OREANDA-NEWS. Fitch Ratings has downgraded the following Columbus City School District, Ohio unlimited tax general obligation (ULTGO) bond ratings to 'AA' from 'AA+':

--$144.3 million general obligation (GO) school facilities construction and improvement refunding bonds, series 2006;

--$910 thousand GO school facilities construction and improvement bonds, series 2007;

--$2.5 million GO school facilities construction and improvement bonds, series 2008;

--$40.5 million GO school facilities construction and improvement bonds, series 2009;

--Issuer Default Rating.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are backed by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.

KEY RATING DRIVERS

The rating downgrade to 'AA' from 'AA+' reflects implementation of Fitch's revised U. S. Tax - Supported Rating Criteria, published on April 18, 2016. The revised criteria include increased focus on an entity's revenue framework including growth prospects and independent ability to increase resources. The 'AA' rating considers the district's weak revenue framework, offset by its sound reserves, expenditure controls, and moderate long-term liability burden.

Economic Resource Base

The Columbus area economy is anchored by a stable and growing economic base. Employment in the greater Columbus area is diverse with major employers like Ohio State University, the federal government, insurance, manufacturing, banking and medical sectors.

Revenue Framework: 'bbb' factor assessment

District revenue growth is expected to be below the level of inflation. 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. Fitch believes the natural pace of spending growth will be above revenue growth, requiring ongoing budget management.

Long-Term Liability Burden: 'aa' factor assessment

The combined liability burden of overall debt and unfunded pension liabilities is moderate in relation to the resource base.

Operating Performance: 'aa' factor assessment

Reserve levels are likely to remain variable as dependence on voter-approved levies for revenue growth makes maintenance of stable operating results impractical. The district has demonstrated its ability to manage expenditures without deferring essential services.

RATING SENSITIVITIES

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

Voter Support: Voter support for new tax levies is key to financial stability. Changes in patterns of voter support could shift the rating.

CREDIT PROFILE

The Columbus area economy has historically been strong, anchored by the presence of the state and federal government and Ohio State University. Employment in the greater Columbus area is diverse, with major employers representing government, insurance, manufacturing, banking and medical sectors. The unemployment rate in both the city and county compares favorably to the state and national rates.

Assessed value within the district declined a modest 1.6% in 2015 due to the county's triennial readjustment. Management expects that AV will remain flat for the next few years. Fitch believes that this is realistic, as 60% of the district is coterminous with the City of Columbus, which is displaying modest AV growth.

Revenue Framework

Ohio school districts operate within a restrictive revenue environment. Property taxes and state support each total about 46% of revenues. Most of Columbus' levies capture new construction and assessed value reductions, but not AV increases.

Management expects ad valorem revenues to remain flat, which Fitch views as consistent with the restrictions of the state levy framework. Continuous fixed rate levies account for 43% of total revenues and are exposed to revenue reduction risk. Inside mill revenue, which captures gains in assessed value, accounts for only 3% of revenues.

State-aid is capped at the state funding formula maximum annual increase of 7.5% in fiscal 2017. The district qualifies for this increase due to a high percentage of economically disadvantaged students. Declining enrollment has been due primarily to rapid charter school growth. Enrollment has declined approximately 6% since 2010, but management expects the pace of enrollment to remain flat in the near term due to modest population growth. The district has some buffer from enrollment declines, as modest shifts in the student body may not impact state aid expectations for districts qualifying for the maximum annual increase. The district population has grown approximately 2% since 2000. Fitch thinks enrollment expectations may be somewhat optimistic, as the pace of charter school growth has remained strong.

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 is nominal.

Expenditure Framework

The largest expenditure item is instruction, which includes teachers' salaries, accounting for 68% of total general fund spending.

Fitch expects the pace of spending growth to be above the expected pace of revenue growth without the use of strong expenditure controls.

The district has solid flexibility to cut spending, if necessary, throughout the economic cycle. Fiscal 2015 carrying costs for debt, pensions, and other post-employment benefits (OPEB) are moderate at 10% of government spending. Mandatory charter school per-pupil based spending is equal to 18% of general fund spending, further reducing the discretionary portion of the budget. Fitch is concerned that prolonged charter school enrollment gains may pressure expenditure flexibility.

The district's student-teacher ratio is well below the state maximum and signals additional instruction related expenditure flexibility. Management has identified approximately $40 million in potential staff-related cost savings, equal to about 5% of general fund spending. The district has also identified $18 million in non-personnel expenditures, in which they can achieve additional cost savings, including a reduction in travel and equipment purchases, dissolution of non-union contracts, and the elimination of other discretionary spending. Current labor contracts include no negotiated salary increases.

Long-Term Liability Burden

The district has a moderate long-term liability burden for overall debt and pensions at 14% of personal income. The district has plans to issue an additional $125 million in new debt within the next year; there is approximately $492 million currently outstanding. The unfunded pension burden comprises approximately 61% long-term liabilities and the plan's weak actuarial funding levels may cause the district's unfunded pension liability to increase despite consistent actuarially-based contribution practices. However, Fitch expects the district's long-term liability burden to remain moderate.

Pension and OPEB are provided through two state-sponsored defined benefit pension plans, the Ohio School Employees Retirement System (OSERS) and the Ohio State Teachers Retirement System (OSTRS). The combined plans reported an assets to liabilities ratio of 74.1%, assuming a 7.75% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return assumption, the estimated assets to liabilities ratio is 68.5%.

Operating Performance

The somewhat elevated volatility of the revenue stream and the practice of building up and drawing down reserves between revenue raising policy actions informs Fitch's evaluation of the adequacy of the district's reserves. Fitch believes now-strong reserves, along with its midrange inherent budget flexibility, provide the district with very strong gap-closing ability, which should enable it to manage through economic downturns while maintaining adequate financial flexibility.

Historical revenue volatility is attributable to fixed rate tax levies that declined in tandem with AV along with adjustments to the state-aid formula, which have created large spikes in the revenue stream. Typically, the district builds up reserves after passage of a new levy and over time begins to make continuous draws on reserves as inflation erodes the value of the levies until the next policy action is taken.

Management passed a 7.85-mill levy in 2008 amidst the great recession, which drove fund balance gains through 2010. In 2013 district voters rejected current expense levy. Rather, state aid increases filled the budget gap. The district intends to return to the ballot in 2016 for a 6.92 combined levy to fund both operations and capital project debt service. The operating levy would yield an approximate 7% boost to general fund revenues. Should the levy fail, the district will return to the voters the following year and is prepared to make expenditure cuts equal to operating variances.

Fitch's assessment of operating performance assumes that the district's performance will remain consistent with historical results and that while fund balance will fluctuate the budget will continue to be actively managed and fund balances will remain consistent with an 'aa' assessment.

District management budgets conservatively, utilizes strict expenditure management, and has an unofficial minimum cash-basis fund balance policy of 8-9% of spending. The district expects its current revenue stream to fully support operations until 2020, when in the absence of policy action cash forecasts show negative cash balances. At that point, a voter initiative will likely be needed.