CREDIT OPINION New Issue West Fargo Public School District No. 6, ND New Sale: Moody's assigns Aa3 to West Fargo Public School District No. 6, ND's $45M GOULT Bonds, Ser. Summary Rating Rationale Contacts Jennifer Card +1 312 706 9983 Analyst jennifer.card@moodys.com Edward (Ted) 212-553-6990 Damutz VP-Sr Credit Officer edward.damutz@moodys.com Moody's Investors Service has assigned a Aa3 rating to West Fargo Public School District No. 6, ND's $45 million General Obligation School Building Bonds, Series. Moody's maintains the Aa3 rating on the district's outstanding general obligation unlimited tax (GOULT) debt, as well as the A1 rating on the district's outstanding general obligation limited tax (GOLT) and lease revenue debt. Post-sale, the district will have $149 million of general obligation unlimited tax debt, $16.6 million of limited tax, and $505,000 of lease revenue debt outstanding. The Aa3 general obligation unlimited tax rating reflects the district's moderately sized and rapidly growing tax base; strong financial operations with healthy reserve levels; above average debt burden; and elevated pension liability. The A1 rating on the GOLT bonds, notched once below the GOULT rating, reflects satisfactory debt service coverage of pledged property tax revenues. The A1 rating on the lease revenue bonds, notched once below the GOULT reflects the annual risk of non-appropriation and the essential nature of the pledged asset. Credit Strengths Moderately sized and rapidly growing tax base favorably located in the Fargo (Aa1) and Moorhead (Aa3) metropolitan area Strong and conservative management team and healthy General Fund reserve levels Credit Challenges High debt burden and exposure to underfunded state cost-sharing pension plan Additional debt expected to accommodate growing student population Expenditures expected to grow as enrollment growth continues Rating Outlook Outlooks are generally not applicable for local government credits with this amount of debt outstanding.
Factors that Could Lead to an Upgrade Significant growth in liquidity and General Fund reserves Sustained valuation growth and demographic improvement Moderation of debt and pension liabilities Factors that Could Lead to a Downgrade Inability to find operational balance amid growing capital and operating costs due to enrollment trends Material declines in reserves or liquidity Sizable increase in debt burden Key Indicators Exhibit 1 Source: Moody's Investor's Service; Audited Financial Statements Detailed Rating Considerations Economy and Tax Base: Moderately Sized, Rapidly Growing Tax Base Favorably Located in the Fargo-Moorhead Metro Area The district encompasses the City of West Fargo (A1), the City of Harwood, the City of Horace, portions of Fargo as well as some of the surrounding unincorporated areas. The district is moderately sized, with a full value of $5.9 billion as of 2015, and has been growing steadily in recent years. The district's full value has grown by an average annual rate of 9.5% over the last five years. The growth reflects the strength of the local economy which is supported by large institutional employers including Sanford Fargo Medical Center (6,020 employees), North Dakota State University (4,464 employees) and Fargo Public School District 1 (Aa2, 1,816 employees). Since the 2000 Census, the district population has grown immensely, increasing 68.2% as of the 2010 census figures to 48,867. Management reports that enrollment has increased in conjunction with the economic growth in the region. Enrollment has grown by an average of 6% per year over the last five years. Most recently, enrollment jumped 5.4%, or by nearly 500 students, bringing total district enrollment to 9,584. Going forward, management expects to see annual growth of approximately 500 students for each of the next five years. The district's resident income indices exceed national figures with median family income at 111.8% of the nation, according This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2
to the 2009 to 2013 American Community Survey. At 2.1% in December 2015, the unemployment rate in Cass County tracks below the state's low unemployment rate (2.8%) but significantly lower than the nation (4.8%) during the same time period. Financial Operations and Reserves: Satisfactory Financial Reserves Despite Planned Draw on Reserves The district's financial operations are expected to remain stable as its primary revenue sources have grown, with adequate reserve levels providing cushion as the district continues to expand. The district has recorded General Fund operating surpluses annually since fiscal 2010. Most recently, the district's $1.4 million operating surplus in fiscal 2014 increased General Fund reserves to $15.5 million, or 17.6% of General Fund revenues. Audited figures for fiscal 2015 reflect a $2.2 million operating deficit. The draw was largely budgeted as nearly $2 million was transferred out of the General Fund for capital and facility improvement purposes. The planned draw was partially driven by management's decision to bring General Fund reserves closer to formalized fund balance policy levels, which dictates that reserves should be at least 10-14% of General Fund expenditures. Based on conservative revenue and expenditure assumptions, management expects to conclude fiscal 2016 with an additional operating deficit of $2 million. Despite the projected draw, reserves will remain within the targeted fund balance parameters. The district is currently levying the maximum allowable amount in the General Fund which does somewhat limit its local revenue raising flexibility. However, the state legislature imposed these limits in exchange for increased state aid funding which is expected to increase given the ongoing enrollment growth, although funding is based on prior year enrollment figures. This may cause some expenditure increases to outpace revenue growth, which may cause some budgetary pressure as the district continues to expand its facilities footprint in the near term. However, given the district's history of positive budget variances, we expect the district to budget for these delays accordingly. Typical of North Dakota school districts, state aid comprises the largest source (76.5%) of General Fund revenues in fiscal 2015. Property taxes are the next largest source of revenue for the district and comprised 17.5% of General Fund revenues. Given management's history of budget surpluses and ability to navigate rapid enrollment growth, we expect the district's financial position to remain strong in the face of these budgetary challenges. LIQUIDITY The district's net cash position in its Operating Funds (General and Debt Service) closed fiscal 2015 at $13.9 million, or a satisfactory 12.5% of Operating Fund revenues. Debt and Pensions: Elevated Debt Burden and Pension Liabilities While the district's overall debt burden is elevated at 7.9% of full value, the direct debt burden is a more manageable 2.9% of full valuation. In November 2015, voters authorized the issuance of $98.1 million in total debt through a referendum to finance the construction of two new elementary schools, a new indoor ice rink, an aquatics center and other improvements to existing buildings. The district issued $7.7 million of the authorized GO debt in December 2015. The current issuance represents $45 million of the authorized GO and moving forward, management expects that the district will issue the remaining $45 million GO debt in 2017. DEBT STRUCTURE All of the district s debt is fixed rate and amortizes over the long term. DEBT-RELATED DERIVATIVES The district has no derivatives. PENSIONS AND OPEB The district has a high employee pension burden, based on its share of unfunded liabilities for its participation in two multipleemployer plans administered by the state. Moody's has allocated liabilities of state cost-sharing plans in proportion to the district's contributions to each plan. Moody's adjusted combined net pension liability (ANPL) for the district as of fiscal 2015 related to Public Employees Retirement System (PERS) and Teachers Fund for Retirement (TFFR), under our methodology for adjusting reported pension data, has averaged 2.4 times operating revenues and 4.1% of full valuation over the last three years. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the district's reported liability information, but to improve comparability with other rated entities. Management and Governance: Strong Institutional Framework; Conservative Budgeting Practices North Dakota school districts have an institutional framework score of 'A' or moderate. District revenues are primarily comprised of state aid and property tax receipts, both of which are increasing. School districts operate under property tax caps and are typically 3
near the General Fund cap, though it can be increased with voter approval. Expenditures are generally predictable though can be more challenging for districts experiencing rapid enrollment growth. Expenditures can be cut as needed. Despite increased expenditures associated with enrollment growth, management continues to implement conservative budgetary assumptions. Legal Security Debt service on the district's GOULT debt, including the current bonds, is secured by the district's full faith, credit, and taxing power. The district's GOLT debt is rated one notch below its GOULT debt given the inherently narrower pledge, a 10-mill Building Fund Levy. Based on taxes payable in 2016, the full 10-mill levy would provide 1.5 times maximum annual debt service (MADS) coverage on the bonds. Use of Proceeds Proceeds of the Series bonds will be used to provide a portion of the funding to build two new elementary schools, update and expand several current school facilities, and build a new ice arena and aquatic facility. Obligor Profile The district is located in eastern North Dakota in Cass County and covers an area of over 79,840 acres. The District currently has 16 schools plus 5 other facilities. The enrollment for 2015/16 school year is 9,584. Methodology The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology. Ratings Exhibit 2 West Fargo Public School District 6, ND Issue Rating General Obligation School Building Bonds, Series Rating Type Sale Amount Expected Sale Date Rating Description Aa3 Underlying LT $45,000,000 04/25/2016 General Obligation Source: Moody's Investors Service 4
2016 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY, INC. AND ITS RATINGS AFFILIATES ("MIS") ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY'S CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS OR MOODY'S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody's Publications. To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S. To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody's Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations Corporate Governance Director and Shareholder Affiliation Policy." Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY'S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER 1023730 5