Fitch downgrades Oregon City School District Bond rating to A- negative

Oregon City has been downgraded to a A- negative, which is worse rating than Toledo got last week.
NEW YORK - (Business Wire) In the course of routine surveillance, Fitch downgrades the rating on Oregon City School District, Ohio's (the district) $42 million outstanding unlimited tax (ULT) general obligation (GO) bonds to 'A-' from 'A+'. The Rating Outlook is Negative.

The downgrade reflects both a severe deterioration in financial flexibility and a pressured regional economy that could result in long-term structural changes to the district's economic base. The Negative Rating Outlook indicates that further downward pressure is likely if the district is unable to stabilize the recent trend of declining reserves by raising recurring revenues and/or cutting expenditures. A history of strong voter support for tax increases remains the key credit strength however, the most recent ballot initiative passed on the second attempt.

The rating further reflects industry concentration risk with the presence of Sun Oil and BP Oil refineries and related companies, a high regional unemployment rate climbing faster than the state and nation, average income levels, and limited future capital needs.

Fiscal 2008 was the second year of negative unreserved fund balance in the general fund and cash projections show another significant reduction in fiscal 2009. The fiscal 2008 unreserved general fund balance totaled -$3 million or -7.2% of general fund spending (GAAP basis). The fiscal 2009 forecast shows an additional draw on fund balance despite a half-year of collections for the district's increased operating millage approved by voters in March 2008. The year-end cash balance forecasted for fiscal 2009 totals just $950,000 or 2.2% of expenditures (cash basis). The forecast shows a negative cash balance in fiscal 2010; substantial additions to recurring revenue and/or reductions to expenditures, which continue to outpace revenues, will be required to achieve balance.

The district's revenue base has been hit hard by the state's repeal of the tangible personal property tax. Tangible personal property fell from 21% of the assessable base in 2005 to 0.1% in 2008, resulting in a $9 million decline in recurring revenue. State aid has made up a large part of the difference but is only guaranteed through 2011. While it is typical for Ohio school districts to experience cyclicality in reserve levels due to the reliance on ballot initiatives for increased revenues, the fluctuation in the district's reserves is substantial. The unreserved balance in the earlier part of the decade topped 17%, compared to the current -7.2%, and the revenue base is now structurally different with a larger burden on the residential property tax base due to the repeal of the tangible personal property tax. The district does maintain some excess flexibility in the capital projects fund.

The district is located directly outside of Toledo in Lucas County. The district's population is estimated to have dropped 2.8% since 2001 to 21,981 people in 2007 and enrollment is expected to continue to decline slightly. Top employers and taxpayers include two oil refineries and their related construction companies as well as utilities and healthcare facilities. The regional employment picture is concerning, with unemployment rates for the county and MSA climbing at a faster rate than the state and US. The Lucas County unemployment rate grew from 6.1% in November 2007 to 9.5% in November 2008, compared to the national average of 4.5% and 6.5%, respectively. The Toledo area maintains exposure to the troubled auto industry with multiple manufacturing and supplier plants. While the district represents a small portion of the county and MSA, regional economic pressure could create long-term challenges for all area jurisdictions. Income levels for Oregon City are just above the state and national average on a per capita basis and more comfortably above on a median household basis.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

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