Fitch Affirms $212MM of Volusia County School Bd's (FL) COPS at 'A+'; IDR at 'AA-'; Outlook Stable

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

--Long-Term Issuer Default Rating (IDR) at 'AA-';

--$212 million outstanding certificates of participation (COPs) at 'A+'.

The Outlook is Stable.

SECURITY

The COPs are payable from lease payments, subject to annual appropriation, made by the district to the trustee, as assignee of the Volusia School Board Leasing Corporation, a Florida not-for-profit corporation.

KEY RATING DRIVERS

The 'AA-' IDR reflects the district's slow revenue growth prospects, limited ability to raise revenues, solid expenditure flexibility and adequate reserve levels. Carrying costs for debt service and retiree benefits are moderate and long-term liabilities are low. The 'A+' rating on the COPs is one notch below the IDR, reflecting the appropriation risk of lease payments for which debt service is paid.

Economic Resource Base

The district's boundaries are coterminous with the county (IDR: 'AA'/Stable Outlook) and is located in the east-central part of the state. The county is bordered by the Atlantic Ocean, is situated 50 miles northeast of Orlando and includes Daytona Beach. The district served approximately 63,043 students in 69 schools in 2016, representing the third year of enrollment growth following a 7% decline from 2008 through 2013. The district sponsors eight charter schools, which represent less than 4% of total enrollment. The county's 2015 population was 517,887, up 4.7% from 2010.

Revenue Framework: 'bbb' factor assessment

The district's revenue-raising ability is limited due to its dependence on state determined revenues. Revenue growth prospects are expected to track the rate of inflation driven by increasing population and enrollment trends, which Fitch expects to continue based upon the somewhat improved environment for state funding.

Expenditure Framework: 'aa' factor assessment

Instructional costs and enrollment growth are the main drivers of spending. The district has solid legal ability to manage employee-related expenditures, although it is somewhat constrained by state class-size mandates. Fitch expects spending to generally track or marginally exceed revenue trends absent policy action.

Long-Term Liability Burden: 'aaa' factor assessment

The district's debt and pension liability is equal to about 3% of personal income. The district's liabilities are expected to remain low given manageable debt plans and its participation in the adequately funded state pension plan.

Operating Performance: 'a' factor assessment

The district became challenged in recent years due to declining revenues and rising costs that resulted in the use of reserves. District management has taken measures to control costs and gradually improve reserves, providing for enhanced financial flexibility to manage through economic cycles.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: A shift that results in a reduction in the district's financial resilience and gap-closing ability could result in downward rating pressure. Conversely, Fitch could consider an upgrade should there be a sustained improvement in the district's overall financial flexibility beyond current expectations.

CREDIT PROFILE

The local economy was traditionally centered on tourism although it has diversified with an increased presence in the healthcare and education sectors. County employment has steadily improved since 2011, resulting in a decline in the unemployment rate from the recessionary peak to levels below state and national averages. Wealth levels are below the state and nation, likely due to its service-based economy.

County home values endured sharp declines during the recession and have grown in recent years but still remain below the pre-recession peak. Home values are forecast to increase further, according to the Zillow Group. IHS forecasts population and non-farm employment to rise by about 5% and 6%, respectively, from 2016 through 2021 for the Deltona-Daytona Beach-Ormond Beach metropolitan statistical area, providing support for future enrollment growth.

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 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. In fiscal 2015 state funding comprised about 58% of the district's total general fund revenues, while property taxes were about 38%.

Fitch's view of school district revenue growth prospects considers the revenue performance of the state as a starting point given its fundamental responsibility for public education. Fitch believes Florida's revenue growth prospects will grow at a pace that is above the rate of inflation but below the U.S. economic performance based on the resumption of population growth and stronger economic expansion. School district revenue expectations are somewhat tempered by the recent history of volatility in state education funding commitments, which have been variable in recent years with annual changes in the base student allocation to 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 expects district revenues to expand in line with inflation, due to projections for continued modest growth in traditional student enrollment.

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 a fundamental state responsibility and the strong foundation of state support for education funding.

Expenditure Framework

School instruction costs comprise approximately 80% of fiscal 2015 spending. These costs grew in recent years in excess of revenues as a result of state mandates regarding classroom size, rising salary and benefit costs and other program requirements from the state.

Fitch expects the pace of spending to generally match or slightly exceed revenue trends, as increased spending related to student enrollments are funded by a similar rise in state funding and growth in local revenues fueled by an expanding student population.

Wages and benefits are bargained collectively but the district has relatively good control over employee-related expenditures with some constraints related to class size requirements and maintenance of staff compensation levels. During the recession the district reduced personnel, outsourced certain positions and deferred capital projects in order to manage spending, and has since restored some positions in order to accommodate the rising student population. In July 2016, the district successfully negotiated employee contracts through fiscal 2018, which resolved the two-year dispute over contract terms. The new contract incorporates pay increases in fiscal 2017 and fiscal 2018, as well as one-time bonuses and changes to health care plans that caps the district's health insurance subsidy and also require increased employee contributions. Carrying costs related to debt service, pensions and OPEB are moderate at 13% of total government spending.

Long-Term Liability Burden

The long-term liability associated with debt and the district's share of the net pension liability of the Florida Retirement System is estimated at 3% of personal income. Direct debt accounts for a majority of the liability metric, and consists of COPs issued under a master lease structure and sales tax revenue bonds. The district's direct debt amortizes at a rate of 57% in 10 years.

The district's capital spending needs are funded by a combination of the local capital outlay millage, sales tax proceeds and impact fees. The district successfully obtained voter approval to extend the sales tax levy to 2032 in support of school capital needs that include the replacement of aging facilities and school repairs, security enhancements and technology upgrades.

Lease payments on COPs are generally paid from the capital outlay levy but are ultimately payable from any legally available source. 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, but not pledged, for lease payments. Effective July 1, 2012, the three-fourths limitation was statutorily 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). The district requires 0.73 mills to fund COPs maximum annual debt service assuming a 96% tax collection rate, with the remainder providing a moderate source of pay-go capital funding.

The pledged assets supporting the COPs under the master lease consist of 11 schools and three additions to schools that served 20% of the district's 63,043 enrolled students during fiscal 2016. Pursuant to the master lease structure, all of these assets would be relinquished if the district failed to appropriate the required funds.

Operating Performance

Fitch's scenario analysis illustrates the district's strong gap-closing capacity, which incorporates the revenue volatility of 2.7% depicted by Fitch's Analytical Sensitivity Tool (FAST), midrange inherent budget flexibility and satisfactory reserves. Fitch expects that in a future downturn the district will undertake similar measures it has used in the past to respond to revenue declines, including reducing spending while maintaining reserves consistent with an 'a' financial resilience assessment. Additional flexibility is augmented by available balances in the local capital improvement fund.

During the recent recession, the district was challenged by enrollment and revenue declines but was able to manage the budget through personnel reductions and cost containment efforts that enabled it to rebuild reserves through fiscal 2013. In fiscal 2014, the district faced a structural deficit following the expiration of a four-year 0.25 mill voted critical needs levy, which contributed revenue in fiscal 2013 of $6.4 million (1.4% of the general fund budget). Other factors such as increased spending for the hiring of additional teachers to meet state mandated class size requirements and higher pension and health insurance costs also pressured the budget, which resulted in the use of reserves in fiscals 2014 and 2015. Despite the decline, the district continues to adhere to its goal and policy of maintaining unassigned reserve levels at 5% and 3% of revenue, respectively. Furthermore, the district has additional resources in its local capital improvement fund that can be used to support debt service or operations if needed, although this support would be predicated upon the district's ability to meet certain maintenance needs.

For fiscal 2016, district officials indicate improved results with a return to structural balance and an increase in reserves, with unaudited fiscal 2016 unrestricted reserves equal to 9% of spending. The district's fiscal 2017 budget is 5% higher than the prior year, reflecting an increase in FEFP funding, increased student enrollment, salary increases, and healthcare savings achieved from the application of an employer health care contribution cap. The 2017 budget also incorporates a $2 million reduction in appropriation for capital projects, as part of management's plan to restore reserves. County officials estimate fiscal 2017 reserves will remain consistent with 2016 results.

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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Fitch Ratings, Inc.
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or
Secondary Analyst
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Director
+1 212-908-0538
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Grace Wong
Director
+1 212-908-0652
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1 212-908-0538
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com