NEW YORK--()--Fitch Ratings takes the following rating action on the Brevard County School Board, Florida (the board) as part of its continuous surveillance effort:
--Approximately $538.7 million in outstanding certificates of participation (COPs) affirmed at 'AA-';
--Implied general obligation (GO) rating affirmed at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district's capital outlay millage, used for debt service payments and capital funding, is highly leveraged and is expected to remain so over the next few years.
-- Like most school districts, the board remains dependent upon state funding (Florida GOs rated 'AAA' with a Negative Outlook by Fitch) which has fluctuated in recent years.
-- Despite volatility in state funding, financial operations remain sound with ample flexibility remaining.
--The district has a somewhat limited economy anchored by the aerospace industry and tourism.
-- The COPs rating also reflects the essential projects and sound master lease structure, including an all-or-none appropriation provision.
KEY RATING DRIVERS:
--The district will need to continue to balance capital needs with debt service obligations despite declining capital outlay revenue.
--The closing of the NASA shuttle program over the next few years could have a negative impact on district enrollment as well as the area economy and corresponding state revenue.
SECURITY:
The COPs are secured by an undivided proportionate interest in lease payments made, subject to appropriation, by the board to the issuer under a master lease purchase agreement.
CREDIT SUMMARY:
Legal provisions under the master lease are strong, requiring an all-or-none appropriation. In the event of non-appropriation, the district would relinquish rights to approximately 75% of its facilities. While the district may use any legally available revenue for COPS debt service, the district has historically allocated revenue for this purpose from its capital outlay millage. Florida school districts have traditionally been permitted by the state to levy 2 mills for capital outlay, with three-quarters of the levy allowed to be used for COPS debt service. Over the past few years, the state has lowered this levy to its current level of 1.5 mills for fiscal 2010 and fiscal 2011. As part of the legislation, a waiver was granted on the limit on the levy proceeds used for COPS debt service. Due to recent declines in assessed value (AV), the millage required for COPs debt service payments has increased to a high of 1.25 mills for fiscal 2011.
The capital millage outlay is further leveraged through the district's use of its revenue anticipation note (RAN) program (not rated by Fitch). The program, which was originated to supplement the use of COPs, is currently being unwound by the district over a period of time, with the last expected payment in fiscal 2013. The notes are secured by the capital outlay millage, although the district is able to use any legally available revenue to make debt service payments. Fitch expects there to be a negative variance between capital outlay millage revenue and debt service payments until the RAN program is defeased. To offset this gap in funding over the next few years, the district has set aside $20 million to aid in debt service payments. The district also ended fiscal 2009 with an additional $77 million in capital projects reserves which could be used for debt service payments or other capital related needs.
Located along Florida's eastern seaboard, Brevard County is home to Cape Canaveral and is coterminous with the school district. The area economy is anchored by the federal government's space program, with ancillary defense and aerospace contractors playing a significant role in the economy. Tourism also represents a sizeable portion of the area economy, driven by the area's numerous beaches. Population growth has been steady, increasing 12% since the 2000 census to 536,357 through 2009. Income levels are slightly below average and the unemployment rate, at 12.2% as of March 2010, is above that of the state and nation. The district cites a slowdown in construction as being a key factor in the rise in unemployment. District student enrollment has been declining over recent years, as is common among Florida school districts, and it could experience more severe decreases in the upcoming years with the closure of the shuttle program, as approximately 12% of total enrollment is linked to the program and the accompanying air force base.
Financial management is strong as evidenced by reserve levels remaining sound despite recent volatility in state funding. The district ended fiscal 2009 with an unreserved balance equal to roughly 6% of spending while unaudited fiscal 2010 results indicate the district ending the year roughly flat. The proposed fiscal 2011 budget is balanced with no use of reserves after the district was able to eliminate a budget gap of approximately $18 million through a combination of expenditure reductions and fee increases. The district still funds many non-essential programs to some degree which have been eliminated by other Florida school districts, allowing Brevard future flexibility to decrease funding further as needed.
The district's overall debt levels are low. Amortization is below average, with 25% of debt being retired in 10 years (which is not uncommon for a Fitch-rated Florida school district). The district's five-year capital improvement plan is manageable, although some capital needs are expected to be deferred due to slowing enrollment growth. With the exception of the RANs discussed above, additional debt plans are limited to potential tax anticipation note (TAN) issuances.
Additional information is available at www.fitchratings.com
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, LoanPerformance, Inc., IHS Global Insight, and the State of Florida.
Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 21 Dec 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470
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