OREANDA-NEWS. Fitch Ratings has affirmed the following Allen East Local School District, OH ratings:

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

-- $6.4 million unlimited tax general obligation (ULTGO) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

The district has limited control over revenues, but state aid provides a reliable revenue source. The district has solid control over expenditures and a moderate long-term liability burden. Fitch believes that the district's ample reserves would remain very strong in a moderate economic downturn stress scenario. The rating also incorporates the district's economy, which is agricultural in nature and has limited projected growth.

Economic Resource Base

The district economy is predominantly agricultural, with limited growth projected. The surrounding area is more diverse with two hospitals, Proctor and Gamble, and Ford Motor among the major employers. Ford maintained employment levels through the recession and Proctor and Gamble's workforce continues to be stable. Enrollment trends overall continue to be stable, in line with the stability in the local economy.

Revenue Framework: 'bbb' 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 and stable enrollment trends. The district is very limited in its ability to independently raise operating revenue.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to be in line with revenue growth and the district has solid ability to reduce expenditures, if needed.

Long-Term Liability Burden: 'aa' factor assessment

The district has moderate debt and pension liabilities, with pensions representing the bulk of long-term liabilities. Future capital needs are minimal.

Operating Performance: 'aaa' factor assessment

The district's budgetary flexibility and strong reserve levels leave it very well positioned to address revenue declines in economic downturns, particularly given the relative stability of the revenue stream.

RATING SENSITIVITIES

State Aid Changes: The district's rating is sensitive to changes in state aid funding and policies, including changes in the state aid formula, as state aid represents the majority of the district's revenues.

CREDIT PROFILE

The district serves a rural area in Allen County, located in west central Ohio, 80 miles from Toledo and 65 miles from Dayton. The district's current enrollment and population of approximately 1,157 and 5,782, respectively, have remained fairly stable since 2000. The district's tax base will likely see limited growth due to its rural and agricultural nature. Positively, district assessed value (AV) has increased 4% cumulatively over the last five years due in part to higher revaluation of agricultural land.

Revenue Framework

Ohio school districts operate with a restrictive revenue environment. The district's revenue mix is largely reliant on state aid (64% of fiscal 2015 general fund revenue) and property tax revenue (25%). The remainder of general fund revenue is from tuition and fees that the district collects through Ohio's open enrollment system. The large exposure to state aid makes the district vulnerable to the state's fiscal condition, but also serves as a protection against declines in the district's property tax base.

About 4% of the district's general fund revenue comes from an inside property tax levy that is a fixed rate and captures AV increases. The rest of the district's property tax revenue comes from outside levies, the majority of which are continuous and do not need to be renewed by voters (17% of general fund revenue). Only one emergency levy, which makes up only a modest 4% revenues and is a fixed dollar amount, is subject to voter renewal. That levy is next up for a renewal vote in fiscal year (FY) 2017. The continuing, fixed rate outside levies capture only growth due to new construction; when AV grows due to property appreciation, the rate is rolled back. The levy can decline with AV declines, introducing downside risk. Like all Ohio school districts, the district is dependent upon voter approval for new operating taxes.

The district's historical revenue growth has been at a rate below U. S. GDP, but slightly higher than inflation. Fitch believes that this level of growth is likely to persist due to expectations that state aid funding will generally grow at close to the rate of inflation and that enrollment trends will remain stable. Property tax revenue is expected to remain relatively flat, given the lack of new construction expected within the district.

The district's independent legal ability to raise revenues is very limited due to a requirement that voters approve any increases in the property tax levy.

The district has been able to take advantage of Ohio's open enrollment system to increase enrollment of students from outside of the district. As of FY 2015, tuition and fees from open enrollment made up a relatively large 10% of general fund revenue. The district does not control the tuition rate, however, and fluctuations in the demand for enrollment spots may put this revenue source at risk.

Expenditure Framework

The district provides K-12 services with about 51% of FY 2015 expenditures on student instruction and 43% on support services. The remaining 6% of expenditures in 2015 was on debt service payments.

Expenditures have risen in line with revenues, leading to a strong trend of operating surpluses. This rate of growth is expected to continue as the majority of growth is tied to teacher salary expenses, which are generally expected to increase with inflation.

Carrying costs are modest for the district, with pension, other post-employment benefits, and debt service costs accounting for only 12.6% of 2015 governmental fund expenditures. The district also has the ability to control employee costs by not filling vacant positions and utilizing staffing efficiencies within the school system. The district is under contract with both of its unions through the end of FY 2017. The district will begin negotiations on new contracts in the months leading up to June 30, 2017.

Long-Term Liability Burden

Overall long-term liabilities are moderate, with debt and unfunded pension liabilities at 10.7% of personal income. About $16 million of the total $22 million liability burden is in the form of unfunded pension liabilities. No new direct debt is expected in the medium term.

The district participates in the state-run School Employees Retirement System of Ohio (OSERS) and the State Teachers Retirement System (OSTRS), which are cost-sharing multiple-employer defined benefit pension systems, making 100% of the actuarially-based contribution. Fitch calculates the combined adjusted ratio of assets to liabilities to be 68.6% assuming a 7% discount rate.

Operating Performance

Fitch expects that the district's exceptionally strong gap-closing capacity would enable it to manage through an economic downturn while maintaining a high level of financial flexibility. The district's revenue streams have a low level of volatility, given the stable nature of enrollment and property tax values within the district. The district's open enrollment revenue also adds a degree of stability to the revenue stream. Available general fund balance was a very high 59% of expenditures in FY 2015.

The district has had balanced financial operations throughout the recent economic recovery, during which it continued to build and maintain high reserve levels. The district has adopted a reserve policy to set aside a budget stabilization reserve at a minimum of 30 days of operating expenditures. The combination of the district's expenditure control and available reserves, in conjunction with its limited exposure to economic cyclicality, leave it well prepared to withstand an economic downturn.