OREANDA-NEWS. Fitch Ratings has affirmed the following South Point Local School District, Ohio ratings at 'AA-':

--the district's Issuer Default Rating (IDR);

--$7.5 million unlimited tax general obligation bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an ad valorem tax on all taxable property within the district's boundaries without limitation as to rate or amount.

KEY RATING DRIVERS

The 'AA-' rating reflects a financial profile characterized by solid expenditure flexibility underpinned by the district's demonstrated ability and willingness to proactively reduce expenses in order to maintain a high level of financial resilience through economic cycles. The rating also incorporates the district's reliance on state aid for over 75% of operating revenues, a moderate long-term liability burden, and Fitch's opinion that the district would manage through an economic downturn reasonably well, maintaining an adequate level of financial resilience in the face of stagnant-to-declining revenues.

Economic Resource Base

South Point Local School District is located in southeast Ohio in rural Lawrence County, 10 miles northeast of Ashland, Kentucky. The district sits on the border of Ohio, Kentucky and West Virginia and is part of the multi-state Huntington-Ashland CBSA (combined statistical area). Prior to the 2007-2009 Great Recession, the area economy was considered to be strong, with a long history of unemployment rates that trended below the U. S. average. Since the recession, unemployment has trended above that of Ohio and the U. S., and the work force has contracted as some residents have moved to neighboring states in search of employment following the closure of several large manufacturing facilities in the area. Wealth levels in the district are below average with 2014 per capita income at 74% and 68% of the state and U. S. medians, respectively.

Revenue Framework: 'bbb' factor assessment

The district is heavily dependent on state formula aid for schools due to its below-average wealth levels. State transfers have increased at above the rate of inflation since 2004, but slightly below the rate of economic growth, and local revenues generally have been stagnant. Like most Ohio school districts, South Point lacks independent legal ability to raise revenues.

Expenditure Framework: 'aa' factor assessment

The district retains strong control of staffing, capital spending, retirements, work assignments and academic program design. By working within these areas, management has been able to effectively control costs. Expenses are likely to rise at above the rate of revenue growth in the absence of continued actions by management. Carrying costs are low at between 11% and 13% of governmental fund spending.

Long-Term Liability Burden: 'aa' factor assessment

The overall debt and unfunded pension liability burden is moderate compared to the district's aggregate wealth levels. The majority of the burden is related to pensions. The district has no new debt issuance plans aside from a potential capital lease of under $500,000.

Operating Performance: 'aa' factor assessment

The district has generally achieved balanced operations and maintained general fund reserves at robust levels, which supports strong financial resilience in light of what Fitch regards as the district's inherently midrange budgetary flexibility. Fitch expects that management would be able to implement sufficient gap-closing measures to maintain adequate financial flexibility during a moderate downturn.

RATING SENSITIVITIES

Enrollment Declines: The rating is sensitive to unexpected and persistent declines in enrollment that cause state aid transfers to stagnate or decline, leading to structural imbalances that pressure reserves.

Reserve Declines: Significant declines in fiscal reserves could pressure the rating.

CREDIT PROFILE

The district covers 31 square miles centered on South Point Village (2015 population: 3,924) in Lawrence County, Ohio, and includes portions of Fayette and Perry Townships. The area is located along the Ohio River at the southernmost point in the state (hence the village's name) and is part of a broader metropolitan area that includes portions of West Virginia and Kentucky. The regional economy was hit hard by the 2007-09 recession given its historical dependence on the manufacturing sector. As a result, South Point Village's population has declined by an estimated 8% since 2010 as residents moved elsewhere in search of employment. The population decline has affected enrollments, which were stable in the 1,800 to 1,900 range for some years, but have declined by 13% since the 2011-12 school year, to 1,621 in 2015-16 from 1,872 five years prior. The district's management team believes that enrollment declines are moderating and anticipates flat enrollments for the near term.

Revenue Framework

Ohio school districts operate within a restrictive revenue framework. The district derives the majority of its revenues from state foundation aid, which made up 77.5% of general fund revenues in fiscal 2015. The district derives approximately 20% of general fund revenues from continuous property tax levies put in place with voter approval some years ago. Like other Ohio school districts, South Point Local's ability to independently raise revenues is heavily constrained by statutes that limit property tax revenue growth to very tight annual limits in the absence of new levies approved by local voters.

All of the district's tax levies, with the exception of a 5-mill unvoted "inside" levy subject to Ohio's 10-mill limitation, consist of continuous levies approved by voters in prior years. All levies are fixed rate and can capture revenues generated by new construction within the district, but they are otherwise unable to capture appreciation, although they are vulnerable to declines in assessed values during periods of housing value depreciation.

The district's 10-year compound annual growth rate for revenues was 2.9% for the years 2004-2014 inclusive, a period embracing both the height of the property bubble and the steep recession that followed. Most of that growth was linked to increased state foundation aid (3% 10-year CAGR) given the district's status as a low-wealth, property-poor jurisdiction. Property taxes grew at a 2% CAGR over the same period from a combination of new construction and property value appreciation captured by the district's unvoted "inside" millage.

Given that property taxes make up a slender portion of revenues, future revenue growth will be tied more closely to increases in foundation aid. Fitch assumes the district's revenue growth rate will likely be slightly below the rate of inflation, but acknowledges some risks to the downside if enrollments continue to fall, which could result in foundation aid revenues stagnating near current levels. The future trajectory of enrollments will, therefore, strongly impact foundation aid, as enrollments are a major determinant of state funding.

Ohio state law limits Ohio school districts' ability to raise local tax revenues in the absence of voter approval. The district does not levy a local income tax and would have to hold an election in order to impose one. Voter approval requires a simple majority. The administration and school board have no independent legal ability to raise property taxes. Fees and charges for tuition and extracurricular activities may be raised at the board's discretion, but such increases are likely to be minimal.

The district has not gone to voters to approve a new tax levy since 2004, when voters approved a 0.5-mill permanent improvement levy to fund the continuous upkeep of the school facilities to be renovated with the proceeds of the district's series 2004 bond issue.

Expenditure Framework

The district provides K-12 public education to students residing within the district's boundaries. The major expenditure items relate to instruction, which includes teacher salaries and consumed 64% of general fund expenditures in fiscal 2015. Although the majority of the district's services are mandated by law, management has some control over program and curriculum design and administration. Headcount decisions are largely under the control of management, and the student-teacher ratio is well below Ohio's legal limit of 25 students per teacher, at roughly 15:1 in 2015.

Fitch believes the natural pace of spending growth would be above the natural rate of revenue growth in the absence of continuous policy actions by management. Teacher salaries, administration and facilities operations costs (including heating fuel and electrical) have grown at slightly above the rate of inflation since 2011. The modest pace of historical cost growth reflects management actions to control costs, which would have been higher in the absence of such action.

The district maintains solid expenditure flexibility. Management has a strong track record of controlling expenses to maintain structurally balanced operations. Between fiscal 2009 and fiscal 2012, the district and its two bargaining units agreed on a wage freeze to control costs with a minimum of layoffs. Most workforce reductions have taken the form of attrition or early retirement, which management has pro-actively encouraged as a way of controlling expenditure growth. Management and labor typically agree on three-year contracts, with the teachers' union and support staff union agreeing to finish their contracts in alternating years. The current contract with the teachers ends in June 2017, with a salary re-opener in the contract's final year. While the district retains ultimate control over headcount decisions, Ohio's public employee labor law requires municipalities to bargain with their labor unions over a broad variety of workplace rules and fringe benefits. Contract disputes are subject to binding arbitration.

Carrying costs for debt service, pension payments and other post-employment benefit (OPEB) contributions are presently moderate, totaling 10.5% of expenditures in fiscal 2015.

Long-Term Liability Burden

The district has a moderate long-term liability burden, as overall debt and pension liabilities equaled about 10.6% of residents' combined personal income in 2015. Of the $41 million of total long-term liabilities, direct debt accounts for $9.2 million and the district's proportionate share of the unfunded liabilities of two state pension plans accounts for $32 million, as adjusted by Fitch.

Employee pensions and retiree healthcare are provided through two state-sponsored defined benefit pension plans: the Ohio School Employees Retirement System (OSERS) and the Ohio State Teachers Retirement System (OSTRS). The plans reported a combined ratio of assets to liabilities of 74.2%, assuming a 7.75% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return for the plan's assets, we estimate a slightly lower ratio of assets to liabilities for the two plans of 68.5% as of the same date.

Operating Performance

Fitch believes the district's financial resiliency during downturns to be very strong based on the district's solid expenditure flexibility and reserves, given moderate levels of revenue volatility. In Fitch's view, the district retains sufficient control over curriculum design and staffing to make cost-saving changes in the short term that would assist it in closing budget gaps while maintaining adequate levels of financial flexibility throughout an economic downturn. Management could also pursue options that include eliminating certain athletic and/or other extracurricular programs and changing the district's capital footprint to reduce overhead costs across several fiscal years.

Management has acted consistently to support the district's longer-term financial flexibility during the most recent economic recovery. Since fiscal 2012, the administration has continued to seek a variety of recurring cost savings by embarking on energy efficiency projects that are expected to lower the long-term cost of heating fuel and reduce the district's electrical bills. Management has negotiated fewer severance days paid out to teachers and replaced a number of retiring senior staff with less costly new employees. The administration has also filled several open positions with re-hired retirees who are able to work at lower salary levels, with fewer fringe benefits. Over the same time period, the state of Ohio has secured higher pension contributions from employees to slow the rate of carrying cost growth connected to annual pension payments, a development that has benefited all school districts.

The district also has kept up with necessary capital projects required to maintain school facilities and grounds in good working order, including a $300,000 project to remedy the effects of erosion on several school properties in fiscal 2014 and fiscal 2015. A planned draw on general fund reserves in fiscals 2014 and 2015 was motivated partly by a desire to cash-fund a portion of capital expenditures rather than selling new debt. The fiscal 2015 operating deficit resulted partly from higher capital spending and partly from lower-than-anticipated state and local funding.

For fiscal 2016, management estimates balanced operations with general fund reserves concluding the year almost unchanged at approximately $5.5 million, equal to approximately 30% of spending. The district had budgeted for a $596,000 draw on reserves for fiscal 2016, but a nearly one-half million dollar funding increase from the state, coupled with $150,000 of higher-than-expected property tax revenues and below-budget salary costs has removed the need for most of the anticipated draw. The fiscal 2017 budget includes a $350,000 appropriation of reserves and grew by 3% year-over-year from fiscal 2016.