NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Martin County School Board, Florida (the district) obligations:
--$34.4 million certificate of participation (COPs) downgraded to 'A' from 'AA-'.
In addition, Fitch downgrades the following rating:
--Implied general obligation to 'A+' from 'AA'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases under the master lease on an all-or-none basis. An event of non-appropriation would result in the termination of the master lease and the surrender to the trustee of all lease-purchased projects under the master lease.
KEY RATING DRIVERS
WEAKER FINANCIAL PERFORMANCE: The downgrade reflects Fitch's concern over the school district's recent weakening of reserve levels.
NEGATIVE OUTLOOK: The Negative Outlook is based on uncertainties regarding the district's ability to achieve sufficient cost savings to regain satisfactory reserves as the majority of the proposed savings are dependent upon union approval.
LOW DEBT BURDEN AND CARRYING COSTS MANAGEABLE: The overall debt burden is low and carrying costs including debt service, pension, and other post-employment (OPEB) benefits are moderate.
LIMITED ECONOMY: The local economy is primarily residential and somewhat limited. Wealth levels are above average; however, the unemployment rate has trended above the state and the nation over the past three to four years.
COPS APPROPRIATION RISK: The one notch rating distinction on the district's COPs is based on the risk of non-appropriation inherent in the lease structure. The appropriation risk is not tempered by the master lease structure as only one school, a middle school, is subject to the lease.
RATING SENSITIVITIES
WEAKENED FUND BALANCE: Failure by the district to restore unassigned general fund balance to the minimum state required level of 3% of spending will result in further negative rating action.
CREDIT PROFILE
Martin County (coterminous with the district) is a 556 square mile area located on the eastern coast of Florida approximately 45 miles north of Palm Beach. The county is home to approximately 148,000 residents in 2011 and is primarily residential with a somewhat limited economy concentrated in agriculture, healthcare and tourism.
SOUND FINANCES DURING DOWNTURN
In fiscal years 2010 and 2011 the district added to reserves through a combination of spending cuts and receipt of federal stimulus funding. As a result of these measures, the unrestricted balance grew to $10 million or 7.3% of spending in fiscal 2011. The district's fund balance policy target is 5% of spending.
WEAKENED FINANCES; CHALLENGES AHEAD
In fiscal 2012 district officials originally reported a $3 million draw to total fund balance, bringing unrestricted general fund balance to $8 million or 5.8% of spending. The fiscal 2012 audited results were revised in February 2013 after the discovery of financial errors mostly involving improper transfers to the general fund from a capital projects fund. The revised results further lowered unrestricted general fund balance from $8 million to $5.4 million or a low 3.9% of spending.
The district's fiscal 2013 budget was based on the general fund balance shown in the original fiscal 2012 audit. Management budgeted an operating deficit of approximately $4 million for fiscal 2013 assuming that ending fiscal 2013 fund balance would still be an acceptable 5.6% of spending. By the time the fiscal 2012 ending general balance was downwardly revised, officials report that it was too late in the current fiscal year to adjust the budget to offset the lower reserve levels. Officials now project a much weaker fiscal 2013 total fund balance of $7 million. Officials have indicated that unassigned fund balance will fall below 3%, which requires the state to be notified. Fitch expects the unrestricted balance to be notably lower.
The district's new management team is considering two proposals to address the restoration of unassigned general fund balance to 3% of spending as part of the fiscal 2014 budget process. Both options include measures to trim spending, such as furlough days, program cuts, program reorganization, etc. While Fitch acknowledges the district's goal of complying with the 3% of spending requirement in fiscal 2014, Fitch remains concerned about the district's ability to gain the necessary union approval to implement over half the savings. Fitch will continue to monitor the situation, including actions taken by management to restore a satisfactory financial cushion.
LOW DEBT BURDEN; MANAGEABLE CARRYING COSTS
The district's overall debt levels are low at $919 per capita and 0.6% of full market value. Amortization is average with 52% of outstanding principle repaid within 10 years. Debt levels are expected to remain stable as the district has limited additional long-term borrowing planned.
Pensions are provided through the state run Florida Retirement System (FRS) and total annual pension contributions were a manageable 3.9% of total governmental spending (net capital) in fiscal 2012. FRS is well funded at 86.9% or an estimated 80% (adjusted by Fitch to assume a 7% rate of return) and as such costs are not expected to increase materially.
Other post-employment benefits (OPEB) are limited and currently funded on a pay-as-you-go basis. The unfunded liability represents a very low 0.01% of market value. Carrying costs including debt service, pension, and OPEB were a low 8.2% of total fiscal 2012 spending.
LIMITED ECONOMY
The county is home to a large retiree population which contributes to a healthy per capita income 30% to 35% higher than the Florida and U.S. averages. The local economy is based mainly in agriculture, health care, and tourism. The largest private sector employers in the county include Martin Memorial Health Systems (2,825), Publix (1,276), IVOX Solutions (532), and TurboCombuster Technologies (420). The 6.9% unemployment rate recorded in March 2013 was down from 8.7% a year prior. The unemployment rate is below the state (7.5%) and the nation (7.6%) for the same month.
SOUND LEASE PROVISIONS
Lease payments are payable from any legally available source, although on a budget basis payments are made from the district's capital outlay millage. The capital millage can be levied up to 1.5 mills for lease payments for COPs issued before 2009 and 1.125 mills for COPs issued post 2009. The district uses a very low 0.159 mills of the levy to meet MADS leaving a great deal of flexibility.
While the lease payments are subject to appropriation, a failure to appropriate would result in the loss of the leased middle school facility.
Additional information is available at 'www.fitchratings.com'.
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, and the 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 -- Effective Aug. 15, 2011 to Aug. 14, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792761
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