NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings on Hernando County School Board, FL's (the district) certificates of participation (COPs):
--$99 million outstanding COPs, series 2005 at 'A+'.
In addition, Fitch affirms the district's implied unlimited tax general obligation (GO) rating at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The COPs are payable from lease payments made by the district to the trustee pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, 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, all leases will terminate, and the district would, at the trustee's option, have to surrender all lease-purchased projects for the benefit of owners of the COPs which financed or refinanced such projects.
KEY RATING DRIVERS
ADEQUATE BUT DECLINING RESERVE LEVELS: Management has historically maintained adequate reserve levels through conservative budget practices and cost saving measures. Current projections though show reserves falling to much lower levels due to use of reserves to offset a decline in revenues. Management has proposed numerous cuts to eliminate its structural imbalance for the current operating budget and plans to restore revenues gradually to its 5% policy level.
MANAGEABLE LONG TERM LIABILITIES: Overall debt burden is low and should remain so given the district's limited capital needs and the absence of additional issuance plans. Carrying costs for debt and employee retirement benefits are manageable.
BELOW-AVERAGE ECONOMIC PROFILE: The economy remains limited with major industries centered in lower-wage agriculture, limestone mining, and cement production. Unemployment rates are consistently higher than state and national averages.
COPS SUBJECT TO APPROPRIATION: The 'A+' COPs rating reflects the district's general credit quality, its obligation to make annually appropriated lease payments under a master lease structure, and the essentiality of leased assets.
RATING SENSITIVITIES
RETURN TO STRUCTURAL BALANCE: The district's declining reserve position through fiscal 2015 results in only a minimal financial cushion. Failure to generate stable operating results in fiscal 2016 and evidence of a gradual restoration of unrestricted reserves closer to the district's 5% policy level would trigger negative rating action.
SALES TAX REFERENDUM RESULTS: The approval of the upcoming sales tax referendum will help the district meet a large component of its current capital and maintenance needs. If approval is not received, the plans for meeting these future costs whether through debt or other actions could cause a change to the district's financial profile and may impact the district's rating.
CREDIT PROFILE
Hernando County School District is coterminous with Hernando County and is a mainly residential area. The county has an estimated 2014 population of 174,441 and is located on the central-west coast of Florida, north of Tampa Bay.
FISCAL 2015 PROJECTED RESULTS SHOW FULL USE OF BUDGETED RESERVES
The district has historically used a large portion of fund balance to balance its budget but has typically had results which retained fund balance levels between 5% and 10% of spending. Fund balance levels have declined in each of the past three fiscal years (2012-2014) with fiscal 2014 ending with unrestricted fund balance at $12.9 million or a satisfactory 8% of spending. Management is projecting a sizable use of reserves of close to $7.9 million for fiscal 2015 which would reduce unrestricted reserves to approximately 3% of spending. The original fiscal 2015 budget included the use of $7.7 million in reserves. Fitch considers reserves at this level to provide limited financial flexibility. These results are due mostly to lower than anticipated state aid as enrollment projections were down and the district did not receive sparcity aid. Other miscellaneous revenues were also down.
This projected result is contrary to Fitch's expectations as historical results have typically outperformed budget due to conservative budget practices. Fitch would expect gradual restoration of unrestricted reserves closer to the district's 5% policy level over the next two years or negative rating pressure will likely result.
TENTATIVE FISCAL 2016 BUDGET REMOVES IMBALANCE
The tentative total district budget for fiscal 2016 is $223 million, a $28 million reduction compared to 2015. A significant portion of the decline is attributable to a drop in debt service as the district's sales tax bonds have matured. Management has also proposed a number of cost savings measures which total approximately $8 million helping offset the prior year's structural imbalance. In addition, state aid is estimated to increase by $8 million. Student enrollment is projected to increase slightly by 2.6% to 21,219. The district projects slight growth to continue in future years based upon demographic trends and development in progress.
SALES TAX REFERENDUM PLANNED FOR SEPTEMBER 2015
Management has approved a half-cent sales tax referendum for Sept. 8. The estimated $8.5 million in annual proceeds from the proposed 10-year sales tax will be dedicated to capital improvements. Fitch has discussed with management the district's contingency plan in the event the referendum should fail to pass. The plan includes the potential closure of schools and cuts in programs. Fitch would consider the approval of the sales tax to be a stabilizing credit factor as it would provide the district with the means to finance needed improvements and ease financial pressure on the district's general and capital funds. Fitch will monitor the results of the upcoming referendum.
LOW DEBT LEVELS
Overall debt ratios are low at only $798 per capita and 1.1% of market value. No new debt is anticipated in the near term. While the district may use any legally available revenue for COPs debt service, the district has historically allocated revenue for this purpose from its capital outlay millage.
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 for lease payments. Effective July 1, 2012, the three-fourths limitation is 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).
Due to prior years of declines in assessed value the district requires a fairly high 1.19 mills to fund COP debt service in fiscal 2015 assuming a 96% tax collection rate. The required millage has lessened each of the past three years as the district's tax base has been experiencing moderate growth since 2012.
MANAGEABLE CARRYING COSTS
Pension benefits are offered exclusively through participation in the Florida Retirement System (FRS). The district's contribution to FRS of $7.1 million equaled 3.5% of spending in fiscal 2014 and contributions were up 7% for both fiscal 2015 and 2016. The district does not explicitly subsidize post-employment healthcare. However, the district recognizes an unfunded actuarial accrued liability (UAAL) associated with retirees' participation in the district's healthcare plan at the group rate. The liability was a modest $12.8 million at July 1, 2014. The district funds this liability on a pay-as-you-go basis, which was $234,317 or a low 0.1% of spending in fiscal 2014. Total carrying costs for COP debt service, pensions and pay-go for other post-employment benefits (OPEB) was a manageable 13% of fiscal 2014 total governmental spending.
LIMITED ECONOMY WITH BELOW AVERAGE SOCIOECONOMIC INDICATORS
Located north of Tampa on the central-west coast of Florida, the county is mainly residential. The district, which is coterminous with the county, experienced rapid enrollment growth in the first half of the decade as the county's population increased over 5% annually before tapering off in the past few years.
The county serves as a bedroom community due to its proximity and direct access via the Suncoast Parkway to the City of Tampa. The area economy remains fairly narrow with concentrations in agriculture, citrus products, cattle production, limestone mining and cement production. The county's unemployment rate remains high at 7.1% for May 2015. This is an improvement from 7.9% the prior year although workforce declined by 0.8% over the same period. Median household income for 2013 was 77% and 87% of the national and state rate, respectively.
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, and National Association of Realtors.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990391
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990391
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.