Fitch Downgrades Citrus County School District, FL's COPs to 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has downgraded the ratings on the following Citrus County School District, Florida (the district) certificates of participation (COPS):

--$35 million in COPs, Series 2010A Qualified School Construction Bonds (QSCB) to 'A' from 'A+';

--$5 million in COPs, Series 2010B to 'A' from 'A+'.

In addition, Fitch downgrades the implied unlimited tax general obligation (ULTGO) rating to 'A+' from 'AA-'.

The Rating Outlook is Stable.

SECURITY

Citrus County School District's 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 Citrus 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. The trustee would be empowered to repossess all property and projects under the master lease for the benefit of owners of the COPs which financed or refinanced such projects.

KEY RATING DRIVERS

DOWNGRADE REFLECTS WEAKENED RESERVES: The ratings downgrade reflects Fitch's concern over the school district's weakened reserve levels. Since fiscal year 2011, district finances have featured operating deficits leading to significant reserve draw-downs.

BELOW-AVERAGE ECONOMIC PROFILE: The local economy is limited and highly concentrated, with Duke Energy its top taxpayer and second largest private employer. Wealth and income indicators are below average and unemployment remains above state and national levels.

LOW DEBT LEVELS: Debt levels are low and are expected to remain so given the district's limited capital needs and absence of additional borrowing plans. Total carrying costs, including debt service, pension and retirement health costs are low.

COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs rating incorporates the risk associated with annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets (a primary school and high school), which are subject to surrender in the event of non-appropriation, temper this risk.

RATING SENSITIVITIES

EXPECTATION OF FINANCIAL IMPROVEMENT: The inability to achieve balanced operations and begin stabilizing financial reserves over the near-term would result in additional negative pressure on the rating.

CREDIT PROFILE

Citrus County is located in the west-central region of Florida, midway between Tampa and the Florida panhandle. The county's 2013 population of 139,360 represents an increase of 18% over 2000, as compared to 22% for the state. Residents who are 65 years or older account for about 34% of the total population. District enrollment (about 14,600 students in 2014) has been declining. Declines have ranged from about 1% to 3% since 2011 and management expects continued declines in the near term.

OPERATING DEFICITS LEAD TO REDUCTION IN RESERVE LEVELS

In recent years, the district experienced operating deficits that resulted in significant and higher than expected declines in general fund ending balances. A portion of the draw-down in fund balance for operations has been intentional, reflecting a district decision to avoid cuts to instructional programs. The fiscal year 2013 (unaudited) general fund unrestricted balance is $4.1 million or 3.5% of general fund expenditures and transfers out, a decrease from 6.7% a year prior and 10.6% in fiscal year 2011. The district's fund balance policy calls for the undesignated fund balance to minimally equal 3.5% general fund revenues excluding transfers.

ADDITIONAL USE OF RESERVES IN FISCAL YEAR 2014

Management currently estimates that it will incur a smaller fiscal year 2014 total operating deficit (approximately $1.7 million or 1.5% of spending) than in fiscal 2012 and 2013 ($4.7 million and $4.4 million in fiscal years 2012 and 2013, respectively, or about 4% of spending). The currently expected deficit would bring the unrestricted general fund ending balance down to $3.9 million or about 3.4% of spending. While the district expects that the fiscal year 2014 balance will be no lower than this level, the final balance figure could prove to be less than estimated, as recent year results have been lower than projections.

The district is working towards a balanced budget for fiscal year 2015. The district is looking to achieve balance through reduced expenditures including cuts to instructional and support staffing (necessitated by enrollment declines) as well as program cuts and lower discretionary spending. Going forward, the focus will be on increasing reserves to what the district has typically considered a more comfortable level, a minimum of about 5%. The district is considering seeking voter approval in November 2014 for a 0.25 critical needs millage. If approved, the tax would yield an estimated $2.4 million in additional revenue (about 2% of fiscal 2014 total budgeted revenue) annually starting in fiscal year 2016.

STATE FUNDING MAKES UP FOR MOST OF DISPUTED TAX PAYMENTS

For fiscal years 2013 and 2014, the school district was faced with the impact of a tax dispute between the county property appraiser and Duke Energy. A lawsuit challenged the property appraiser's calculation of the taxable assessed value of Duke Energy's Crystal River Energy Complex, which includes nuclear and coal power plants. Duke Energy's underpayment of taxes resulted in a fiscal year 2013 revenue loss for the district of about $8 million ($5.8 million required local effort, $700 thousand discretionary local effort and about $1.5 million in capital outlay taxes). The fiscal year 2014 loss totaled $16 million ($11 million required local effort, $1.6 million discretionary local effort and $3.4 million capital outlay taxes.

The state reimbursed the district for the required local effort losses. In addition, it increased sparsity funding, related to reduced taxable value, for fiscal year 2014 by about $1.5 million. The district dealt with the loss of capital revenues through capital reserves and decreased capital spending. The lawsuit is still pending, and the county property appraiser and Duke Energy have initiated mediation discussions. The final appraisal will depend on the outcome of the litigation, and the level of state required local effort funding will ultimately be adjusted for the final, potentially lower, appraised value. Capital and discretionary local effort revenues, however, would likely be negatively affected by lower assessed values.

STRONG COPS 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 facilities, which are essential in nature (a primary school and high school). 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. The district requires 0.738 mills of the levy for total COPs maximum annual debt service (excluding the federal subsidy for the Series 2010A Qualified School Construction Bonds).

LIMITED LOCAL ECONOMY

Power generation has long been a dominant county industry, with Duke Energy the district's top taxpayer and second largest private employer. Duke Energy alone accounted for 37% of TAV in fiscal year 2013, based on the county property appraiser's original estimate. The company's Crystal River Nuclear Power Plant, which currently employs about 275, is in the process of being shut down. Construction of a new natural gas power plant is planned to be completed by 2018, which could create over 500 construction jobs and up to 100 permanent jobs when completed, potentially partially offsetting the loss from the shutdown of the Crystal River Nuclear Power Plant.

The district's taxable assessed value (TAV) has declined annually in recent years, with a total decline of 18.5% for fiscal years 2008 through 2012. For fiscal years 2013 and 2014, TAV was initially assessed at $9.7 billion (4% decline from fiscal year 2012) and $10.9 billion (12.2% increase from fiscal year 2013), respectively. Due to the Duke Energy dispute, however, these estimates were reduced by the state Department of Education for purposes of allocating education funding to $7.4 billion for fiscal year 2012 (26.6% decrease from fiscal year 2012) and kept essentially flat for fiscal year 2014. Future assessments will depend on the outcome of the Duke Energy litigation, but management expects modest base growth in the near term. Going forward, state required local effort revenue amounts will be adjusted to reflect potentially lower final assessment figures, though capital and discretionary local effort revenues would likely be negatively affected by lower assessed values.

Healthcare is also an important economic sector, though to a lesser degree. Citrus Memorial Hospital is the county's largest private employer with 1,400 employees. Seven Rivers Hospital is the third largest with over 500 employees. Although it has declined from 8.9% a year prior, the county's December 2013 6.8% unemployment rate remains above comparable state (5.9%) and national (6.5%) rates. County wealth and income indicators are below state and national averages.

LOW DEBT LEVELS

Overall debt levels are low at 0.7% of market value and $716 per capita for fiscal year 2013. Annual debt service as a percentage of governmental spending is also low at 4% in fiscal year 2013. Amortization of debt is slow (23% of par in 10 years) because the bulk of the district's debt relates to the Series 2010A QSCBs. Debt levels are expected to remain low, as no additional long-term debt is presently being contemplated.

The district provides pension benefits through the state-administered Florida Retirement System (FRS) and funds 100% of its required contribution. The FRS funding ratio as of June 30, 2013 was 85.4% or approximately 78.9% under Fitch's more conservative 7% discount rate assumptions. The district offers only an implicit subsidy for other post-employment benefits (OPEB) and funds the liability on a pay-as-you go basis. Total carrying costs including debt service, required pension contribution, and OPEB payment requirements were low, at 8.4% of fiscal year 2013 governmental spending.

Additional information is available at 'www.fitchratings.com'.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822466

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-00514
Analytical Consultant
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-00514
Analytical Consultant
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com