NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Minneapolis Special School District No. 1, Minnesota (the district) obligations:

--$21.3 million general obligation (GO) school building bonds, series 2014A;

--$45.09 million GO alternative facilities bonds, series 2014B;

--$11.785 million GO refunding bonds, series 2014C;

--$138.17 million full term certificates of participation (COPs), series 2014D.

The 'AA' rating is based on the district's participation in the Minnesota School District Credit Enhancement Program (the program).

Fitch also assigns an 'AA' underlying rating to the series 2014A, 2014B, 2014C bonds and 2014D COPs. The series 2014D COPs are full-term COPs as described below. The bonds and COPs are expected to sell via competitive sale on or about December 9. Proceeds are being used for various capital improvement projects and to refund outstanding bonds.

In addition, Fitch affirms the underlying ratings on the following district obligations:

--Approximately $243 million of outstanding district GO bonds at 'AA';

--Approximately $89 million of full-term COPs at 'AA';

--Approximately $38 million of outstanding series 2010A and 2010B COPs at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by a pledge of the full faith and credit and unlimited taxing power of the district. The full-term COPs are payable from district lease payments that come from a separate unlimited property tax levy and are not subject to appropriation. Both the GO bonds and full-term COPs are backed by the program, which provides timely debt service payments in the event the district notifies the state that it is unable to meet debt service requirements on the GO bonds or COPs. The district must notify the state 15 working days ahead of time that it has insufficient funds, and the state must deposit funds with the paying agent three business days before the payment date or notify the state.

The series 2010A and 2010B COPs are a special limited obligation of the district payable solely from rental payments made by the district under the terms of the lease purchase agreement between the trustee and the district. The district has covenanted in the lease to include in its annual budget for each fiscal year moneys sufficient to pay all rental payments. While the covenant is absolute and unconditional, there is no legal obligation to actually appropriate such amounts. The lease is not subject to abatement.

KEY RATING DRIVERS

RATING BASED ON STATE PROGRAM: The GO bonds and full-term COPs benefit from the state of Minnesota's (rated 'AA+' by Fitch) school district credit enhancement program rated, 'AA'. The state will make payments to the trustee for debt service upon notification from the district that funds are insufficient to do so. Payments are subject to annual appropriation to the state department of education from the state general fund.

DISTRICT CREDITWORTHINESS: The 'AA' underlying rating on the GO bonds and full-term COPs reflects the district's large and diverse economic base, coterminous with the city of Minneapolis. Debt levels are moderate, and reserves remain at a level that provides solid financial flexibility despite recent declines.

RELIANCE ON STATE FUNDING: The district is highly dependent on funding from the state. Past delays in state aid payments have created long-term budgetary uncertainty and reduced liquidity. Recent delays have been reversed, but could recur in the future.

APPROPRIATION COPS RATIONALE: The 'AA-' rating on the appropriation COPs is based on the district's absolute and unconditional covenant to budget and appropriate lease rental payments.

RATING SENSITIVITIES

RATING-LEVEL RELATIONSHIP CHANGES: The GO bonds and the full-term COPs are rated based on the higher of the state program rating and the district's underlying rating, which are currently the same. The appropriation COPs are rated solely based on the district's credit quality as they are not supported by the state program.

CREDIT PROFILE

The district is coterminous with the city of Minneapolis (GO bonds rated 'AAA') whose diverse and broad economic base benefits from the strong presence of the relatively stable health care, financial institutions, higher education, and government sectors. September 2014 unemployment equaled a low 3.9%, well below the national rate of 5.7% and slightly above the state rate of 3.6%.

DISTRICT BENEFITS FROM BROAD LOCAL ECONOMY

After several years of declines, the tax base has shown growth in recent years and further growth is expected as home prices rise and the city enjoys substantial construction activity. The commercial tax base, primarily located in the city's central business district, is supported by a diverse group of businesses and is home to numerous corporate headquarters including Target and US Bank.

ENROLLMENT GROWING AFTER YEARS OF DECLINE

The district serves over 34,000 students. After several years of severe enrollment declines, the district has had four consecutive years of growth and projects further growth over the next seven years, though enrollment will remain well below past highs. The enrollment growth is driven by reduced student migration to charter schools as well as overall population growth in the city. The district is evaluating its facilities to match these trends, with capital costs expected to be manageable.

FUND BALANCE GROWTH HELPED DISTRICT PREPARE FOR PLANNED EXPENSES

The district's primary revenue source is state aid, which represented 67% of fiscal 2013 general fund revenues. State aid has been gradually increasing on a per pupil basis, so the district should benefit from its expected enrollment growth. In order to make up for its own budget gaps, in 2011 the state shifted its funding formula such that 70% of a year's budgeted funding was received in the current year, with 30% deferred to the following year; previously the ratio was 90/10. The state extended the shift further to 64/36 in 2012. These shifts resulted in a significant decline in the district's liquidity levels. Recent improvements in the state's finances have allowed it to reverse these shifts back to 90/10, which materially improved the district's liquidity position. However, the district remains at risk for future payment shifts should the state's fiscal condition deteriorate again.

The district has had substantial fund balance growth despite declining liquidity, with consecutive net surpluses from fiscal 2004 through fiscal 2011. In fiscal 2012, the district finished essentially flat. The district's unrestricted general fund balance finished fiscal 2012 at $128 million, or 25.4% of total spending.

The district finished fiscal 2013 with a $38.6 million (6.8% of expenditures) decline in general fund balance, slightly better than budgeted, reducing the unrestricted fund balance to $85 million or 15.1% of expenditures. The primary cause for this large decline was a planned transfer of $26 million to the capital projects fund to be used for school additions. The fund balance remains above the district's policy minimum of 8%.

Unaudited fiscal 2014 results show a $2.9 million deficit, slightly worse than the balanced budget. State aid increased from the reversal of past shifts, but property tax revenue declined due to a tax shift, federal aid was down, and transportation and utility costs went up. The fiscal 2015 budget is balanced as increases in state aid offset increased staffing. Despite projected growth in enrollment, long-term capital needs are manageable.

MODERATE DEBT BURDEN

The district's overall debt burden (including debt of the city, county and other overlapping governments) is moderate at $2,477 per capita and 2.7% of estimated market property value. Principal amortization is rapid with 79% maturing in 10 years. The current issue is larger than recent issues, but the district expects to revert to past issuance levels going forward.

District employees participate in the state's retirement plans, namely the Teachers Retirement Fund and the Public Employees Retirement Fund, with payments set by the state. Both plans have below-average funding levels with the teacher's plan at approximately 62% using a Fitch-adjusted 7% return level and the other plan at approximately 70%. Pension contributions have been increasing at a manageable rate. The district's unfunded actuarial accrued liability for other post-employment benefits (OPEB) is modest at $83 million or 0.2% of market value, and the district recently prudently set aside $15 million in an OPEB trust. Total carrying costs for the district in fiscal 2013 were a moderate 18% of government fund expenditures, though will likely increase as pension costs rise.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Fitch Rates Minnesota's $904MM GOs 'AA+'; Outlook Stable' (Aug. 1, 2014).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=940136

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