Fitch Rates Highlands County School Board, FL's Capital Improvement Revs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Highlands County School Board, FL's (the district) bonds as follows:

--$3.5 million capital improvement and refunding revenue bonds, series 2014.

The bonds will be during the second week of April on a negotiated basis. Proceeds will be used to refund outstanding racetrack revenue refunding bonds, series 1999 as well as provide additional funding for district capital projects.

In addition, Fitch affirms the following ratings:

--$875,000 racetrack revenue refunding bonds, series 1999 affirmed (pre-refunding) at 'A+';
--Implied unlimited tax general obligation (ULTGO) rating affirmed at 'A+'.

The Rating Outlook is Stable

SECURITY

The revenue bonds are payable solely from an annual $223,250 distribution to the district from state sales tax revenues, pursuant to Florida statutes; the revenue is a substitute for racetrack revenues previously distributed. Highlands County (the county) is entitled to an annual fixed-dollar distribution of $446,500, of which the district directly receives one-half of that allocation.

KEY RATING DRIVERS

RATING CAP: The distributions securing the bonds are derived from state sales taxes allocated to the district. Fitch caps the rating at the lower of the district's implied ULTGO rating or one notch below the state general obligation (GO) rating. The state's GO rating is 'AAA'.

FIXED AND RELIABLE DISTRIBUTION SOURCE: Distributions to the district supporting debt service are fixed and derived from the state's considerable sales tax receipts, allowing for sum sufficient debt service coverage.

DISTRICT FINANCES REMAIN CHALLENGED: Despite increased state support, district fiscal 2014 finances are contending with the expiration of its critical needs millage and further decline in its tax base. A general fund deficit is budgeted for fiscal 2014 which would bring unassigned reserves down close to the district's 4% of spending minimum target.

LIMITED ECONOMY: The local economy is rural and agriculturally-based, characterized by tepid employment trends and low wealth levels.

MODEST LONG TERM LIABILITIES: Debt levels are modest with no major capital needs. Pension obligations are provided through the state plan and are manageable while other-post employment benefit (OPEB) costs are minimal.

RATING SENSITIVITIES

NEGATIVE RATING ACTION ON DISTRICT GO: A downgrade of the district's implied ULTGO rating would result in negative rating action on the bonds as the district's ULTGO rating currently serves as the basis for the rating on the bonds. Fitch believes a downgrade of the state of the magnitude needed to affect this rating is highly unlikely.

RESERVES BELOW TARGETS: District general fund balance levels below the district's minimum targets would likely lead to a rating downgrade.

MINIMAL UPSIDE POTENTIAL: The district's limited economy most likely precludes an upward adjustment of the rating over at least the mid-term.

CREDIT PROFILE

ENROLLMENT DECLINES ABATE

The district is coterminous with Highlands County in central Florida and consists of 18 schools with an enrollment of approximately 12,000. Enrollment declined during the recession but recent student counts show a slight increase in fiscals 2013 and 2014. Officials attribute the enrollment growth to an improving economy.

EXTENSIVE FUNDING SOURCE

The revenue bonds are payable from an annual $223,250 distribution from the state to the district, which is part of a statutory annual $446,500 allocation to the county. Formerly derived from taxes on pari-mutuel wagers and labeled race track revenues, the state switched the source of funding in 2000 to the 6% state sales tax after pari-mutuel wagering suffered significant declines. The legislature of the state may not lawfully modify the statutory scheme for the distribution of sales tax revenues in a manner that would impair the receipt by the district of sufficient pledged revenues to pay debt service on the bonds.

Sales taxes constitute the state's largest revenue source, exceeding $21 billion in fiscal 2013. The magnitude of sales tax receipts ensures more than sufficient funds will be available to cover the state's annual $30 million racetrack revenue distribution obligation. The fixed nature of the distribution and the extensive scale of the revenue source mitigate Fitch's concerns regarding very tight coverage of maximum annual debt service (MADS) of 1.0x and weak legal requirements, including the lack of a debt service reserve fund and the thin 1.1x MADS additional bonds test.

Typical of other credits secured by fixed Florida sales tax payments, Fitch's methodology caps the rating at the lower of district's implied ULTGO rating or one notch below the state of Florida's GO rating.

HIGH RELIANCE ON STATE AID

The district is primarily rural with a relatively small tax base, which creates a sizable dependence upon state aid to finance operations. State aid provides over one-half of general fund revenues, growing since fiscal 2010 to almost 60% in fiscal 2013 according to unaudited results. Stimulus funds were used to bolster reserves in fiscal 2011 raising unrestricted general fund balance to almost 10% of spending. But reserves were drawn down in fiscals 2012 and 2013 to historical levels of about 4% to 6% of spending.

In fiscal 2012, the district was faced with a sizable decline in state aid combined with the expiration of the stimulus. To offset the losses, officials tapped $2.4 million of reserved education jobs funding received in fiscal 2011. The actual $2.2 million drawdown was slightly better than budget, lowering unrestricted general fund balance to 6.8% of spending. Audited fiscal 2013 general fund results show a very small net deficit of $455,000 (0.5% of spending) dropping unrestricted general fund balance to $5 million or 6% of spending. The district's minimum unassigned fund balance target is 4% with an informal target of 5%.

FISCAL 2014 BUDGET FURTHER CONTRACTS RESERVES

The district is receiving $4.8 million of additional state aid in fiscal 2014, a 10% annual increase (and approximately 6% of district revenue). However, reduced property tax revenues and expiration of the critical needs levy (a 0.25 mill voted temporary tax levy which generated about $1.2 million annually) counter-balance much of the state aid growth. In addition, overall spending expanded by $1 million or 1.2%, much of it due to wages and pension costs.

With actual results tracking budget, the projected $1.5 million drawdown would drop unrestricted fund balance to 4.3% of spending, slightly above the district's minimum target of 4%. Fitch will continue to monitor financial results. Fund balance drawdowns to below the district's minimum target level could lead to negative rating action.

LIMITED AGRARIAN BASED ECONOMY

The economy is based primarily on agriculture, with emerging retail trade and health services sectors. Economic activity continues to lag with tepid job growth and a sluggish housing recovery. Characteristic of many agricultural-based economies, unemployment trends are above average.

The unemployment rate for December 2013 was 7%, down from 8.5% the year before but still above the state (5.9%) and national (6.5%) averages. The improved unemployment metrics are partially due to decreases in labor force although employment did rise by 0.5%. Leading employers include the school board, Florida Hospital and Wal-Mart.

The county's population rose significantly during the early and mid-2000s but growth tailed off at the outset of the recession and has since been stagnant. Wealth values are well below average with per capita income at less than three quarters of the state and national medians. The poverty rate is 25% and 28% above the state and national levels, respectively.

MODEST DEBT AND RETIREMENT OBLIGATIONS

Debt levels are modest with direct and overlapping debt to market value of 1% or $700 on a per capita basis. Debt service carrying costs also are manageable at 5.5% of fiscal 2013 general government expenditures, and amortization of direct debt is slightly above average at 61% of principal retired within 10 years. Capital needs are minimal and no other debt is planned.

Pension benefits are provided through the well-funded Florida Retirement System. The district's contribution in fiscal 2013 totaled $4.6 million or a modest 4.2% of general government spending. The district provides an implicit subsidy for OPEB. The subsidy is funded on a pay-go basis and the district's contribution for fiscal 2013 was a minimal $222,000. Total debt service, pension and OPEB carrying costs for the district in fiscal 2013 were a low 9.9% of 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, 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

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826017
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Contacts

Fitch Ratings
Primary Analyst:
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Nicole Wood, +1-212-908-0735
Associate Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Nicole Wood, +1-212-908-0735
Associate Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com