Fitch Rates Palm Beach County School Board, FL COPs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a rating of 'AA-' to certificates of participation (COPs) to be issued by Palm Beach County School Board, FL (the district):

--$153.115 million COPs, series 2015B.

The COPs are expected to be sold through negotiation on Dec. 2. The fixed-rate COPs will be used to advance refund a portion of the series 2006A COPs for level debt service savings.

In addition, Fitch affirms the following ratings:

--$1.7 billion COPs at 'AA-';

--Implied general obligation (GO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease payments subject to annual appropriation by the Palm Beach County School Board under a master lease-purchase agreement. Upon certain events of default or the school board's failure to appropriate funds, leases for all 91 facilities under the master lease will terminate and the district is required to immediately surrender possession of all facilities subject to the master lease.

KEY RATING DRIVERS

SOUND MANAGEMENT: The key credit strength supporting the 'AA' implied GO rating is the district's long track record of strong financial management including conservative budgeting and maintenance of adequate reserves.

AFFORDABLE DEBT LEVELS: Fitch considers key debt ratios to be low. Capital demands are manageable with no additional borrowing needs anticipated.

ECONOMIC RECOVERY ACCELERATING: Taxbase growth and employment expansion are rebounding. The county has above-average wealth indicators, strong population growth projections, and a diversifying economy fueled by recent investments in the biotechnology sector.

STRONG APPROPRIATION INCENTIVE: The district has a strong incentive to appropriate lease payments given the large share of educational facilities captured under the master lease program and its reliance on certificate indebtedness to finance capital needs.

RATING SENSITIVITIES

Fitch's key assumption supporting the Stable Outlook is the expectation for adherence to balanced operations in fiscal 2015 with no further draw on reserves. Results inconsistent with this expectation could apply negative pressure on the rating.

CREDIT PROFILE

This district is located in south Florida on the Atlantic coast and serves the entire county, which had a 2013 population of 1.4 million. The district is the fifth largest in the state and the 11th largest in the nation, with 2013-2014 enrollment of 178,482.

ACCUMULATED RESERVES ENABLED FLEXIBILITY

The district's financial performance over the last few years has benefited significantly from one-time revenues received in fiscal 2011 which built balances to a strong 12.3% of spending. The district has executed planned draws on these higher reserves through fiscal 2014 to weather the economic downturn. Fitch expects the district to maintain structural balance over the longer term as further weakening of reserves would strain credit health.

The fiscal 2014 budget was balanced with an $86.8 million use of reserves. Through conservative budgeting and cost controls, the unaudited results for the year show actual reserve use of $19.8 million (a modest 1.3% of spending). General fund revenues were 1.2% over original budget, expenditures were 4.3% under budget. The district's conservatively budgets for full staffing and turnover contributes to expenditure savings. Unrestricted general fund balance (unaudited) of $75.7 million was an adequate 5% of spending, including the 3% contingency reserve required by board policy.

Total general fund balance, including reserves restricted, was 7.5% of spending. While restricted reserves are locally tied to categorical spending, the funds contribute to liquidity. The district's cash flow borrowing has been a moderate $115 million in each of the past four years.

The fiscal 2015 budget is balanced with a moderate $65 million of reserves, approximately the amount of the fiscal 2014 favorable variance in expenditures. Fitch expects year end results to be largely balanced given the district's practice of conservatively budgeting expenditures. Fiscal 2015 budget appropriations total $1.61 billion, a 3.7% increase from the prior year's budget. Spending for district staff is budgeted to decline reflecting turnover.

In large part, increased appropriations are driven by growing charter enrollment. State funded charter expenditures are recorded in the district's financial audit as contractual services and the state aid funding is passed through the district to the charter schools. Charter enrollment continues to increase, and district enrollment is projected to again decline for fiscal 2015. The appropriation for charters is $147.6 million in fiscal 2015, or 9% of resources. The district is looking ahead to operational reforms for fiscal 2016 to improve responsiveness to competition from charter school expansion.

VOTER SUPPORT FOR MILLAGE RENEWAL

Florida school district's school property tax rates are largely prescribed by the state. Exceptions include the ability to go to the voters for additional operating millage for a period of up to four years subject to the overall statutory millage limit of 10 mills, which the district is well under. In November of 2014, voters approved, by a sizable 79%, renewal of the .25 mills designated for the fine arts and choice programs. The four-year millage will expire after the levy for fiscal 2019. In fiscal 2015 this levy is expected to generate $36 million.

The district's overall level of financial flexibility should benefit over time from increasing capacity under the capital outlay millage capped at 1.5 by state law. Estimated maximum annual lease payments require 68% of the fiscal 2015 levy with the remainder of the levy funding maintenance needs. Limited construction and debt needs, and prospects for tax base growth should result in declining utilization of capital millage for debt service, freeing up additional funds for maintenance related operations. The tax base increased a sizable 4.5% for fiscal 2014 and a robust 8.3% for fiscal 2015.

LOW DEBT AND LOW CARRYING COSTS

District debt ratios are expected to remain low given the absence of new issue borrowing plans. Overall debt is just 1.6% of market value and under $2,000 per capita. The district's fiscal years 2015 to 2019 capital improvement plan includes projects totally $534 million with spending primarily for transfers to the general fund for maintenance improvements. All needs are funded with pay-as-you-go revenues, largely excess capital outlay millage.

The district maintains 182 schools: between fiscal 2001 and 2014, 41 new schools were built and 56 others were replaced or totally renovated. The district believes existing school capacity will serve the needs of the district for at least the next 10 years.

Long-term liabilities related to pension and other post-employment benefits (OPEB) are manageable. The district participates in the Florida Retirement System, a statewide defined benefit pension plan. The Fitch adjusted funded ratio for the plan is 78.9% at July 1, 2013.

Total county carrying costs (debt service, pensions and OPEB) are a low 10.8% of total government fiscal 2013 expenditures. The OPEB unfunded accrued liability is $138.5 million (unaudited), is minimal relative to fiscal 2015 market value of real property. The OPEB liability represents the implicit subsidy of offering retirees the ability to purchase health insurance at the group rate. The district does not otherwise fund retiree health insurance.

The district has $352 million in variable-rate debt outstanding equaling 21% of total direct debt, structured as floating-rate notes absent a put feature, eliminating the need for liquidity support. Interest rate risk is hedged via three derivative contracts with a notional amount of $347 million and a negative mark-to-market of -$80 million as of Oct. 31, 2014. The variable-rate exposure is mitigated by the district's active financial and debt management practices and swap terms that do not require collateral posting in any event.

RECOVERY ACCELERATING

The Palm Beach County economy continues to recover with robust job growth and improving conditions in residential construction. The September 2014 unemployment rate of 6% is at the national rate of 6%. Employment growth in the county for the year ended September 2014 was a vibrant 4%, led by gains in the construction sector, and labor force growth for the year was also sizable at 2.4%.

High per capita resident wealth levels help fuel recovery in service and retail sectors. The county's 2012 poverty rate of 14% modestly trails the national rate of 14.9%. The county's educational attainment levels exceed the national and state averages, fostering the growth of more highly skilled, higher wage jobs.

Global Insights (GI) projects strong gains in population and healthy consumer spending in South Florida, ahead of the national average for the next five years, with employment growth driven by professional and business services. The county's list of top employers is dominated by health care networks such as Tenet Healthcare, Hospital Corporation of America, Bethesda Memorial Hospital and Boca Raton Community Hospital. Research within the healthcare sector is a growing presence, anchored by the Scripps Research Institute (biomedical studies) and the Max Planck Florida Institute for Neuroscience. The county's educational attainment profile surpasses the state and nation, with a notable 12% of residents holding advanced degrees.

LIMITED 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 and allow the trustee to repossess a total of 91 school buildings acquired pursuant to the master lease, representing approximately 46% of the educational facilities space available to the district. An event of non-appropriation could also impair the district's ability to issue additional COPs, the primary mechanism for funding long-term capital needs, with nearly $1.7 billion in principal amount outstanding.

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=925616

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Patricia McGuigan
Director
+1-212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Patricia McGuigan
Director
+1-212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com