Fitch Rates Volusia County Schools, FL's, Refunding COPs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following Volusia County School Board, Florida (the district) certificates of participation (COPs):

--$117,195,000 refunding COPs, series 2014B.

The COPs are scheduled to price on May 28, 2014. Proceeds will be used to refund a portion of the district's outstanding series 2006A COPs for savings.

In addition, Fitch takes the following rating actions:

--$289 million outstanding COPs (series 2007, 2006A, 2005C, and crossover refunding series 2005B), affirmed at 'A+';

--Implied unlimited tax general obligation (ULTGO) affirmed at 'AA-'.

The Rating Outlook for the COPs and implied ULTGO is Stable.

SECURITY

--The COPs are secured by lease payments, subject to annual appropriation, made by the district to the trustee, as assignee of the Volusia School Board Leasing Corporation, a Florida not-for-profit corporation.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: The 'AA-' implied ULTGO rating reflects the district's satisfactory financial performance and expected maintenance of adequate reserves. The district's conservative budgeting practices and policies have contributed to historically sound operations and adequate reserves even as revenues have declined in prior years due to decreases in property values and volatile levels of state funding.

COPS SUBJECT TO APPROPRIATION: The 'A+' COPs rating reflects the district's general credit quality, the district's obligation to make annually appropriated lease payments under a master lease structure, and the essentiality of leased assets which provides strong incentive to continue to appropriate.

ECONOMY AND TAX BASE IMPROVING: The local economy is heavily influenced by tourism and retail activity, and is now recovering from significant stress from the fallout of the housing market. Significant economic development is creating new job opportunities and helping boost tax base values. Income levels are below-average.

LOW OVERALL DEBT LEVELS: Overall debt ratios are low and are not expected to change materially.

RATING SENSITIVITIES

MAINTENANCE OF ADEQUATE RESERVES: A reduction in reserves to below policy goal levels could put downward pressure on the district's COP and implied ULTGO ratings. The Stable Outlook reflects Fitch's expectation that reserves will be maintained at or above these levels.

CREDIT PROFILE

The district's boundaries are coterminous with Volusia County (Fitch implied ULTGO rating of 'AA'). The county is situated on the central east coast of Florida, 50 miles northeast of Orlando, and includes Daytona Beach. The county's population was 496,950 in 2013, up 10% since 2000.

FINANCIAL PERFORMANCE REMAINS SOUND

Financial performance exceeded expectation in fiscal 2013 and the district continues to maintain a satisfactory unrestricted general fund balance. The district generated a surplus after transfers of $3.1 million (0.8% of spending) and ended the fiscal year with an unrestricted fund balance of $46.4 million, or 11.2% of general fund spending. Revenues increased due to an increase in Florida Education Finance Program (FEFP) funding and expenditures were conservatively budgeted and lower than anticipated due to a reduction in teaching and support staff positions.

The district continues to adhere to its goal and policy of maintaining unassigned reserve levels at 5% and 3% of revenues, respectively. Although the 3% policy is in accordance with state guidelines, Fitch believes it provides only a modest cushion against financial volatility. Fitch would view with concern a decline in unrestricted reserves below the higher 5% goal.

FISCAL 2014 BUDGET DEFICIT ADDRESSED

The fiscal 2014 general fund budget of $466 million closed a $33 million current services deficit caused in part by the expiration of a four-year, .25 mill voted critical needs levy. Voters did not approve a 1 mill replacement levy at a November 2012 referendum. The expired levy contributed $6.4 million to the imbalance.

Other factors included mandatory class size compliance costs of $5.3 million, higher pension funding costs ($5.9 million) and increased health insurance costs ($2.5 million). The final approved budget closed this gap while protecting student instructional programs through a combination of the privatization of certain services, a reduction in office staff, utilities savings and a planned use of $25 million of fund balance (leaving a 5.4% general fund cushion).

State sources account for 61% of the original budget with 38% coming from local sources and 1% from federal sources. Eighty percent of the budget is used to cover employee compensation and benefits.

FISCAL 2014 PROJECTIONS BETTER THAN BUDGET

Management has indicated that fiscal 2014 results to date are exceeding budget reducing the need to use the appropriated fund balance. The district received higher FEFP revenues of $4.3 million due to growth in enrollment, and employee and utility savings were experienced in certain areas. Mid-year budget amendments were made to accommodate recurring salary increases of $3.6 million that were approved for certain non-instructional staff and additional teachers were hired during the year, offsetting some of these savings. Fund balance levels are expected to remain at satisfactory levels and in excess of the district's 5% goal.

The fiscal 2015 budget is still in preliminary stages but management predicts a slight increase in student enrollment, higher FEFP funding and an increase in health insurance costs due to the Affordable Care Act.

ECONOMY BENEFITS FROM TOURISM

Volusia County's economy has historically centered on tourism, serving as the home of several popular leisure destinations including Daytona Beach. The economy has diversified into the health care and education sectors providing new employment opportunities. The county is home to four major health care employers including Halifax Community Health System, the second largest employer in the county following the district, and three higher education institutions.

ECONOMIC GROWTH EXPECTED

A number of new economic development projects are underway or in the works including the new $1.3 billion Sunrail commuter line project between DeBary and Orlando, with phase 1 completed this past month; a new Hard Rock Hotel in Daytona; $400 million in planned renovations to the Daytona International Speedway; and the county approved One Daytona entertainment complex project for which construction could start later this year. These projects and others are expected to boost sales tax growth and improve employment opportunities in the county. Notably, home prices are up 15.7% year over year through March 2014 according to Zillow, Inc.

IMPROVED UNEMPLOYMENT LEVELS; BELOW AVERAGE WEALTH

Unemployment rates have improved, declining to 6.3% in March 2014 from 7.5% a year prior, and are in line with state and national averages. The improvement is a result of both job and labor force growth. Wealth levels are moderately below state and national levels.

COPS BEING PAID FROM CAPITAL OUTLAY MILLAGE

Lease payments on COPs are generally paid from revenue of the capital outlay levy, but are ultimately payable from any legally available source. 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 was statutorily waived for lease purchase agreements entered into prior to June 30, 2009 (all of the district's lease agreements were entered into prior to this date). The district requires a manageable 0.924 mills to fund 2014 COPs debt service, with the remainder providing a moderate source of pay-go capital funding.

The district's tax base increased moderately for fiscal 2014 by 4.1% to $36.6 billion and the preliminary estimates suggest around 5% growth for the fiscal 2015 tax roll. This growth follows a period of decline in assessed values of 36% from fiscal 2008 through 2013 due primarily to a stressed housing market. As tax base values improve, the millage rate required to pay COP debt service will decline resulting in additional funds for capital expenses. COP debt service is level.

The pledged assets supporting the COPs under the master lease consist of 16 schools and three additions to schools that served 31% of the district's 61,234 enrolled students during fiscal 2014. Pursuant to the master lease structure, all of these assets would be relinquished if the district failed to appropriate the required funds.

DEBT LEVELS ARE MODERATE AND RETIREE COSTS ARE MANAGEABLE

Overall debt levels are low at $923 per capita and 1.3% of market value. Amortization of district debt is above average with 55% of outstanding principal repaid in 10 years. No new debt is contemplated in the near term. Total carrying costs for debt service charges, district paid pension and other post-employment benefit (OPEB) pay-go of $67.6 million equal a moderate 12.7% of total fiscal 2013 governmental expenditures.

Declining enrollment prior to this fiscal year has led to reduced capital spending in recent years although certain of the district's schools are in need of roof and structural repairs due to aging. To accommodate these and other needs, including school security and technology improvements, the district is seeking voters' approval this August to extend the half-cent sales tax for another 15 years, beginning in 2017. The sales tax revenues could only be used for capital needs.

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' (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=830993

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Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson:
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson:
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com