Fitch Rates Lake County School Board, FL's Series 2014A COPS 'A+'; Outlook Stable

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

--$52.6 million series 2014A COPs.

The COPs are expected to price on June 17.

Proceeds will be used to refund a portion of the outstanding series 2005A COPs for savings.

In addition, Fitch affirms the following ratings:

--$262.7 million outstanding COPs at 'A+';

--$5.1 million outstanding series 2004 sales tax revenue bonds at 'A+';

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

The Rating Outlook is Stable.

SECURITY

The COPs are secured by an undivided proportionate interest in lease payments made by the district to the financing corporation for the district under the master lease purchase agreement, subject to annual appropriation. The district is required to appropriate funds for all outstanding leases on an all-or-none basis. In the event of non-appropriation the district must surrender possession of all leased facilities under the master lease to the trustee, for disposition by sale or re-letting of its interest in such facilities.

The sales tax bonds are secured by the district's portion of the local option one-cent infrastructure sales tax. Revenues are collected within Lake County (the county) with the district receiving 1/3 of gross revenues according to an interlocal agreement. The tax will sunset in December 2017, three months after the bonds mature. The debt service reserve requirement is met by an Ambac surety (not rated by Fitch).

KEY RATING DRIVERS

PRUDENT FISCAL MANAGEMENT: The district's financial operations have been historically sound despite declines in property tax revenues and state funding. Reserve levels remain adequate and are expected to increase as revenues trend upwards.

LIMITED LOCAL ECONOMY: Lake County's economic profile is marked by fairly limited employment opportunities but benefits from its proximity to rapidly expanding Orlando. Unemployment rates have improved but wealth levels remain slightly below state and national levels.

FAVORABLE DEBT PROFILE: Debt levels should remain affordable as the district reports no new money borrowing plans. Principal is amortized at an above-average rate.

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.

STRONG SALES TAX COVERAGE: The 'A+' rating on the infrastructure sales tax bonds incorporates strong debt service coverage provided by pledged revenues, as well as historical volatility in the revenue stream and the general credit characteristics of the district.

RATING SENSITIVITIES

DECLINE IN REVENUES: A significant decrease in revenues utilized to pay COPs debt service, including capital outlay millage revenues and/or infrastructure sales tax collections, could result in negative rating action.

CHANGES IN RESERVE LEVELS: Deterioration of unrestricted general fund balances below the district's minimum balance threshold would be viewed unfavorably by Fitch. Conversely, a material increase in reserves could lead an upward change in the ratings.

CREDIT PROFILE:

The district is coterminous with Lake County and is located in central Florida between Orlando and Ocala. Its estimated 2013 population was 303,186, up 2.5% since 2010.

LIMITED ECONOMY

Lake County (implied ULTGO rating 'AA-' by Fitch) has historically been concentrated in citrus with some recent diversification into light manufacturing. The county's large number of residents over 65 years old has also driven an expanding health care sector. The largest employers are the school district, followed by Leesburg Regional Medical Center and the Villages of Lake-Sumter, Inc. (a large retirement community).

The local economy is benefiting from rapid growth in nearby Orlando, which serves as the economic anchor for the region. Many residents commute to Orlando for employment, and areas of the county closest to the city are experiencing an influx of residents due to spillover from Orlando.

Employment experienced significant growth in 2013 of 3.6% following two years of modest increases. This trend is continuing into 2014 as March 2014 employment is 4.1% over job levels in March 2013. The March 2014 unemployment rate of 6.7% represents a one-year decline from 7.7% but still exceeds the state average of 6.4%.

Assessed values (AV) stabilized in fiscal 2014 after four years of declines totaling 28%. While the fiscal 2014 tax base increase was less than 1%, preliminary AV for fiscal 2015 is up a more substantial 4%. The housing market is recovering, as evidenced by May 2014 housing values surging by 15% year over year according to Zillow.com. Given this growth, the district's expectations of future AV growth appear reasonable.

Rapid population growth has historically driven corresponding enrollment growth rates in the district. While recent enrollment had leveled off, fiscal 2014 student counts were up a healthy 5.8% from the prior year. Overall slower growth, however, is expected over the near term. Wealth levels remain slightly below average with median household income equal to 99% and 90% of state and national averages, respectively (although recent growth in this metric has outpaced that of the state and nation).

SOUND FINANCIAL OPERATIONS

Financial operations have historically been sound and unrestricted fund balances have consistently exceeded the district's minimum fund balance policy of 4% of spending. The district prudently built up fund balances during fiscals 2010 and 2011 when it was able to set aside a portion of stimulus funds. These reserves have been used to offset declines in state funding and falling property tax revenues in subsequent years.

Management reported a general fund net operating deficit of $12.7 million for fiscal 2013, bringing unrestricted general fund balance down to $11.7 million, a slim but still adequate 4.2% of spending. The results were an improvement over the budgeted $16.7 million use of reserves. Revenues were about $1 million under budget while spending dipped $5 million below budgeted levels as a result of tight cost controls.

District finances rely heavily upon state aid, which accounts for over 60% of general fund revenues. For fiscal 2014, the state sharply raised its base student allocations - dedicating about half the increase to personnel salary increases. Coupled with a modest decline in property tax revenues, the district budgeted a much smaller $3.1 million (1% of budget) use of reserves, reducing unrestricted general fund balance to $11.2 million or 4% of spending. Officials expect to outperform the budget with a small surplus at year end and an unassigned general fund balance equal to 5.5% of spending.

For fiscal 2015, management is proposing a $1.4 million operating surplus for the general fund. Operations should benefit from increased state aid and expansion of the tax base. Included in the budget proposal are salary increases averaging about 2% for all employees. Fitch considers management's ability to maintain satisfactory reserve levels to be critical to rating stability.

STRONG COP SECURITY BUT LEVERAGED CAPITAL OUTLAY MILLAGE

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 school facilities which, according to management, currently serve a sizable 40% of its total students.

The district currently utilizes capital outlay funds from the levy of 1.5 mills to support COP debt service, but also has available excess infrastructure sales tax revenues after payment of outstanding sales tax revenue bonds. In 2012, the state raised its limit on the use of capital outlay millage for COPs debt service from 1.125 mills to 1.5 mills 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).

Due to recent declines in AV, the revenues generated from the 1.5 mills alone are insufficient to cover the district's aggregate COPs debt service. Fiscal 2014 coverage of COPs debt service is 0.93x, assuming a 97% collection rate (a shortfall of $1.7 million). Excess infrastructure sales tax revenues totaling nearly $5.5 million in fiscal 2013 are sufficient to fill in any gaps in coverage as well as provide funds for capital maintenance needs. The district also has approximately $7 million of reserves in its sales-tax sinking fund available for sales tax bond or COP debt service.

COPs debt service ramps up through fiscal 2018 to $27.7 million (incorporating projected savings from this refunding) from $25.7 million this fiscal year. With a significant increase in fiscal 2015 preliminary AVs and stable sales tax revenues, Fitch expects capital outlay millage revenues and excess infrastructure sales tax revenues will adequately cover COPs debt service before the sales tax expires at the end of 2017.

COPs debt service is scheduled to decline to $19.1 million beginning in fiscal 2019, and sales tax reserves should be sufficient to supplement capital outlay millage revenues from the beginning of 2018 until the decline in debt service the following year. However, significant near-term declines in AV and/or infrastructure sales tax collections could pressure the rating.

SOLID SALES TAX PERFORMANCE

Following several years of recession-led declines, infrastructure sales tax revenues have experienced three years of sustained growth. Fiscal 2013 collections were up 5.8% from the prior year and 22% above fiscal 2010 levels. Fiscal 2013 coverage of MADS of $6.03 million in October 2017 is a strong 1.95x. Fiscal 2014 year-to-date results through April are on par with prior year collections and well ahead of budget. The debt service reserve requirement is standard but funded by a surety from Ambac, thus Fitch does not factor this reserve into the rating.

FAVORABLE DEBT PROFILE

Overall debt is low at 1.3% of fiscal 2013 market value and $1,022 per capita and is expected to remain low given no additional new money borrowing plans. The district has entered into a forward delivery agreement to privately place COPs in 2015 in order to refund for savings a portion of outstanding series 2005B COPs.

Principal amortization of all district debt is above average at 59% in 10 years. COP debt service accounted for an affordable 9.1% of fiscal 2013 general government expenditures. An additional 3% of the district's budget is consumed by contributions to the well-funded state pension plan and an implicit rate subsidy for retiree health care costs. In total, the district's carrying costs including debt service, pension and other post-employment benefits (OPEB) was a below-average 12.1% in fiscal 2013.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and 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=834197

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
George Stimola
Analyst
+1-212-908-0770
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
George Stimola
Analyst
+1-212-908-0770
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com