Fitch Affirms Osceola County School Board, FL's COPs at 'A+'; Outlook Positive

NEW YORK--(BUSINESS WIRE)--As part of its continuous surveillance effort, Fitch Ratings takes the following rating action on Osceola County School Board, Florida's (the district):

--$216.25 million certificates of participation (COPs) affirmed at 'A+';

--$76 million sales tax revenue bonds affirmed at 'A'

--Implied general obligation (GO) rating affirmed at 'AA-'.

In addition, Fitch has revised the Rating Outlook for the sales tax revenue bonds to Stable from Negative. The Rating Outlook for the COPs and implied GO rating is Positive.

RATING RATIONALE FOR THE COPS AND IMPLIED GO RATING:

--The district maintains strong financial operations characterized by solid reserves and significant financial flexibility despite recent volatility in state funding.

--The rating incorporates the sound master lease structure including an all-or-none appropriation provision.

--Debt levels are moderate and should remain so given the district's capital needs.

--While the effect of the national economic downturn has been amplified in the county, the impact on the district remains manageable as tax collection rates remain sound and above budget and financial results remain positive.

RATING RATIONALE FOR THE SALES TAX REVENUE BONDS:

--The Stable Outlook reflects the stabilization and recent positive trend of pledged revenues coupled with adequate coverage levels consistent with the rating level.

WHAT COULD TRIGGER AN UPGRADE FOR THE COPS AND IMPLIED GO RATING:

--The district will be challenged to maintain solid financial margins given uncertainties associated with state funding, enrollment and the tax base. Continued financial flexibility at current levels in spite of these budgetary pressures will likely lead to a rating upgrade.

KEY RATING DRIVERS FOR THE SALES TAX REVENUE BONDS:

--Maintenance of adequate coverage levels and stabilization of pledged revenues is key to preserving credit quality.

SECURITY:

--The COPs are secured by undivided proportionate interest in lease payments made from any legally available funds, subject to annual appropriation by the Osceola County School Board to the Osceola County School Board Leasing Corporation under an all-or-none master lease purchase agreement. There is a leasehold interest in the pledged assets further strengthened by the all-or-none lease structure.

--The sales tax revenue bonds are secured by a one cent local government sales surtax. There is also a debt service reserve satisfied by an Assured Guaranty Municipal surety.

CREDIT SUMMARY:

While the district is allowed to use any legally available revenue for COPs debt service, the district has historically paid this obligation with revenue from its capital outlay millage. Florida school districts have traditionally been authorized to levy 2 mills for capital outlay, of which 3/4 may be used for COPs debt service. Over the past few years, the state has lowered this levy to 1.5 mills reducing the amount available to be used for COPs to 1.12 mills, which is still above the district's internal policy of limiting COPs debt service payments to 1 mill of the levy. Due to recent declines in assessed value (AV), the district now uses 0.67 mills for debt service, which is average for a Florida school district. Given the likelihood of additional AV declines, the tax base could fall an additional 12% before reaching the 1.12 capital outlay cap.

The one-half cent local government sales surtax securing the sales tax revenue bonds softened moderately in fiscal years 2009 and 2010 declining 6.6% and 6%, respectively. Commensurately, coverage of maximum annual debt service (MADS) declined to 1.24 times (x) in fiscal 2010 from 1.34x in fiscal 2009. Debt service for the sales tax revenue bonds is level thus MADS approximates annual debt service expenditures. Revenues have modestly improved in fiscal year 2011 with a 5% gain reported for the first six months of the fiscal year. Coverage would improve to 1.30x if the 5% annual increase materializes. As a stress test, fiscal 2010 revenues could decline 15% to generate sum-sufficient MADS coverage. While volatility has lessened in the past few months, relative to the previous year, the next several months will indicate whether pledged revenues have stabilized.

Osceola County is located roughly 14 miles south of Orlando and adjacent to Disney World, leading to the county's concentration in tourism. The Walt Disney Co., rated 'A' by Fitch with a Stable Outlook, employs 61,500 employees in Orange and Osceola counties while Osceola's other large employers are largely tourism, retail, and health care related. A combination of rapid population growth and Florida's recent housing market bubble led to marked growth in AV. The tax base increased 140% in five years ending fiscal 2008, with new construction accounting for approximately 39% of the increase. The current housing market correction has led to a 15.2% AV decrease for fiscal 2010 and an additional 16% decline for fiscal 2011. The November 2010 unemployment rate of 12.9% was relatively stable compared to the prior year but remained notably above the state (11.2%) and national (9.1%) levels.

Although district revenues are vulnerable to state funding fluctuations, the district has maintained positive operations. Fiscal 2010 ended with an $11.1 million surplus, increasing the unreserved fund balance to 15% of spending, which is above average for Florida school districts rated by Fitch. Fiscal 2011 year to date performance indicates a $13.8 million addition to fund balance due primarily to federal stimulus funds and various cost savings measures. The district will carefully manage its last receipt of the federal stimulus monies during the current fiscal year, and may implement further cost-cutting measures to avoid using reserves in fiscal 2012 and soon thereafter. The district's strong reserve levels should provide management with sufficient flexibility to adapt to any unplanned revenue reductions.

Debt levels are expected to remain moderate. Overall debt per capita equals nearly $2,700 per capita and 2.8% of market value. MADS for the district's COPs is a moderate 5% of spending and principal amortization is average at nearly 50% of debt retired in 10 years. The district's five year capital plan totals a manageable $345.1 million, excluding debt service and is fully funded. There is no additional debt issuance planned in the near term. Other long-term obligations are manageable. The district participates in the well-funded state pension plans contributing approximately 7% of general fund spending annually while other post-employment benefits (OPEB) are limited to the implicit subsidy.

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, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct 8, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and 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=564566

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