OREANDA-NEWS. Fitch Ratings has downgraded to 'AA-' from 'AA+' the following Princeton City School District Board of Education, OH ratings:

--$113 million of outstanding general obligation (GO) bonds;

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the district's full faith and credit ad valorem tax on all taxable property within the district. The bonds are voted unlimited tax general obligations of the Board of Education.

KEY RATING DRIVERS

The downgrade to 'AA-' from 'AA+' reflects the application of Fitch's revised criteria, published on April 18, 2016. The revised criteria include an analysis of the adequacy of reserves given an entity's limited independent legal ability to increase tax revenues without voter approval. All of the operating tax levies are permanent, thus not subject to voter renewal. However, expenditure growth is expected to outpace projected revenue growth absent future voter-approved tax levies. Additional considerations include the district's moderate long term liability burden and satisfactory expenditure flexibility.

Economic Resource Base

The school district benefits from its close proximity to Cincinnati and its diverse economy, with financial services, healthcare and manufacturing, including General Electric, Ford Motor Company and Proctor & Gamble.

Revenue Framework: 'bbb' factor assessment

The district has limited ability to increase tax revenues without voter approval. Revenue growth will likely remain relatively in line or below the level of inflation based on the current state aid funding formula and limited ability to benefit from improving property tax assessed valuations.

Expenditure Framework: 'aa' factor assessment

The district has benefited from active expenditure management resulting from long term financial planning and ongoing efficiency initiatives. Carrying costs for debt, pension and other post-employment benefits (OPEB) are moderate and the district has adequate financial flexibility to make future expenditure reductions.

Long-Term Liability Burden: 'aa' factor assessment

The district's long-term liability burden including unfunded pension liabilities and overall debt are moderate relative to the resource base. The total burden is equivalent to 15.8% of personal income.

Operating Performance: 'a' factor assessment

Moderate financial resilience through downturns is driven by solid reserves, limited budgetary flexibility and a volatile revenue stream. Positive general fund operations driven by long term financial planning, expenditure reductions and voter support for increased tax rates in fiscal 2012 have resulted in recent increases to general fund reserves.

RATING SENSITIVITIES

Reserve Maintenance: The 'AA-' rating is sensitive to the maintenance of a sufficient reserve position to offset limited budgetary flexibility and notable revenue volatility.

CREDIT PROFILE

The district's population of 42,620 resides within a 29 square mile area located in the northern portion of Hamilton County, with a small portion in Butler and Warren Counties. Most residents commute to work outside of the district in the Cincinnati region. Hamilton County's unemployment rate is lower than the state and national levels and wealth levels are in line with the state averages. Enrollment has remained fairly stable over the past few years at approximately 5,300 students and Fitch expects enrollment trends to increase slightly in the next several years.

Revenue Framework

Property taxes account for over 60% of revenues, followed by state aid at over 30%. Ohio school districts operate within a restrictive revenue environment. The district has limited legal ability to increase property tax revenues without voter approval. Currently, there no plans to go to voters for additional tax levies.

Revenues have been stagnant over the past decade, trending below the rate of inflation. The district's total tax rate for the operating property tax levy was 54.18 mills in fiscal 2015. All of the current operating levies are continuous so they do not require voter renewal. The fixed millage captures the growth driven by new construction; however, only a small portion of the millage, or 4.63 inside operating millage rate can benefit from improved property appraisal values (AV). As a result, the district will likely have to return to voters in the future to increase revenues. State aid to the district is growing at the capped rate of 7.5%. Because of this, state-imposed cap, changes in enrollment will not affect how much aid the district receives in the near term.

Management has some control over miscellaneous revenues. The district has utilized its newly renovated facilities for community rental space through shared joint use agreements for recreation, adult education and other community services.

Expenditure Framework

Fitch expects the natural pace of expenditure growth is likely to slightly exceed the rate of inflation due to labor cost demands although the district has identified areas for potential expenditure reductions.

The largest expense is employee salaries and benefits which account for 70% of expenditures and are managed through labor contracts. The most recent three-year labor agreements, effective June 1, 2016, included a 2.5% annual increase after a three-year salary freeze. Health benefit costs declined in fiscal 2015 and 2016 due to plan changes and decreased staffing levels but are expected to increase slightly in fiscal 2017. The district also anticipates increasing spending for facility improvements and technology in future budgets.

Expenditure flexibility is adequate. Carrying cost for long-term pension and debt are moderate at 20.5% of governmental fund expenditures. The district has demonstrated its ability to cut expenditures when necessary. Through ongoing initiatives, the district reduced total per-pupil expenditures to $12,983 in fiscal 2015 from $15,922 in fiscal 2010. Staffing levels decreased by 150 employees from 2009 through 2014 and the district outsourced transportation services for savings.

The district's finance committee which focuses on continuously improving district operations and reducing costs previously identified over $6 million in potential reductions, approximately 9% of budgeted expenditures that could have been made if the continuous levy did not pass in 2012. The levy increase passed but many of these cuts are still available to be made if necessary.

The district projects that staffing levels will remain consistent in the five year forecast; however; under current labor agreements the district has the ability to make workforce reductions if necessary. The district allows open enrollment; however, lost more students than it gained in fiscal 2016 resulting in a net loss of $419,318 for the year. Management is marketing the district's open enrollment and facilities to bring back students and augment revenue collections, but further losses are possible.

Long-Term Liability Burden

The long-term pension and debt liabilities equate to a moderate 15.8% of personal income. Overall debt is 5.4% of market value and the amortization rate is slow with 27.5% of principal paid within 10 years. The last bond referendum, for $120 million in new construction and renovations, was approved in 2010 with a fairly strong voter approval margin of 59%. The district has no authorized and unissued debt and no future borrowing plans.

The district contributes to the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS) to fund other pension and OPEB. Both plans are cost sharing, multiple employer defined benefit plans and the district make 100% of its actuarially based annual required payment for the system. The actuarial assets to liability is 74.1% as of June 30, 2015, however, when adjusted to a 7% rate of return is approximately 68.4%.

Operating Performance

Fitch believes the district has satisfactory reserves to offset revenue shortfalls in a moderate economic downturn scenario. Fitch believes that the districts inherent budget flexibility is limited given the inability to increase revenues without voter approval. The district would likely have to make expenditure reductions and draw on reserves to maintain stable general fund operations in the absence of a new voter approved levy if revenues weakened.

The district's lack of independent revenue flexibility is mitigated by demonstrated voter support for additional levies. The 2012 levy increase helped stabilize general fund operations. Officials agreed to modest expenditure reductions and school improvements if voters approved the levy increase. The levy increase, along with expenditure reductions, led to an increase in available general fund balances to an ample 54.6% of general fund expenditures in fiscal 2015 from 9% in fiscal 2009, improving the district's ability to withstand a potential economic downturn.

Management reports a $2.6 million general fund surplus for year-end fiscal 2016 due to salary savings from attrition, one-time revenues including an unbudgeted Medicaid reimbursement and other positive budgetary variances. Projected general fund balance for fiscal 2016 is expected to exceed 56% of general fund expenditures. The district has a strong record of managing expenditure growth; however, will likely go back to voters within the next four years to for additional revenues in order to maintain stable financial operations.