OREANDA-NEWS. Fitch Ratings affirms the following Fairfield City School District, OH ratings:

--Issuer Default Rating (IDR) at 'AA';

--$61.3 million unlimited tax general obligation (ULTGO) school improvement bonds, series 2014 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligation of the school district payable from its unlimited ad valorem taxing power without limit as to rate or amount.

KEY RATING DRIVERS

The 'AA' IDR and ULTGO rating are based on the district's low long-term liability burden and very strong financial resilience characterized by healthy general fund reserves given limited independent revenue-raising ability, solid expenditure flexibility, and relatively high revenue volatility.

Economic Resource Base

The school district benefits from its close proximity to Cincinnati and its diverse economy, with financial services, healthcare and manufacturing. The district includes the City of Fairfield (68% of the district's assessed valuation) and the Fairfield Township (32%). Enrollment has remained fairly stable over the past few years at approximately 10,000 students, which make it one of the largest districts in the state.

Revenue Framework: 'bbb' factor assessment

The district has limited ability to independently increase revenues without voter approval. Revenue growth prospects are expected to remain moderate based on anticipated state aid funding and relatively stable assessed valuations.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to exceed revenue growth given employee salary and benefit cost increases. Management has some flexibility to make cost reductions in discretionary spending and to manage the size of its workforce.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low at 8.9% of personal income.

Operating Performance: 'aa' factor assessment

In the event of a moderate economic downturn, Fitch believes that the district would maintain strong financial flexibility given its healthy reserve position that serves to offset moderate revenue stream volatility and solid ability to control expenditures.

RATING SENSITIVITIES

State Aid, Reserve Maintenance: The rating is sensitive to change in Ohio's school funding formula that could result in revenue declines.

Health General Fund Reserves: The rating is sensitive to maintenance of healthy reserve levels given expected revenue volatility and management's limited ability to independently increase revenues.

CREDIT PROFILE

The Fairfield City School District, located in Butler County in Southwest Ohio, is approximately 18 miles from downtown Cincinnati and 36 miles from downtown Dayton. Property tax valuations were relatively flat from 2011 through 2015; however they are expected to increase slightly in 2016. Wealth levels and unemployment are in line with state levels. Enrollment has hovered around 10,000 students since 2011 with a slight decline for fiscal 2016. The city has experienced a slight increase in population in recent years.

Revenue Framework

Ohio school districts operate within a restrictive revenue environment. The revenue framework is based on the inability to independently increase tax rates, limited growth in the tax base and trend of increasing state aid. The largest source of general fund revenue is the property tax levy, which accounts for over half of annual revenues, followed by state aid at approximately 40%.

Total general fund revenues have increased at a rate above the national rate of inflation over the past 10 years due to increased state aid. The state aid allocation is based on a funding formula that has been beneficial to the district because the formula is weighted towards lower property wealth and income. State aid is expected to increase at a slower rate in the next several years. A portion of the general fund revenue growth was driven by a new voter approved 6.4 mills continuous levy approved in November 2011.

The district has very limited independent ability to raise revenues, as any new or increased operating taxes require voter approval. The majority of the district's levies are voter approved continuous outside levies that do not require voter re-approval. While there is no renewal risk for existing levies, officials may need to ask for voter approval of new revenues to maintain stable financial operations in the future because voted levies capture growth due to new construction but not increases in existing taxable values. The district currently has no plans to request additional levies, although officials anticipate limited growth in the local economy. State revenues are expected to increase in fiscal 2017, but the district is vulnerable to changes in state funding in the next bi-annual budget beginning fiscal 2018.

The district has taken advantage of Ohio's open enrollment system to attract students from outside of the district. As of FY 2015, tuition and fees from open enrollment made up a relatively small 3.8% of general fund revenues.

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. Expenditure flexibility is solid, and carrying costs for debt service pension and other post-employment benefits (OPEB) are moderate.

The pace of expenditure growth has been in line with revenue growth in recent years; however in fiscal 2017 through fiscal 2020, employee salaries are expected to increase by 2.25% annually based on negotiated labor agreements. In addition, the district will be adding seven new teachers and various administrative positions in fiscal 2018.

Carrying costs for pension, OPEB and debt service are moderate at 14% of governmental expenditures. Management has solid flexibility to make expenditure reductions in the current labor environment. Labor contracts provide a process that allows some flexibility to control headcount and work rules. The areas of greatest flexibility include capital and purchased service agreements, which make up 20% of spending. Management has been proactive in controlling employee benefit costs by pursuing lower rate plans and through employee contributions.

Long-Term Liability Burden

The 'aaa' assessment reflects the district's low long-term liability burden, with unfunded pensions and overall debt equating to a low 8.9% of personal income. Debt levels are expected to remain stable given limited future borrowing plans and little overlapping debt. The unfunded pension liability accounts for a significant portion of the district's long-term liability and is vulnerable to increases given recent actual investment returns relative to the plan's assumption. However, Fitch believes the overall liability burden on personal income will remain low.

The district contributes to the Ohio State School Employees Retirement System (SERS) and the State Teachers Retirement System for pension and OPEB benefits. The state plans are both cost-sharing, multiple-employer defined benefit plans. Fitch calculates the combined adjusted ratio of assets to liabilities to be 68.5% assuming a 7% discount rate.

Operating Performance

Operating performance is very strong, characterized by very strong gap-closing capacity and replenishment of reserves during the recovery. Under a moderate economic downturn scenario, Fitch believes the district would likely utilize a portion of its available general fund balance to address a revenue decline. Given the limited independent ability to increase revenues, the district has the ability to mitigate the use of reserves through expenditure reductions and cost controls.

Fitch assesses the district's inherent budget flexibility as 'midrange' given the limited ability to increase revenues and moderate ability to control expenditures. The district has maintained strong general fund reserves over the past five years primarily driven by increased state aid. Available general fund reserves were a healthy 40.7% of general fund expenditures at the end of fiscal 2015, providing significant financial cushion to offset moderate revenue volatility.

The 6.4 mills permanent continuous tax levy approved in 2011 has helped improve general fund results. In addition, the state school funding formula included in the state's bi-annual budget has been favorable to the district with increases expected through 2018. After four years of large general fund surpluses, management reports a modest surplus for fiscal 2016. With strong cash balances and healthy general fund reserves, the district has no plans to go to voters for additional revenues in the near term. In the long term, the district anticipates the need for additional voter approved revenues to maintain balanced operations over time and to fund future capital needs.