NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the following Hillsborough County School Board Leasing Corporation's (the corporation) certificates of participation (COPs):
--$56,090,000 refunding COPs series 2016A.
In addition, Fitch has affirmed the following ratings:
--Implied unlimited tax general obligation (ULTGO) of the Hillsborough County School District at 'AA+';
--$798 million outstanding corporation COPs at 'AA'.
The Rating Outlook for the implied ULTGO and COPs remains Negative.
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 made from legally available funds of the district, subject to annual appropriation by the Hillsborough County FL School Board. In the event of less than full appropriation, the trustee may force the district to surrender possession of all leased facilities under the master lease to the trustee for disposition of its interest in such facilities by sale or re-letting.
KEY RATING DRIVERS
WEAKER FINANCIAL PROFILE: Deficit operations for fiscal 2015, primarily as a result of unbudgeted increases in employees' compensation, resulted in a notable decline in reserves. This was the fourth year of a decline in reserves causing a reduction in the district's overall financial flexibility compared to historical levels.
BUDGET CHALLENGES PERSIST: Management approved a balanced budget for fiscal 2016 and has implemented a number of savings initiatives which combined with an increase in state aid eliminated the large structural imbalance (roughly $80 million or 5% of spending). The maintenance of the Negative Rating Outlook reflects Fitch's belief that achieving balanced operations this fiscal year may prove difficult due to budgetary pressures, including an increase in employee-related costs and lack of control over revenues.
DIVERSE ECONOMY: Hillsborough County, which includes the city of Tampa, serves as the economic anchor of western Florida, with significant employment in the professional, business, education and health services. Signs of economic vibrancy are evident as employment levels have seen significant improvement and sales tax revenues and housing prices continue an upward trend.
LOW DEBT BURDEN: The district's debt burden is low, and debt service requirements do not pressure the financial profile. The district has no immediate near term borrowing plans.
COPS SUBJECT TO APPROPRIATION: The 'AA' COPs rating is a single-notch below the implied ULTGO rating reflecting additional structural risk inherent in the annual appropriation of lease payments tempered by a good incentive to appropriate based on the master lease structure and essentiality of leased assets.
RATING SENSITIVITIES
STABILIZATION OF OPERATIONS; RESERVE REPLENISHMENT: The district's implied ULTGO rating and COP rating is sensitive to management's ability to make progress in achieving and maintaining structural balance and implementing a near term plan for restoration of reserves to more robust levels nearer to historical levels.
CREDIT PROFILE
The district is coterminous with Hillsborough County (GOs rated 'AAA'/Outlook Stable) and is located on central Florida's western coast and includes the city of Tampa (implied ULTGO of 'AA'/Outlook Stable). The 2014 population for the county was 1,316,298.
LARGE DEFICIT RESULTS FOR FISCAL 2015
General fund results for fiscal end 2015 showed a large net operating deficit of $83.6 million or 5% of spending. The results reflect primarily the financial impact of newly negotiated salary raises and bonuses. Other costs tied to state mandates and transportation also contributed to the imbalance even as state revenues increased due to continued enrollment growth and higher per pupil funding. This deficit reduced unrestricted reserves from 12.4% to 7% of spending; a still sound level of reserves but well below historical levels. Prior years' usage of fund balance had related to one-time uses for equipment, technology and security upgrades but this past year's results reflected a use of fund balance primarily for recurring expenses.
FISCAL 2016 BUDGET BALANCED
Management approved a balanced budget for fiscal 2016 relying on additional state funding of approximately $62 million and a number of savings initiatives and budget cuts. These initiatives include implementing a freeze on certain purchases, expenditure items and new hires, and a realignment of use of its teachers to meet state mandates. Management reports that these savings and budget cuts, which total approximately $77 million, are projected to help meet the growth in new salary and bonus costs for fiscal 2016 and lead to maintenance of the existing fund balance.
Fitch remains concerned that actual results may vary due to the sizeable initial imbalance and these growing employee related costs. While state funding is projected to increase along with enrollment growth, state mandated programs and a lesser degree of available options for spending cuts could continue to pressure the budget. As a result, the return to robust levels of reserves, more in line with the current rating, could be difficult to achieve in the near term. The maintenance of the Negative Rating Outlook reflects these concerns.
BROAD EMPLOYMENT BASE CONTINUES RECOVERING
Hillsborough County serves as the economic center for Florida's Gulf Coast. Major economic sectors include business services, health care and education. This historically strong and diverse economy has rebounded nicely following the recession. Unemployment rates continued their improvement and stood at 4.4% for November 2015 down from 5.5% the prior year with employment up 1.1% over the period. Wealth levels are slightly above the state average and just below national levels.
Rapid population growth has historically driven corresponding enrollment increases in the district. Recent enrollment growth has become more moderate with an approximate 2% increase in fiscal 2016. The district expects moderate enrollment gains to continue for the next few years.
FAVORABLE DEBT PROFILE
Overall debt levels are low at $1,337 per capita and 1.6% of market value. Variable rate debt equals an approximate 12% of total district debt, which Fitch considers to be a moderate level of risk even with its lack of revenue control.
The district's facilities are reportedly in good shape, with capital needs greatly reduced after a building push earlier in the decade driven by escalating enrollment and state mandated class size requirements. The district uses excess revenue from the 1.5 mill capital outlay levy, after COPs debt service, for the majority of its capital and maintenance needs. No additional borrowing is planned presently.
COPS DEBT SERVICE
The district has historically made COPs debt service payments from the 1.5 mill capital outlay tax, although any legally available revenue can be used. The district's taxable assessed value (TAV) for fiscal 2016 is $80.5 billion (up 7.6% over fiscal 2015) and an estimated 0.86 mill rate generates sufficient revenues, assuming a 96% tax collection rate, to cover fiscal 2016 COPs debt service of $66.7 million.
The master lease structure on the district's COPs is strong, requiring an 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 would amount to approximately 20% of the district's facilities. Fitch considers this requirement a strong incentive to appropriate.
MANAGEABLE RETIREMENT COSTS
All district employees participate in the state operated retirement system which Fitch considers adequately funded. Pension and OPEB costs are affordable. Total carrying costs for pension, OPEB pay-as-you-go and debt service equaled an affordable 9% of total fiscal 2015 governmental spending.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
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=999963
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999963
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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