Fitch Affirms Broward County School Board Leasing Corp., FL's COPs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the rating on Broward County School Board Leasing Corp., Florida's (the corporation) following outstanding certificates of participation (COPs):

--$1.6 billion COPs at 'A+'.

In addition, Fitch affirms its 'AA-' rating on the Broward County School District, FL (the district) implied unlimited tax general obligation (ULTGO).

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease payments subject to annual appropriation by the Broward County School Board under a master lease-purchase agreement with the corporation. Upon certain events of default or the school board's failure to appropriate funds all leases under the master lease will terminate, and the school board is required to immediately surrender possession of all facilities subject to the master lease.

KEY RATING DRIVERS

PRUDENT FISCAL MANAGEMENT: The district has demonstrated prudent budgeting practices and maintenance of reserves within state and district policy levels even through periods of volatile state funding and notable declines in property values. Reserves remain adequate and are expected to rise gradually in the near term.

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.

ECONOMY SHOWING IMPROVEMENT: Employment levels are increasing at a steady pace over the last three years, and unemployment remains lower than the state and other large Florida counties. The economy exhibits good diversity, and benefits from extensive transportation and trade infrastructure and a reputation as a leading tourist destination. Income metrics are slightly above-average.

TAX BASE EXPERIENCES GROWTH: The county-wide tax base experienced significant pressure during the recession and after stabilizing in fiscal 2013 has experienced upward growth this fiscal year.

LOW DEBT: Key debt ratios are low, and the district has materially reduced its capital improvement plan in recent years in response to the weakened revenue environment. The capital outlay millage required to service the district's outstanding COPs is above average, limiting revenue available for pay-go funding of capital and capital maintenance, but continued tax base growth could mitigate this risk.

RATING SENSITIVITIES

MAINTENANCE OF RESERVES: The district's history of maintaining adequate reserves while addressing operating and capital needs indicates continued rating stability. A decline in reserves to levels below policy targets would pressure the rating.

CREDIT PROFILE

DEEP AND DIVERSE SOUTHEAST FLORIDA ECONOMY

The district serves Broward County (unlimited tax general obligations rated 'AAA' by Fitch), situated on Florida's Atlantic coast between Miami-Dade and Palm Beach counties. The county is home to 31 incorporated municipalities including Fort Lauderdale, Coral Springs, and Hollywood, and ranks as Florida's second largest county with a 2013 population of 1.8 million. Broward County's unemployment rate improved to 5% in December 2013 from 6.6% the prior year. The county's unemployment rate compares favorably to Florida's unemployment rate of 5.9% and the nation at 6.5%. The county's job growth rate since 2011 has ranged between 2.6% and 3.4% through 2013 and labor has increased over the same period by 1.1% to 1.8%.

IMPROVING TAXABLE PROPERTY VALUES

After a 24% decline in taxable assessed property values (TAV) from fiscal 2008-2012, the tax base is stabilizing and showing signs of improvement. Values were up marginally for fiscal 2013 but increased 4.5% for fiscal 2014. Officials expect continued growth for fiscal 2015. According to the Zillow Home Value Index, the growth in home values in Broward County is continuing. Housing prices for the metropolitan area, which includes Miami, were up 17.7% in 2013 and up 14.9% in Fort Lauderdale alone, according to Zillow.com.

POSITIVE FISCAL 2013 RESULTS; GRADUAL RESERVE BUILD-UP

The district was forced to reduce expenditures in recent fiscal periods as a result of a declining tax base and state budget pressures resulting in cuts in state aid. The district, like others in Florida, benefitted from Federal Education Jobs and American Recovery and Reinvestment Act (ARRA) monies received in 2011 helping to offset some of the state aid cuts. The district's efforts to reduce costs continued in fiscal 2013 and with the state boosting aid to schools the district was able to balance its budget without the use of fund balance. Fiscal 2013 general fund results were positive with a $5.7 million surplus, after transfers, increasing total fund balance by a corresponding amount. The district's unrestricted fund balance improved to $70.3 million or a slightly low 3.8% of spending.

The district currently maintains a fund balance policy that requires assigned and unassigned fund balances to be maintained at a minimum of 3% of revenues, excluding charter school revenues which flow through the district's general fund. Based on the district's policy calculation, at fiscal end 2013 it had a 4.4% fund balance. The district has stated its intention and goal to increase fund balance to at least 6% and expects to do so over the next few years. Fitch believes that gradual growth in fund balance is achievable based on projections of student enrollment growth, the potential for increased state aid and management's monitoring of expenditure growth. The maintenance of adequate fund balance levels is a key rating factor.

Fitch notes the district continues to fail to comply with constitutional class size requirements instituted in fiscal 2011. For fiscal 2013 the district was 87.7% compliant and received a penalty of $1.3 million, less than the estimated cost of hiring new teachers necessary to comply. For fiscal 2014, the district is 89.3% compliant, but its penalty was only $51,188 after the state's penalty formula changed and the district began to achieve improved compliance.

FISCAL 2014 BUDGET UP MODERATELY

The districts fiscal 2014 general fund budget of $1.97 billion is up by 5.3%. The district benefited from the increases in the state's education funding for fiscal 2014 over the prior year, which will pay for teacher salary increases and support virtual school program costs. The increase in appropriations also reflects higher contributions for pensions, additional funds for charter schools and additional salary and benefit costs only partially paid for during fiscal 2013.

Management has indicated its intention to maintain fund balance levels in excess of its policy and no use of general fund balance was appropriated. The recent state-mandated spending is generating some pressure on operations, but Fitch believes the district retains the ability to adjust outlays to offset these directives. Management's history of prudent fiscal controls suggests that the district's sound financial profile will be maintained.

ABOVE-AVERAGE MILLAGE RATE SUPPORTS COPS DEBT SERVICE

While any legally available revenue can be used for COPs debt service, the district has historically made payments 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, but not pledged, for lease payments. Effective July 1, 2012, the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009. Ninety-seven percent of the total par for COPs outstanding is associated with the district's lease agreements entered into prior to this date. Due to declines in assessed value, the district now requires an above-average 1.12 mills to fund fiscal 2014 COP debt service and 1.16 mills to fund maximum annual debt service. This provides only a moderate source of funding for pay-go capital funding. The district has no plans for additional debt under its five year capital program.

LIMITED COP APPROPRIATION RISK

Fitch believes the district has a strong incentive to appropriate for lease payments. An event of non-appropriation would terminate all current leases under the master lease. Approximately 42% of the districts total assets are pledged under the master lease.

LOW DEBT BURDEN

Overall debt ratios remain low at 1.7% of TAV and just under $1,330 per capita. Debt service costs consume 7% of total fiscal 2013 governmental spending which Fitch considers quite reasonable.

The district has $180 million in variable rate COPs which is equal to a manageable 8% of total direct debt; however, Fitch believes that school districts are more vulnerable to the risks of variable-rate debt than other issuers given their lack of revenue autonomy.

The district is not exposed to liquidity providers as the series 2014A COPs (which refunded the series 2004D COPs) and series 2006B COPs are index-linked direct placements. Interest rate risk is synthetically fixed via swap contracts with limited termination risk and no collateral posting requirement for the district. The mark-to-market was a negative $40 million as of March 3, 2014.

RETIREMENT COSTS ARE MANAGEABLE

All district employees participate in the state operated retirement system. Pension and OPEB costs are affordable. Total carrying costs for pension, OPEB pay-go and debt service equaled an affordable 10% of total fiscal 2013 governmental spending.

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, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (August 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (August 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=824990

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1 212-908-0538
Director
Fitch Ratings, Inc.
One State Street
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Arlene Bohner, +1 212-908-0554
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1 212-908-0538
Director
Fitch Ratings, Inc.
One State Street
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Arlene Bohner, +1 212-908-0554
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com