Fitch Affirms Polk County School Board, FL's IDR at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Polk County School Board ratings:

-- $46.7 million sales tax bonds, series 2007, at 'A-';

-- Issuer Default Rating (IDR) at 'AA-'.

In addition, Fitch has affirmed the following ratings for Polk County School Board Financing Corp bonds, issued on behalf of the district:

-- $47.9 million outstanding certificates of participation (COPs), series 2003B and 2010A at 'A+'.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are payable from a senior lien on a one-half-cent local government sales surtax and a debt service reserve fund satisfied by surety bonds.

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 that financed or refinanced such projects.

KEY RATING DRIVERS

The 'AA-' IDR reflects the district's solid prospects for enrollment-driven revenue growth, very limited ability to independently raise revenues, a low long-term liability burden and adequate reserves that may be sensitive to cyclical economic declines.

The 'A+' rating on the COPs is one notch below the IDR, reflecting the slightly higher degree of optionality associated with lease payments subject to appropriation.

The 'A-' rating on the sales tax bonds reflects the solid growth prospects for pledged revenues, while incorporating limited resilience to economic downturns. The rating is capped by the district's IDR.

Economic Resource Base

This district, which is coterminous with Polk County (rated 'AA'/ Stable Outlook) is situated near the center of Florida on the Interstate 4 corridor, almost equidistant from Orlando and Tampa, and residents enjoy easy commuting access to these growing metropolitan areas. It had an estimated 2014 population of approximately 650,000, up 8% since the 2010 census. District enrollment (about 102,000 in 2016) has shown slight growth recently and management expects 1% to 2% growth annually.

Revenue Framework: 'a' factor assessment

District general fund operations are funded through a state formula based on enrollment which includes a combination of state aid and local property taxes. Fitch expects strong revenue growth to continue through strong enrollment gains and a somewhat improved environment for state funding. The district has very limited legal ability to raise revenues.

Expenditure Framework: 'aa' factor assessment

Instructional costs are the main driver of expenditures and are expected to rise in line with to marginally above revenues absent policy action. The district has ample legal control over workforce decisions.

Long-Term Liability Burden: 'aaa' factor assessment

The district's long-term liability burden is low and it participates in the adequately funded Florida Retirement System (FRS).

Operating Performance: 'a' factor assessment

Historically, general fund balance has been kept above the district's policy of 5% of spending. The district's inability to independently raise revenues limits its budget flexibility and thus gap-closing ability in times of economic stress.

RATING SENSITIVITIES

Maintenance of financial flexibility: The rating is sensitive to a draw on general fund reserves below expected levels while the district adds staff and capacity to accommodate a growing student population.

Sales tax coverage: A material contraction of revenues or further leveraging of the revenue stream during the current sales tax authorization that decreases coverage could pressure the rating.

CREDIT PROFILE

Citrus and phosphate mining have historically been key sectors for the district economy, though there has been diversification in recent years into insurance, health care, light manufacturing, and distribution. Citrus farms have been largely replaced by either seasonal crops, which attract more migrant and seasonal workers, or residential development. The district stands to benefit from various development projects that are recently implemented or underway including a recently opened Florida Polytechnic University campus, an Amazon distribution center, and hotel facilities expansions associated with Legoland and the Streamsong resort, which are expected to increase tourism activity.

Revenue Framework

The Florida Education Finance Program (FEFP) is the primary mechanism for funding the operating costs of Florida school districts. The FEFP process determines a base per-student funding level. The funding is split between state funds largely derived from statewide sales tax revenue, and local funds via the required local millage rate established pursuant to state statutory procedure.

Discretionary taxes for operations and capital/maintenance are also levied by the district up to the statutory maximum rates of 0.748 mills and 1.5 mills, respectively. State aid made up about 75% of the district's fiscal 2015 revenues (prior to transfers in), with about 23% generated by property taxes.

Fitch's view of school district revenue prospects considers the revenue performance of the state as a starting point given its fundamental responsibility for public education funding. Fitch believes Florida's revenue prospects will grow at a pace that is above the rate of inflation but below U.S. economic performance based on a resumption of population growth and stronger economic expansion. School district revenue expectations are somewhat tempered by the state's education funding commitments which have been variable in recent history with annual changes in the base student allocation as low as a 1% increase for fiscal 2017. Enrollment trends and expectations are the second key determinant of a school district's revenue growth prospects and are based on Fitch's view of the local economy, demographic patterns, and competition from non-traditional public schools, among other factors. Fitch anticipates district revenues to perform above inflation but below GDP, a reflection of modest district enrollment growth.

Due to the state funding mechanism, Florida school districts have very limited ability to independently increase general fund revenues. However, this limitation as a factor in the revenue framework assessment is somewhat offset by the recognition of K-12 education as fundamentally a state responsibility and the strong foundation of state support for education funding.

Expenditure Framework

Salaries and benefits make up the bulk of general fund expenditures.

Fitch expects the natural pace of spending growth to match or marginally exceed revenue growth, reflecting enrollment-driven spending needs largely funded by the state funding formula.

Wages and benefits are collectively bargained and the district has relatively good control over employee-related expenditures through the ability to ultimately implement a contract after non-binding arbitration. The district is currently meeting class size requirements in all schools.

Carrying costs related to debt service, pensions and OPEB are low at roughly 9% of fiscal 2015 total government spending, driven largely by debt service costs. Carrying costs are not expected to rise in the near future, as the district has limited borrowing plans and participates in the adequately funded Florida Retirement System (FRS). The district provides a retiree health insurance subsidy, which it funds on a pay-as-you-go basis.

Long-Term Liability Burden

The district's fiscal 2015 combined long-term liability burden, comprising debt and the district's share of the net pension liability of the FRS, is low at less than 4% of personal income. Rapidly amortizing direct debt (roughly 77% of principal retired in 10 years) makes up approximately 46% of the district's combined long-term liability burden. The district has no intermediate-term plans for new money debt and plans to fund near-term capital projects with sales tax revenues that exceed debt service requirements.

Pensions are provided through the state run FRS and costs are manageable. FRS is well-funded at a reported 86.5% as of July 1, 2015 or an estimated 80.7% when adjusted by Fitch to assume a 7% rate of return, and as such, costs are not expected to increase materially.

Operating Performance

The Fitch Analytical Sensitivity Tool (FAST) indicates a potential revenue decline for the district of 1.4% in a moderate economic decline in which GDP drops by 1%. Fitch expects the district to respond to such a decline similarly to historical patterns, in which they maintained reserves in excess of 5% of spending, in line with district policy. Flexibility is augmented by available balances in the capital projects fund.

Fiscal 2015 available general fund reserves totaled $46.2 million, or an adequate 6.4% of expenditures and transfers out. The district expects a deficit in fiscal 2016 general fund results of approximately $8 million, or less than 2% of spending. The deficit is a result of lower than expected state revenues paired with staff raises that were issued with the expectations of higher state revenues. Incorporating this expected fiscal 2016 drawdown, available general fund balance will remain above the district's policy.

The fiscal 2017 general fund budget is $813 million, roughly 1.9% higher than fiscal 2016 actual spending and includes a fund balance appropriation of approximately $8 million. Fitch expects fiscal 2017 to perform above budget due to conservative budgeting of revenues and a consistent practice of outperforming the expenditure budget.

Improving Sales Tax Coverage but Volatile Revenue History

Maximum annual debt service (MADS) coverage in fiscal 2015 was 1.46x, up from a low 1.11x during the recession. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP stress scenario) and the largest consecutive decline in actual collected revenue since fiscal 2001. The county government's sales tax revenues are used as a proxy for the district's, since the district's voted sales tax does not have a long enough history to be analytically relevant and the two revenue streams trend together. FAST generates a 4% scenario decline in sales tax revenue. The largest actual cumulative decline in historical sales tax revenues is a 24% in fiscal 2007 through fiscal 2010, due to the recession.

Fitch considers the scenario results consistent with an 'a' assessment. Given there is no additional leverage expected (the sales tax authorization expires at the end of 2018, two months after the final maturity of the bonds) Fitch uses the current coverage of 1.46x to calculate sales tax revenue tolerance. Sales tax revenue could tolerate a 33% decline before MADS coverage fell to 1x. This level of tolerance is equivalent to 8.3x the FAST results and 1.4x the largest historical decline in the review period. Given the outsized impact of the housing market collapse on the Florida economy, the rating incorporates Fitch's expectation that such a drastic decline in pledged revenues would not reoccur in future economic downturns.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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Fitch Ratings
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Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
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+1-212-908-0568
or
Media Relations
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jeremy Stull
Analyst
+1-646-582-4981
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com