NEW YORK--()--Fitch Ratings assigns an 'A+' rating to the following Lake County School Board, Florida (the district) certificates of participation (COPs):
--$20 million series 2013A COPs.
Bond proceeds will be used to refund a portion of the outstanding series 2004A COPs for savings. The COPs are expected to price during the week of Jan. 7.
In addition, Fitch affirms the following ratings:
--$275 million outstanding COPs at 'A+';
--$11.4 million in outstanding series 2003 and 2004 sales tax revenue bonds at 'A+';
--Implied unlimited tax general obligation (ULTGO) rating at 'AA-'.
The Rating Outlook is Stable.
The COPs are secured by an undivided proportionate interest in lease payments made, subject to appropriation by the Lake County School Board (the district), to the Financing Corporation for the district under the master lease purchase agreement. The district is required to appropriate funds for all outstanding leases on an all-or-none basis. In the event of non-appropriation the district must surrender possession of all leased facilities under the master lease to the trustee, for disposition by sale or re-letting of its interest in such facilities.
The sales tax bonds are secured by the district's portion of the local option one cent infrastructure sales tax. Revenues are collected within Lake County (the county) with the district receiving 1/3 of gross revenues according to an interlocal agreement. The tax is set to sunset three months after the bonds mature. The debt service reserve requirement is fulfilled by a surety from Ambac (not rated by Fitch).
KEY RATING DRIVERS
PRUDENT FISCAL MANAGEMENT: The district's conservative budgeting practices and policies have contributed to historically sound operations. Reserves remain adequate even as revenues have declined due to significant decreases in property values and volatile levels of state funding.
LIMITED LOCAL ECONOMY: Lake County's economic profile is marked by fairly limited employment opportunities but benefits from its reasonable commuting distance to Orlando. Unemployment rates have improved but wealth levels remain slightly below state and national levels.
FAVORABLE DEBT PROFILE: Debt levels should remain affordable as the district reports no new money borrowing plans. Principal is amortized at an above-average rate.
COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs ratings incorporates the slightly elevated risk of annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets, which are subject to surrender in the event of non-appropriation, temper this risk.
STRONG SALES TAX COVERAGE: The 'A+' rating on the infrastructure sales tax bonds incorporates the sound debt service coverage provided by pledged revenues as well as recent volatility in the revenue stream and the general credit characteristics of the district.
The district is coterminous with Lake County and is located in central Florida between Orlando and Ocala. Its 2010 population was 297,052, up 33% since 2000.
Lake County (implied ULTGO rated 'AA-' by Fitch) has historically been concentrated in citrus with some recent diversification in light manufacturing. Many residents commute to nearby Orlando, which serves as central Florida's economic anchor with a broad and diverse economy. The largest employer is the school district followed by the Villages of Lake-Sumter, Inc. and Leesburg Regional Medical Center. Unemployment rates are still high, but have declined to 8.4% as of October 2012 from 10.9% a year prior.
Assessed value (AV) has declined 27% since fiscal 2009 but the rate of decline has lessened and management expects a stabilization of values going forward based on its discussions with the county assessor. Rapid population growth has historically driven corresponding enrollment growth rates in the district. Recently, enrollment has leveled off at 40,628 and is not expected to change materially. Wealth levels remain below average with median household income equal to 98% and 90% of state and national averages, respectively.
SOUND FINANCIAL OPERATIONS
Financial operations have historically been sound and unrestricted fund balances have consistently exceeded the district's policy equal to 4% of spending. The district has managed fiscal operations the last two years by prudently using its American Recovery and Reinvestment Act (ARRA) and Federal Education Jobs Bill funding to supplement the declines in state funding and falling property tax revenues due to declining tax base values. Management built up reserves in fiscal 2010 and 2011 by 'banking' these funds to offset the potential for future declines in revenues.
Management had budgeted the use of $30 million in reserves (11% of spending) for fiscal 2012 but through monthly monitoring and implementation of cost controls, a lower but still sizable $13 million was used, resulting in an unrestricted general fund balance of $24 million or a sound 9% of spending. This follows unrestricted fund balance levels of 13% and 12% in fiscals 2011 and 2010, respectively.
The district adopted the fiscal 2013 budget with a $16.6 million (6% of budget) use of reserves, which would reduce the general fund balance to $10.5 million or a slim but adequate 4% of the district's $280 million general fund budget. Fiscal 2013 budgeted general fund revenues are up 2.1% from the fiscal 2012 budget reflecting primarily the modest increase in the state's base student allocation. Management expects that through conservative budgeting practices the ending fiscal 2013 general fund balance will approximate between 6%-8% of spending, which Fitch believes is realistic given its historic financial performance.
Fitch believes the district is well positioned to close this gap in revenues due to the projected stabilization of property values, expected maintenance of state funding at the current levels, along with the district's remaining expenditure flexibility. Cuts in staff and other programs if necessary, could be made, as it has not had to dramatically make these types of cuts to date. Maintenance of expected reserve levels is critical to ratings stability.
STRONG COP SECURITY BUT LEVERAGED CAPITAL OUTLAY MILLAGE
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 its pledged school facilities which, according to management, currently serve a sizable 40% of its total students.
While the district may use any legally available revenues for COP debt service, the district has historically targeted the use of capital outlay funds from 1.25 mills to support COP debt service with the remainder paid from excess revenues pledged to outstanding sales tax revenue bonds. The capital outlay millage is authorized by state law up to 1.5 mills. Up to three-fourths of the proceeds of the capital levy is available for lease payments. Effective July 1, 2012, the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009 (all of the district's lease agreements were entered into prior to this date).
Due to recent declines in AV, for fiscal 2013 the 1.5 mills alone are not sufficient to cover the district's aggregate COP debt service. Coverage is 0.98x prior to the series 2013A refunding (a shortfall of $387,000). Annual surplus sales tax revenues of over $4 million provide sufficient support for coverage of COP debt service as well as providing funds for capital maintenance needs. The district also has surplus sales tax revenues of $4.8 million in its sales tax sinking fund which is available for sales tax bond or COP debt service.
COP debt service ramps up through fiscal 2018 to $28.1 million from the $25.3 million this fiscal year (prior to the refunding) and excess revenues could be constrained should sales tax revenues decline below current levels. Compounding this would be a further decline in AV. Fitch notes that the sales tax expires Dec. 31, 2017 although COP debt service is structured to decline to $19.4 million beginning in fiscal 2019. The future lack of adequate surplus revenues to support debt service and capital maintenance needs combined with a depletion of reserves to below average levels could pressure the ratings.
STRONG SALES TAX PERFORMANCE
Sales tax revenues, which exhibited volatility over the past few years, have begun to stabilize with a return to moderate growth over the last two years. Fiscal 2012 revenues improved 5% over 2011 levels. This follows a 10% increase in fiscal 2011 over fiscal 2010 levels. Coverage on MADS of $6.03 million in October 2017 from fiscal 2012 revenues is a strong 1.77 times. Fiscal 2013 year-to-date results through November are ahead of budgeted projections for the year. The debt service reserve requirement is standard size but fulfilled by a surety from Ambac, thus Fitch does not factor this reserve into the rating.
FAVORABLE DEBT PROFILE
Overall debt is low at 1.3% of 2011 market value and $1,025 per capita and is expected to remain so given no additional borrowing plans. Amortization of all district debt is above average at 55% in 10 years. COP debt service accounted for an affordable 9.3% of fiscal 2012 expenditures. An additional 4% of the district's budget is consumed by contributions to the state pension plan and an implicit rate subsidy for retiree health care costs. In total, the district's debt service burden combined with pension and other post-employment benefits (OPEB) is at a moderate level.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and 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).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria