NEW YORK--()--Fitch Ratings affirms its ratings on the following Polk County School District, Florida's (the district) outstanding obligations:
--$137.6 million infrastructure sales tax revenue bonds at 'BBB+'; and
--Implied unlimited tax general obligation (ULTGO) at 'AA-'.
In addition Fitch Ratings affirms its ratings on the following Polk County School Board Financing Corp., FL's outstanding certificates of participation (COPs):
--$1.1 million COPs, series 2001A, at 'A+';
--$7.9 million refunding COPs, series 2003B, at 'A+';
--$49.8 million refunding COPs, series 2010A, at 'A+'; and
--$2.4 million refunding COPs, series 2010B, at 'A+'.
The Rating Outlook is revised to Stable from Negative for the sales tax bonds, and remains Stable for the COPs and Implied ULTGO.
SECURITY
The sales tax revenue bonds are secured by a senior lien on a one half cent local government sales surtax and a debt service reserve fund satisfied by surety bonds.
The COPs are secured by lease payments made by the district to the trustee pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, subject to annual appropriation by the Polk County School Board. The district is required to appropriate funds for all outstanding leases on an all-or-none basis. In the event of non-appropriation, all leases will terminate, and the district would, at the trustee's option, have to surrender all lease-purchased projects for the benefit of owners of the COPs which financed or refinanced such projects.
SENSITIVITY/RATING DRIVERS
IMPROVED SALES TAX COVERAGE: The revision in Outlook to Stable reflects the steady improvement of sales tax revenues over the last 24 months resulting in improved coverage of debt service.
SOUND FINANCIAL MANAGEMENT: The implied ULTGO rating of 'AA-' reflects the district's history of sound financial management and conservative budgeting practices contributing to adequate reserve levels.
MODERATE DEBT RATIOS: Debt levels should remain moderate given current capital needs and absence of additional borrowing plans. The district has an above-average level of variable-rate demand bonds outstanding compared to other school districts.
ECONOMY STILL IN RECOVERY MODE: The economy is still demonstrating weakness as a poor housing market has pressured the tax base, and unemployment rates, although improved, remain high. County building permit numbers have improved slightly and new construction efforts previously put on hold are beginning to resume.
COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs rating incorporates the slightly enhanced 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.
CREDIT PROFILE
Polk County lies on the Interstate 4 corridor, 25 miles east of Tampa and 35 miles southwest of Orlando. It has a 2010 population of 602,788 which is up 23% since 2000.
IMPROVED SALES TAX PERFORMANCE
Fiscal 2012 sales tax receipts increased by 6.2% to $32.3 million resulting in maximum annual debt service (MADS) coverage of an improved 1.22x. This follows a 3.2% increase in revenues for fiscal 2011 and MADS coverage of 1.15x.
A year ago, Fitch noted early signs of stabilization, as sales tax collections had been improving from the prior year. This trend continued in fiscal 2012 and, for the first four months of fiscal 2013, actual sales tax collections are up by 6% from the same prior year period. The positive trend is similar to other counties nearby and reflects the minor economic improvement that is occurring in the county.
Tax collections can decline by approximately 18% before coverage of MADS falls below 1.0x. Collections have not fully recovered to pre-recession levels, having peaked at $36 million in fiscal 2007.
The debt service reserve fund requirement is currently satisfied by surety bonds; providers are Assured Guaranty Municipal and National Public Finance Guarantee, neither of which is rated by Fitch.
SOUND FINANCIAL OPERATIONS
Financial operations have historically been sound and unrestricted fund balances have consistently exceeded the district's policy equal to 5% of general fund revenues and transfers in. 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. Reserves were increased in fiscals 2010 and 2011 primarily as a result of the receipt of these funds and with the plan to use the reserves to offset future declines in revenues.
Management budgeted the use of $22.7 million in reserves for fiscal 2012, but with conservative revenue forecasts and prudent management of vacant positions and overall expenditures, a significantly lower $4.1 million was used. The unrestricted general fund balance at fiscal end 2012 was $50 million or a still satisfactory 7.7% of general fund spending. This follows unrestricted and unreserved fund balance levels of 9.8% and 8.7% in fiscals 2011 and 2010, respectively.
Fitch views positively the consistency with which the district has outperformed projections, having expended on average only 95% of its budget during the preceding five fiscal periods.
SOME USE OF RESERVES LIKELY
The district adopted the fiscal 2013 general fund budget with a $19.5 million (2.8% of budget) use of total general fund reserves, which would reduce the general fund unrestricted fund balance to a projected $31.5 million or a slim 4.5% of the district's $693 million general fund budget. Management's practice is to manage its budget to its 5% fund balance policy. Management has indicated to Fitch that budget performance through the first five months of fiscal 2013 is positive. A decline in reserves to levels below policy would pressure the rating.
VARIABLE-RATE AND DERIVATIVE EXPOSURE
The district has variable-rate debt outstanding totaling $125 million or 30% of total debt. Fitch considers the district's variable-rate exposure above a prudent level, as it exposes the issuer to the possibility of unexpected and, in extreme cases, unaffordable future financial demands given the limited revenue and budgetary flexibility exhibited by school districts generally.
The district's variable-rate position is hedged with derivative contracts with Citibank, N.A (Long Term IDR of 'A' by Fitch) with a negative net mark-to-market value of $34.8 million as of June 30, 2012. Fitch will continue to monitor the district's administration of its derivative position, which exposes the district to counterparty risks not commonly present for school districts with highly limited financial flexibility.
STRONG COP SECURITY
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 represent approximately 20% of total facilities. Fitch considers this a strong incentive to appropriate.
While the district may use any legally available revenues for COP debt service, the district has used proceeds from the 1.5-mill capital outlay tax. 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 was waived for lease purchase agreements entered into prior to June 30, 2009, but the majority of the district's COP debt, and corresponding leases, were issued after this date. The district will use 0.84 mills (56% of the 1.5 mills) for COP debt service in fiscal 2013, leaving a satisfactory cushion beneath the 75% state cap. The district expects no additional new money COPs to be issued in the near future.
LONG-TERM OBLIGATIONS
Overall debt levels are average at 2.5% of taxable assessed value (TAV) and $1,048 per capita. Annual debt service is budgeted at $50.4 million in fiscal 2013, or an affordable 6.8% of combined general fund and debt service budgeted spending. Amortization of all debt is rapid at 68% of par in ten years. Debt levels are expected to remain stable, as no additional long-term debt is presently being contemplated.
The district participates in the statewide multiple-employer pension plan (FRS). For fiscal 2012, the district's annual contribution was $32 million, equal to a manageable 5% of general fund spending.
The district offers an implicit subsidy for other post employment benefits (OPEB) as required by state law. The district continues to fund the liability on a pay-as-you-go basis with a fiscal 2012 contribution of $3.5 million or 0.5% of spending. This payment represented 35% of the district's annual OPEB cost of $10.2 million, which if contributed in full would equal a still manageable 1.6% of fiscal 2012 general fund spending.
DIVERSIFYING BUT STILL PRESSURED ECONOMY
Historically known for its citrus and phosphate mining industries, Polk County's economy has diversified in recent years into health care, light manufacturing, and distribution. Residents benefit from the proximity of the Tampa and Orlando metropolitan employment centers. Management reports numerous commercial development projects either underway or nearing startup due to the county's location along Interstate 4 and the opening of the new Florida Polytechnic University campus in 2013. Additionally, Legoland, which opened in October 2011, has reportedly outpaced visitor expectations and is expanding its attractions to meet demand. Off-shoots of this successful theme park include the future development of hotel, restaurant and retail development nearby which is expected to increase sales tax revenues.
Unemployment has improved to 9.2% as of October 2012, down from 11.9% the prior year, but still remains high and above state (9%) and national (8.4%) averages. Per capita income is below average, equal to approximately 82% and 80% of state and national averages, respectively.
Foreclosure activity was very high in 2009 and 2010 and had begun to decline, but filings were up in 2012 compared to 2011 based on information provided by the county. This activity could further dampen housing prices and negatively affect assessed values, although housing prices have been trending slightly higher the past two years. The district's assessed value declined 4.3% for fiscal 2013 and is down 31% since fiscal 2009.
While Fitch notes that Florida school districts are less dependent on the tax base than other local entities, tax base losses do lessen revenues available for capital needs and debt service. The district's tax collection rate continues to be between 96% and 97% and does not appear to be materially affected by foreclosure activity.
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, University Financial Associates, 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
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
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