Fitch Rates Minneapolis School District No. 1, MN's $60MM GOs 'AA+'.

CHICAGO -- Fitch Ratings assigns an 'AA+' rating to the Minneapolis Special School District No. 1, Minnesota's general obligation (GO) bonds as follows:

-- $25,640,000 GO bonds, series 2006A;

-- $25,660,000 GO pension bonds, taxable series 2006B;

-- $8,795,000 GO refunding bonds, series 2006C.

The rating is based on the district's participation in the Minnesota School District Credit Enhancement Program. Also, Fitch assigns an 'AA-' underlying rating to the bonds and affirms the same rating on $467 million of outstanding GO debt and certificates of participation. The underlying rating has a Negative Outlook. Although the district's financial performance has improved through deep programmatic and personnel reductions, Fitch will consider moving the Outlook to Stable upon review of fiscal 2006 financial results, the outlook for state revenue support, and the implications of shifting teacher pension obligations to the state.

All three series will sell competitively on Sept. 12, 2006. Public Financial Management is serving as financial advisor. The series 2006A will finance various capital improvements, bus replacements, technology and refrigerated trucks; series 2006B will finance the outstanding pension liability with the Minneapolis Employees Retirement Fund (MERF); and series 2006C will current refund the outstanding series 1998B GO refunding bonds. The bonds have a general obligation pledge of the school district, payable from unlimited ad valorem property taxes.

The 'AA-' underlying rating is based on Minneapolis Special School District No. 1's prudent financial management, manageable debt levels, and diversified economic base. The district's underlying Rating Outlook is Negative. Recent budgetary pressures, due to reduced and delayed state aid to school districts and a slight decline in enrollment, forced the district to make sizable budget and personnel cuts to limit the potential shortfalls in fiscal years 2002 through 2004. The district's budget tightening has included personnel reductions, enlarged class sizes, closed schools and deferred capital spending. After a period of budgetary shortfalls, the district produced general fund surpluses of $7.5 million in fiscal 2004 (June 30 year-end) and $11.0 million in fiscal 2005. While capital needs are significant, debt levels should remain moderate due to the above-average amortization of existing debt, approximating 80% in ten years. The district is coterminous with the city of Minneapolis (rated 'AAA' by Fitch), which is a major regional financial, services, and trade center. Income levels in the area are above average, and unemployment rates are consistently near or below state and national levels.

Due to fiscal pressures created by reduced state aid payments and declining enrollment, the district has cut expenditures drastically through staff reductions and less administrative spending. Since Jan. 1, 2002, the district has instituted and maintained a hiring freeze on all non-classroom-related employees, further restraining salary expenditure growth, and implemented tighter purchasing practices. Fifteen schools are scheduled to close in fiscal years 2006 and 2007.

Except for one bargaining unit, collective bargaining agreements are in place through fiscal 2007. Legislative action in 2006 allowed the transfer of pension responsibilities from the Minneapolis Teachers Retirement Fund Association (MTRA) to the state-managed teachers retirement system. As of July 2005, the MTRA had an unfunded pension liability of $972.6 million (45% funded).

While budgetary actions have been significant, these changes have not been sufficient to offset shortfalls in the fiscal 1999-2003 period. Consequently, the general fund ending balance declined to $1.1 million in fiscal 2003 (0.2% of spending) from $40.5 million (8.4%) in fiscal 1999. The surplus in fiscal 2004 and 2005, however, elevated the ending balance to $19.5 million (4.0%) and results in fiscal 2006 will be in near balance.

Direct debt is manageable, at $1,354 per capita and 1.9% of fair market value, with debt retirement outpacing new issuance. As for many urban school districts, the capital plan is sizable, but the district is addressing these needs with a deliberate, long-term plan of external financing. Parts of the plan are flexible, depending on funding availability. Overall debt is $2,560 per capita and 3.7% of fair market value.

Under state law, a Minnesota school district may elect to participate in this program by covenanting to notify the state commissioner of education about a potential default in debt service payable. Upon such notification, the state gives funds to the paying agent to make timely debt service payment. Moneys for this purpose are appropriated annually to the Department of Education from the state general fund. The program requires that the school district covenant to deposit with the paying agent sufficient funds to pay upcoming debt service three business days before the payment date and to notify the state 15 business days before the payment date if the district might default. The paying agent agrees to notify the state two business days before the debt service payment date if the district has not deposited sufficient funds. Upon receipt of such notice, the commissioner of education notifies the state commissioner of finance about the potential default, who, in turn, issues a warrant authorizing payment to the paying agent on or before the due date.

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