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Fitch Affirms Clawson Public Schools, MI's Bonds and IDR at 'A'; Outlook StableFitch Ratings has affirmed the following Clawson Public Schools, MI ratings at 'A': --$9 million school building and site bonds, general obligation unlimited tax (ULTGO), series 2014; --Issuer Default Rating (IDR). The Rating Outlook is Stable. The enhanced rating on the bonds, based on the state of Michigan's State School Bond Loan Fund program, is 'AA' with a Stable Outlook. SECURITY The bonds are payable from the district's full faith and credit and an unlimited ad valorem property tax pledge. KEY RATING DRIVERS Fitch's affirmation of Clawson School District's 'A' IDR and 'A' GO rating reflects the district's moderate long-term liability burden, solid expenditure management and adequate financial flexibility, which together provide an offset against the district's limited ability to raise revenues. Fund balances remain narrow, but would provide an adequate cushion in the event of a moderate downturn. Fitch believes that finances could become stressed in a downturn but would quickly recover. Economic Resource Base The district serves the city of Clawson, MI and a small portion of the city of Royal Oak ('AA'/Outlook Stable). The district is coterminous with Clawson, which encompasses approximately 2.3 square miles and has a population of about 12,000. Clawson and Royal Oak are located in Oakland County in southeast Michigan. Enrollments have fluctuated between 1,900 and 1,650 since 2007. Enrollment is 1,720 for the 2016-17 academic year, representing a 3% year-over-year increase. In total, enrollments have declined by 8% since 2011, however, when enrollments equaled 1,875. The district generally benefits from increased competition among Michigan public school districts. Management estimates that nearly one-third of its students are residents of neighboring school districts. Revenue Framework: 'bbb' factor assessment Revenues are likely to expand at approximately the rate of inflation given what Fitch views as muted growth prospects for enrollments and state aid, which are the largest revenue sources. As with most U.S. public school systems, the district's independent revenue-raising ability is heavily restricted by state statute. Expenditure Framework: 'a' factor assessment The district's expenditure flexibility is moderate given its somewhat elevated carrying costs. Fixed spending on debt service, statutorily required pension payments and other post-employment benefits (OPEB) accounted for 23% of fiscal 2015 spending. The district has limited leeway to reduce or eliminate academic and athletic programs, as they attract students from neighboring districts under Michigan's open enrollment policies, a source of competitive advantage for Clawson. Given the slow pace of expected revenue growth, active expenditure management will be necessary. Long-Term Liability Burden: 'aa' factor assessment The district's long-term liability burden is moderate. Net direct and overlapping debt, along with its public pension liabilities, equaled approximately 16% of personal income in fiscal 2016. Direct debt, overlapping debt and employee pension liabilities each account for about one-third of the total liability, with unfunded pensions a slightly higher and growing percentage. Operating Performance: 'a' factor assessment Fitch regards the district's financial flexibility as adequate. General fund reserves remain narrow after two years of gradual rebuilding; Fitch believes fiscal operations could become stressed in a downturn, but would likely recover after one to two fiscal years. Budget management during the recovery has been characterized by a strong focus on preserving fiscal stability. RATING SENSITIVITIES ENROLLMENT DECLINES: Persistent enrollment declines could negatively impact state aid, resulting in a larger disparity between revenue and expenditure growth, thereby constraining financial flexibility. STATE AID REVENUE PATTERNS: If state funding increases at a pace faster than what Fitch currently expects, then this could place positive pressure on the rating, particularly if the district uses the additional revenues to bolster its fiscal reserve cushion. CREDIT PROFILE The school district primarily serves the city of Clawson, which is located in Oakland County in southeastern Michigan. The area which the district serves benefits from residents' access to employment opportunities in the robust Oakland County economy. The county is a major employment center for engineering-related occupations. All three major U.S. automakers continue to have a significant presence in the county. In addition, resident personal income levels in the county are high. Long-term challenges remain for the region as southeast Michigan continues to diversify away from its heavy reliance on the automotive industry. Taxable assessed values (TAV) have increased for three consecutive years (2014 through 2016) due to strengthening of the local real estate market. Renewed TAV growth follows steep peak-to-trough losses of about 24% in the district from fiscal 2009 through 2012. The local housing market is performing well, with solid increases in Zillow's home value index over the past five years. Poverty levels are below those of the state and the U.S. Revenue Framework State aid serves as the district's largest revenue source, accounting for approximately 70% of general fund revenues on an annual basis. Local sources, including property taxes and inter-district transfers, accounted for 27% of general fund revenues in 2015. Local property taxes typically generate between 7% and 9% of revenues. The district's legal ability to raise revenues is limited. The district's natural revenue growth prospects are moderate. Future growth in state aid is directly tied to the economic fortunes of the state of Michigan, the state's willingness to fund K-12 public education, and district enrollment levels. The district's enrollment history has been static to mildly declining, with the student body averaging slightly below 1,800 over the past 10 years. Enrollment declines have had a negative impact on state aid receipts in the past. Fitch has calculated a 10-year compound annual growth rate (CAGR) of 3.8% for the district's general fund revenues, which is just above average U.S. GDP growth over the same period. Two large increases in state aid just prior to the last U.S. recession accounted for the largest share of aid revenue growth. Fitch expects growth in state aid will be somewhat more muted in the future, rising at closer to the level of inflation if enrollments stay stable. Property taxes are likely to expand at a rate below that of inflation given modest growth in the tax base. The district's independent legal ability to raise revenues is extremely limited given the nature of Michigan school district funding. Under Proposition A, the state funds the majority of public school budgets and leaves little to no local control over revenues in the hands of the individual public school districts. Management has some ability to raise athletic and academic fees, though these provide a minimal contribution to finances. The ability of all Michigan municipalities to raise their annual property tax levies is limited by the Headlee Amendment and successive adjustments to Headlee that have been enacted since the late 1970s, including Proposition A of 1994. Expenditure Framework The district's largest expenditure items are student instruction (56% in fiscal 2015 general fund expenditures) and support services (39% of expenditures). The general fund is by far the largest of all the district's governmental funds, accounting for 76% of total operating spending. The natural pace of spending growth is likely to exceed the pace of revenue growth in the absence of policy action. The district has been successful at managing salary and employee benefit costs and adjusting staffing to align with recent enrollment declines; however, potential future pension cost increases and the likelihood of higher post-employment benefit (OPEB) contributions could offset management's ability to control costs elsewhere in the budget. Fitch regards the flexibility of the district's major expenditure items as adequate. Fixed carrying costs for debt service and retiree benefits are slightly elevated, at approximately 23% of expenditures in fiscals 2015 and 2016 (unaudited). Pension contributions could rise further as the state mandates increases in annual contributions to improve the funded status of the state teachers' pension plan, though the district's contribution for fiscal 2017 is set to decline slightly. Pension contributions for Michigan school districts are funded at statutory, rather than actuarial levels, with the state providing the difference. OPEB contributions are rising; debt service is scheduled to level off in the near term. The district has successfully controlled costs in the past. Enrollment declines in fiscals 2012 through 2015 enabled management to reduce the total number of teachers, as well as replace retiring teachers with new teachers at lower starting salaries. The district's ability to reduce expenses may be waning, however, as it has already realized attrition-related efficiencies and taken savings from pay cuts ranging between 1.5% and 3% across all bargaining units in 2014 and a subsequent two-year salary freeze. The pay cuts for all but one bargaining unit will be restored in the current fiscal year (i.e. 2017) and are unlikely to be repeated in the near term. Management's ability to cut funding for academic and athletic programs is also limited, given that its offerings represent a competitive advantage. The district estimates that about one-third of students come from neighboring districts. It receives a share of per-pupil state aid from the sending districts. Long-Term Liability Burden The district's long-term liability burden is moderate, with unfunded pension liabilities and net overall debt equal to an estimated 16% of district personal income. The debt burden is roughly equally split between bonds issued directly by the district ($28 million as of June 30, 2016 - unaudited) and those issued by overlapping municipalities ($28.6 million) including the district's share of debt issued by the City of Clawson and Oakland County. The district has no near-term debt issuance plans. Amortization of direct debt is rapid, with about 81% of principal repaid within 10 years. Clawson Public Schools participates in the Michigan Public School Employees' Retirement System (MPSERS), a cost-sharing multi-employer defined benefit pension plan. The district typically contributes 100% of its contractually required contribution to the plan, with the state contributing the remainder to fund the full actuarially determined amount. As of Sept. 30, 2016, the plan reported an assets-to-liabilities ratio of 63% using the official 8% discount rate (7% for the Pension Plus plan within MPSERS). Fitch calculates an adjusted ratio of assets to liabilities of 57% using a slightly more conservative 7% discount rate assumption for the district's proportionate share of MPSERS' net pension liability. Operating Performance District revenues demonstrate limited volatility, even during periods of recession. Financial operations could become stressed during a mild downturn given the district's revenue constraints and a presently limited reserve cushion, but Fitch believes the district would adapt by instituting cost controls, negotiating concessions with labor, and making modest draws on reserves. Fitch expects management would restore fiscal flexibility in one to two fiscal years, at which time any state aid cuts resulting from the recession would likely be restored. Fitch expects the district to maintain available reserves above the 'bbb' assessment level (i.e. 2% of spending) during periods marked by a modest decline in U.S. GDP. The district's historically low revenue volatility and adequate gap-closing capacity will limit the extent of reserve draws in a mild recession. The district's current formal reserve policy requires a minimum available reserve balance equal to 5% of general fund spending. Management has moved proactively to restrict spending growth during periods of revenue stagnation, which would adequately describe the past five fiscal years. Enrollment declines in fiscals 2013 and 2014 contributed to weaker-than-anticipated state aid revenues. The district responded by securing concessions from labor groups that included higher employee contributions for health insurance and dental premiums and temporary pay reductions. After reaching a low point of $636,000 in fiscal 2014 (equal to 2.9% of general fund spending), available fund balances rose by $377,000 in fiscal 2015 to just over $1 million, or 4.6% of spending. As per the district's draft fiscal 2016 financial statements, management achieved a second operating surplus of approximately $182,000, bringing general fund reserves to $1.2 million, or about 5.5% of spending. The fiscal 2017 budget was balanced with the use of $700,000 of fund balance and conservatively assumed that enrollment would decline to just under 1,600 students. As of October 2016, enrollments were 113 higher than anticipated, which will net the district an additional $900,000 in state aid for fiscal 2017, and eliminate the planned draw on reserves. Elimination of two positions due to departures will generate an additional $280,000 in savings, according to management. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools. 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