Fitch Affirms Sarasota County School Board, FL's COPs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed an 'AA' rating on the following certificates of participation (COPs) for the Sarasota County School Board, Florida (the district):

--$117.1 million outstanding COPs, series 2004, 2009 and 2010B.

In addition, Fitch affirms an 'AA+' implied general obligation rating of the district.

The Rating Outlook is Stable.

SECURITY

The certificates are secured by lease payments made by the district to the trustee as assignee of the Sarasota County School Board Financing Corporation (the Corporation), which is a not-for-profit corporation created to assist the district in lease-purchase financing. The school board grants to the Corporation a leasehold estate in the land on which the project is located. Additionally, the Corporation assigns to the trustee for benefit of bondholders all of its rights, title, and interest in the lease, including the right to receive lease payments but excluding rights related to indemnification.

KEY RATING DRIVERS

COPS APPROPRIATION RISK: The 'AA' rating is based on the district's general creditworthiness and its obligation to make lease payments (subject to annual appropriation). The all-or-none feature of the master lease and the significant number of school facilities, which are subject to surrender in the event of non-appropriation, temper this risk.

SUPERIOR FINANCIAL PROFILE: Fund balance levels remain sound despite recent drawdowns. Conservative budgeting and adherence to prudent fiscal policies creates general fiscal stability and a return to balanced operations is expected within the next year or two.

ECONOMIC RECOVERY CONTINUES: The area economy has improved considerably over the past few years. Expanding employment, a recovering housing market and resumption of tax base growth characterize present economic conditions.

MANAGEABLE LONG-TERM OBLIGATIONS: Overall debt levels are moderately low and expected to remain so given the school's modest capital needs and its lack of plans for future debt issuance. Pension and other post-employment benefits (OPEB) liabilities do not limit financial flexibility.

RATING SENSTIVITIES

DETERIORATION OF RESERVES: Continued depletion of district reserves below the district's minimum fund balance target could lead to negative rating action. The Stable Outlook reflects Fitch's expectations that this development is unlikely.

CREDIT PROFILE

The district is coterminous with Sarasota County (the county; rated 'AAA' with a Stable Outlook by Fitch) which encompasses 620 square miles along the southwestern coast of Florida. The county's estimated population is approximately 386,000. District enrollment for fiscal 2014 totaled 41,874, an increase of less than 1% from the prior year. Management expects modest but steady enrollment growth over the next two or three fiscal years.

HEALTHY RESERVE LEVELS MAINTAINED DESPITE OPERATING PRESSURES

The district's financial position remains healthy despite a series of fund balance drawdowns stemming from decreased property tax revenues and lower levels of state aid. Fund balance levels are maintained well above the district's prudent 7.5% unassigned fund balance to spending policy.

Finances also benefit from management's conservative budgeting practices as actual results invariably outperform the budget. Fiscal 2013 operations ended with a $10.5 million general fund operating deficit (after transfers) compared with a budgeted $14.1 million drawdown. While results outperformed budget, fiscal 2013 reflects the fourth operating deficit over the past five fiscal years. Reserve levels remained solid, however, with unrestricted and unassigned general fund balance at 12.7% and 10.9%, respectively of general fund spending.

Financial flexibility has been reduced somewhat in recent years as the district has engaged in extensive spending cuts to offset state funding reductions. Between fiscals 2008 and 2014, officials eliminated 650 positions or about 11% of headcount. As a result of these and other cost cutting measures, fiscal 2013 general fund expenditures were $30 million or 7% under fiscal 2009 spending. The recent renewal of the district's voter-approved one-mill operating levy extends the levy for an additional four years through March 2018, maintaining flexibility on the revenue side.

FISCAL 2014

The district budgeted a $9.2 million use of reserves for fiscal 2014 that would bring unassigned balances down to 8.7% of spending. Growth in property tax revenues partly offset a state-mandated wage increase and rising benefit costs. Based on year to date actuals, projected results improve substantially upon the budget with a $1.1 million year end operating deficit.

Property tax receipts were significantly over budget as the district budgets conservatively assuming all taxpayers take advantage of the 4% early payment discount. In addition, the district also received $2.1 million of unbudgeted revenues as a result of a profit sharing plan with its medical insurer. Projected unassigned general fund balance is approximately $42 million or 10.75%% of spending.

The fiscal 2015 budget benefits from a 7.8% increase in the district's tax base. Elevated property tax revenues partially offset increased costs for employee benefits and pass-through funding to charter schools. The modest projected use of fund balance would bring down unassigned general fund balance to $38.3 million or a still solid 9.6% of spending. Officials predict that finances will achieve structural balance by fiscal 2016, which Fitch believes is reasonable given the consistency with which the district has outperformed projections and the improved economic climate.

LOCAL ECONOMY CONTINUES TO RECOVER

Sarasota County's location along the Gulf of Mexico supports its position as a popular tourist and retiree destination. Service-based industries, such as healthcare and education have a large presence in the local economy. Sarasota Memorial Hospital and Venice Regional Hospital are the county's first and third largest private employers, with almost 4,300 employees in aggregate. Wealth indices generally exceed the state and national benchmarks.

The county is experiencing a sustained recovery from the past recession, which hit its economy particularly hard. Between 2006 and 2010, the county's employment base fell 14% while housing valuations shrunk by over 50%. Employment stabilized in 2011 and has since then consistently expanded. April 2014 jobs were up 5.1% year over year, pushing the county's unemployment rate down to a low 5.4%. Despite the employment gains, overall job levels remain below pre-recession levels.

Since 2012, housing values have been gradually rising. May 2014 home values were up over 12% from the prior year, but are only at 60% of pre-recession peak values, according to Zillow.com. Foreclosure activity is also down considerably from prior years.

The housing correction combined with tax reform beginning in fiscal 2008 had a severe impact on the county's tax base. Between fiscals 2008 and 2013, total assessed value (TAV) decreased by over $21 billion (33%). TAV stabilized in fiscal 2013 and grew by 4.6% in fiscal 2014, lagging trends in the housing market.

Preliminary values for fiscal 2015 are up an ample 7.8% from the prior year. Approximately $500 million of the $3.4 billion growth in fiscal 2015 TAV represents new construction, additions and other improvements to property. Management forecasts continued near term TAV expansion due to the improved economic climate, expected completion of a high-end mall in the fall of 2014, an influx of new retailers and the construction of multiple residential subdivisions.

LOW-RISK DEBT PROFILE

Overall debt levels are moderately low ($1,391 per capita and 1.1% of market value). Amortization of outstanding principal is very rapid, with 96% retired in 10 years.

Future capital needs center on replacement of HVAC systems, the building of permanent classroom wings to replace portable facilities and the construction of a technical center in the southern portion of the County. The district has received a $3 million grant from the state for the estimated $20 million cost of the technical center. The remainder of the capital program will be financed on a pay-as-you-go basis from a combination of capital outlay millage revenues and the district's 25% share of a countywide 1% voted sales tax for capital purposes. The district has no plans for future debt.

Employee retirement benefits do not stress the district's operations. Like other Florida school districts, employees are members of the Florida Retirement System, to which the district has made annual contributions equal to 100% of the state-determined ARC for at least the past three years. The district offers only an implied subsidy for its post-employment benefits (OPEB). Total carrying costs including debt service, pension contributions and OPEB requirements are modest at 10.4% of fiscal 2013 general government spending.

COPS DEBT SERVICE

The district pays COPs debt service with revenue from its capital outlay millage, although all legally available revenues may be used for this purpose. The capital outlay millage can be levied up to 1.5 mills with three quarters of that levy available for the payment of debt service. To cover maximum annual debt service, the district requires only 0.59 mills of this levy. Coverage is expected to increase after fiscal 2015, as debt service is scheduled to decline by over $6 million.

The master lease structure of the COPs is strong, requiring all-or-none appropriation. In the case of non-appropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease which include four elementary schools, two high schools and the Sarasota County Technical Institute. Approximately 15.0% of the district's students attend these facilities.

The series 2004 COPs fully mature after fiscal 2015, after which three elementary schools financed by those COPs will be released from the master lease. The remaining facilities under the master lease will still constitute a significant portion of the district's school capacity covering nearly 11% of the student population. No reserve fund is provided, which Fitch does not deem a concern given the district's elevated credit characteristics and very strong incentives to appropriate.

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=838785

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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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com