OREANDA-NEWS. Fitch Ratings has affirmed the following Cincinnati City School District OH's (the district), unlimited tax general obligation (ULTGO) bonds:

--Approximately $334.6 million, series 2006 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an ad valorem tax levied upon all taxable property within the district, without limitation as to rate or amount.

KEY RATING DRIVERS

HEALTHY FINANCIAL POSITION: Financial reserves and cash position are currently strong but maintenance is reliant to a large extent upon continued voter approval of tax levies.

DEMONSTRATED VOTER SUPPORT: The district has generally received strong voter support for both new and renewal operating levies. Two property tax levies were recently renewed by a wide margin, although ongoing support for a new levy is uncertain.

STABLE/DIVERSE ECONOMY: The economy benefits from the stabilizing presence of numerous corporate headquarters and is a regional center for healthcare and higher education employment.

BELOW-AVERAGE WEALTH INDICATORS: District wealth levels are below state and national averages, and, typical of urban environments, poverty levels are well above-average.

MANAGEABLE LONG-TERM OBLIGATIONS: The district's debt profile is moderate on a per capita basis but high relative to full value. Carrying costs for debt service, pension and other post-employment benefit (OPEB) are affordable. Debt ratios should decline as the district has completed its massive facilities master plan, no additional borrowing is anticipated and amortization is above-average.

RATING SENSITIVITIES

MAINTENANCE OF STRONG RESERVES: Maintenance of the current rating and Outlook is dependent on the continuation of strong GAAP reserve levels and budgetary balance. Failure to garner voter support for a new tax levy to close future budget gaps or identify offsetting measures could result in downward rating action and/or a Negative Outlook.

CREDIT PROFILE

Located in Hamilton County and encompassing 90 square miles, the district is the third largest public school district in the state. With an estimated population of 331,086, the district serves the city of Cincinnati and several surrounding area communities.

The district's nearly $1 billion, 10-year capital plan was completed on time and under budget. The project downsized the district's buildings from 66 to 55, completely rebuilding/renovating the remaining facilities. District enrollment of approximately 33,365 has shown recent positive trends, increasing by 1.23% from 2013 to 2014 and 3.7% from 2014 to 2015, after a trend of declines. Management is projecting small increases through 2019 as a result of the rehabilitated facilities, introduction of new programs, open enrollment and the district's strong academic reputation.

HEALTHY GAAP RESERVES-BUDGETARY CHALLENGES FORECASTED

Primary support for operations comes from property taxes, which provides 54% of general fund revenues, followed by state foundation aid at 46%. Property tax revenue has been fairly stable, but will need to increase via a new tax levy in order to offset projected cash deficits. Because the district is categorized as 'wealthy' by the state for funding purposes, management expects aid from the state will not increase under the new state biennium (2016-2017) budget; wealthy districts are expected to raise revenues locally.

On a GAAP basis, for fiscal 2014 (year-end June 30) the district reported a general fund operating surplus after transfers of $3.4 million. The unrestricted fund balance remained ample at $161.1 million or 34.7% of general fund spending, slightly lower than the 36.6% in 2013. Audited GAAP statements for fiscal 2015 are not currently available, but Fitch does not expect any material change in fund balance or reserves from the prior year.

On a draft unaudited cash basis, for fiscal 2015 the general fund reported a surplus of $5.7 million, higher than the May 2015 forecast of $1 million. The ending cash balance at June 30, 2015 was $58.7 million, or 12% of expenditures compared to $52.9 million or 10.5% of expenditures at June 30, 2014.

The district's May 2015 (includes 2015 draft actual numbers) five-year cash-basis forecast projects budgetary challenges with annual deficits starting in 2016 and continuing through 2019. Ending cash balances remain positive through 2016 with a $43.8 million cash deficit (8% of expenditures) projected in 2017, increasing to $200.4 million in 2019. The forecast does not include renewal or new levies. The district's two renewal levies are up for renewal in 2017 and 2019 and a new levy is being considered for the November 2016 ballot. Given the district's record of outperforming its financial projections, historical strong voter support for renewal and new levies and pro-active management of expenses, Fitch expects the district to manage future budgetary gaps. However, consistent failure to pass renewal and new levies may drive downward rating migration.

DEMONSTRATED VOTER SUPPORT FOR TAX LEVIES

The district typically builds up general fund balance following the passage of a new operating levy, and then draws down some reserves before requesting voter approval for another millage. This pattern is common to Ohio school districts and underscores the importance of voter support to financial health. Current levies do not grow so any increase in revenues is dependent on new or replacement levies.

Financial stability remains dependent on the continuing approval of renewal and new property tax levies. Only two of the district's levies (totaling about 45% of 2014 GAAP general fund revenues) require renewal every five years and both have recently been strongly supported by voters. In November 2014, a 10.26 mill ($65.2 million annually) was renewed by 70% of the voters and in November 2012, an 8.55 mill ($52 million annually) renewal levy was approved by 68% of voters. Typical of most Ohio school districts, new levies have proven harder to garner voter support. The district has a strong history of eventually passing new levies although some are defeated on the first attempt. Of the 21 levies that have been on the ballot since 1987, six have been defeated - four being new levies that were subsequently approved on the second attempt.

DIVERSE ECONOMY; STABILIZING TAX BASE

The Cincinnati economy is broad and diverse and includes the corporate headquarters of a number of Fortune 500 companies as well as the University of Cincinnati and Cincinnati's Children's Hospital. Its role as a regional center for healthcare and higher education employment provides economic stability.

The city's recent employment growth at 2% (May 2015 to May 2014) has been fairly strong, outpacing both state and U.S. levels. Slower labor force growth at 1.2%, also compares favorably to both state and national averages. For May 2015, the city's unemployment rate was 4.9%, the same as the state but below the national rate of 5.3%. The district's per capita income is slightly lower than the state and U.S. at 97% and 90%, respectively. However, median household income is considerably weaker at 73% of the state and 67% of the U.S. Typical of urban environments, the poverty level is almost double that of the state and nation.

Assessed valuation declined by 8.6% in 2012, following a scheduled reappraisal but appears to be stabilizing. A small decline (less than 1%) was recorded in 2013 but increased (1.5%) in 2014. Going forward, the district is projecting stable to small increases which Fitch believes is reasonable given a number of new projects coming on line and on-going economic development.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt is moderate at $3,589 per capita but above-average at 6.9% of market value due to borrowing associated with the district's facilities master plan. Fitch expects the district's debt levels to remain stable to declining given no additional major borrowing plans and above-average debt amortization with 58% retired in 10 years.

The district contributes to the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS) to fund both pension and other post-employment benefits (OPEB). Both plans are cost-sharing, multiple-employer defined benefit plans with weak funded ratios. Based on a 7% rate of return, Fitch-estimated system-wide funded ratios were 60.3% for SERS at June 30, 2013 and 64% for STRS at June 30, 2014. The district consistently contributes 100% of its statutorily required payments to both plans, which is lower than the actuarially required contribution. Fitch considers carrying costs to be moderate with debt service, pension and OPEB comprising 14.5% of government funds spending.