuarially accrued liabilities is low at 74.2%; however, when adjusted by Fitch to reflect a 7% discount rate, the ratio drops to an estimated 68.6% as of June 30, 2014.

Operating Performance

The district exhibits strong gap-closing ability in Fitch's stress scenario, which incorporates the district's midrange inherent budgetary flexibility, moderate revenue stream volatility and healthy general fund reserves. Fitch's assessment of midrange inherent budget flexibility is based on limited legal ability to independently increase revenues and satisfactory expenditure flexibility.

The district has seen an improvement is general fund reserve balances in recent years, primarily driven by changes in the state's school funding formula. Fiscal 2015 ended with a $1.5 million surplus primarily from increased state aid ending the year with a healthy general fund balance at 18.5% of expenditures. Fiscal 2016 is expected to end with a $300,000 general fund surplus which will increase reserves to approximately $4 million, 20% of budgeted general fund expenditures. Management anticipates the increased state aid to moderate in the next two years and projects a break-even budget for fiscal 2017 and a potential deficit in fiscal 2018. The fiscal 2017 budget assumes a 5% increase in state aid and projects that aid will level off in fiscal 2018. Long term fiscal stability will require revenue growth, likely incorporating additional voted levies, to remain in line with future labor and service demands.