NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Indian River County School District, FL (the district) ratings:
--Approximately $81.7 million certificates of participation (COPs) at 'A+';
--Issuer Default Rating (IDR) at 'AA-'.
The Rating Outlook has been revised to Stable from Positive.
SECURITY
The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases under the master lease on an all or none basis. An event of non-appropriation would result in the termination of the master lease, and the surrender to the trustee of all lease-purchased projects under the master lease.
KEY RATING DRIVERS
The 'AA-' rating on the IDR reflects the district's strong gap-closing ability, realized through solid expenditure flexibility, prudent budget management and a low liability burden. Fitch believes that these strengths are balanced against stagnant enrollment trends, which could temper future revenue growth given the state funding mechanism.
The Outlook revision to Stable from Positive reflects the implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. While the district's financial position has improved in recent years, the revised criteria place increased focus on operating performance throughout the economic cycle. Fitch believes that the district's gap-closing capacity is strong, but could be somewhat weakened in a moderate economic downturn.
Economic Resource Base
The school district, which is coterminous with Indian River County, is located on the Atlantic coastline approximately 135 miles north of Miami, and includes the cities of Vero Beach and Sebastian. The district operates 25 schools and sponsors five charter schools. Traditional school enrollment growth has experienced modest declines since 2008. The county's population has shown steady gains with a 2015 census estimate of 147,919, up 7% from 2010.
Revenue Framework: 'bbb' factor assessment
The district's 10-year general fund revenue growth rate (through fiscal 2015) exceeded national inflation but was lower than GDP growth. Fitch expects revenue gains to fall below historical levels given weak enrollment prospects. The district's independent legal ability to raise taxes is statutorily limited.
Expenditure Framework: 'aa' factor assessment
Spending growth is expected to trend at a pace generally in line with revenue growth. The district derives reasonable expenditure flexibility from solid management of its workforce costs and moderate carrying costs associated with debt service and retiree benefits.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden related to debt and retiree benefits is low relative to personal income. The district currently has no plans for future issuance, and amortization of existing debt is above average. The district participates in the adequately-funded Florida Retirement System (FRS).
Operating Performance: 'aa' factor assessment
The district faced significant financial pressures during the past recession, but Fitch believes it would maintain a satisfactory reserve level in a moderate economic downturn, supported by its solid expenditure flexibility.
RATING SENSITIVITIES
Maintenance of Financial Flexibility: The rating is sensitive to the district's ability to maintain adequate gap-closing capacity throughout economic cycles. A reduction in reserves beyond Fitch's expectations could reduce its financial flexibility, and result in downward pressure on the ratings.
CREDIT PROFILE
The economy of Indian River County is historically based in agricultural production and tourism, although it has diversified with an increased presence of health care, information technology, light manufacturing, wholesale and retail trade and service. Ample developable waterfront land and a relative lack of congestion serve to attract a significant wealthy retiree population. This is evident in above average per capita personal income levels, though median household income more closely approximates state levels.
Strong population growth between 2000 and 2010 helped sustain a retail and service-based economy, which proved extremely vulnerable to the effects of the latest recession. A steep 28% decline in taxable property values occurred between fiscal 2008 and 2013, but recovery towards pre-recessionary levels is becoming more apparent given recent housing value increases and projected growth. The county's unemployment rate has been trending positively, but has typically remained above state and national levels.
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, and currently lie at the statutory maximum rates of 0.748 mills and 1.5 mills, respectively. State aid comprised roughly 29% of the district's unaudited fiscal 2016 revenues (prior to transfers in), with about 67% 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. 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. 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 local economy, demographic patterns, and competition from non-traditional public schools, among other factors.
The district experienced steady traditional school enrollment growth through 2008 but in subsequent years slowed and sustained declines, largely due to charter school growth. Existing charter schools are currently at capacity, and any future growth would likely be absorbed by district schools absent future charter approvals. Total enrollment growth has remained stagnant in recent years and management projects a continuation of this trend. While the county projects continued population gains, much of it is derived from growth within retiree communities. Based on this dynamic, Fitch expects future revenue gains to remain slow given a combination of stagnant enrollment trends and some growth in FEFP per-student funding.
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.
The district's revenues are bolstered by a voter approved, 0.6 mill property tax levy for technology expenditures, which has typically generated roughly $8 million of general fund revenue per year. The four-year levy, which expires towards the end of fiscal 2017, was renewed by voters at 0.5 mills in August 2016 and will expire on June 30, 2021. This exposes the district to the potential one-time revenue loss if the tax is not re-approved, but Fitch does not believe the expiration of the levy would affect revenue growth prospects in the long term.
Expenditure Framework
Salaries and employee benefits comprise 57% and 14% of the district's general fund expenditures in fiscal 2016, respectively. Additional investment in technology, as supported by a portion of the district's voter-approved special operating levy, has added to the district's spending needs.
The pace of spending is expected to marginally exceed revenue growth in the absence of policy action given slowing enrollment growth.
Fixed carrying costs for debt service, pension and OPEB are moderate at roughly 11% of governmental expenditures. Factors limiting district spending flexibility include class size requirements that can dictate staffing levels and the need to maintain adequate salary and benefit levels. The district is currently in compliance with its class size requirements. Wages and benefits are collectively bargained between the district and unions representing roughly 1,600 teachers and support staff. Under Florida law a bargaining impasse is ultimately resolved by action of the governing body of the local government following the conclusion of a non-binding mediation process.
Long-Term Liability Burden
The district's long-term liability burden, including its share of the net pension liability of the Florida Retirement System and overall debt, is low at roughly 2% of personal income. The district's burden is largely comprised of the direct debt, which amortizes at an above average rate. The district has no near-term plans for issuance. The five-year capital improvement plan will be funded through proceeds from the capital outlay levy.
Pensions are provided through the state-run FRS, which is adequately funded. As of the July 1, 2015 valuation the plan reported an asset to liability ratio of 86.5%, or an estimated 80.7% when adjusted by Fitch to assume a more conservative 7% rate of return.
Millage utilized for debt service is currently 0.73 mills, which remains below the board's policy of 1 mill.
Operating Performance
The Fitch Analytical Sensitivity Tool indicates that the district would experience modest revenue losses in a mild economic downturn. The district was particularly impacted by the last recession, during which significant mid-year state funding cuts resulted in the use of reserves for one-time expenditures. The district's reserves weakened during the economic downturn due to pressures related to enrollment growth and then significantly increased in fiscal 2011 due to a combination of expenditure cuts and the receipt of federal stimulus monies. Fitch expects that in a more moderate economic downturn management would be able to respond to revenue declines through cost controls and the use of reserves, which now remain more robust. In addition the district has implemented improved budgeting practices including more conservative spending estimates and significant budgetary reserves to ensure balanced results.
The district realizes additional revenue uncertainly from the voter-authorized tax levy, first effective fiscal 2014. Fitch believes the district would be able to maintain reserves consistent with the 'aa' financial resilience assessment in the event that the levy is not renewed.
The district has typically outperformed budgeted expectations in recent years due to its improved budget practices, lack of enrollment pressure and improved state funding. In addition, restructuring of labor contract provisions has resulted in better control of payroll expenditures. The district also maintains a policy requiring reserves at 5% of revenues, which remains higher than the state's requirement of 3%. While the district maintains additional funds in its capital improvement fund, much of it is committed to funding the district's medium-term capital needs.
The fiscal 2016 budget initially assumed a $6.1 million use of reserves; however, unaudited fiscal 2016 results indicate a surplus of $2.1 million, boosting general fund reserves to $17.8 million or 12.3% of spending. The fiscal 2017 budget projects a $12.4 million draw on reserves, but management expects to maintain positive operating results. The fiscal 2017 budget, unlike prior years, includes a $2.3 million transfer out to minimize a deficit in the internal service fund. The district plans to make additional transfers of similar amounts over the following three fiscal years to restore reserves to the required amount (60-days of projected insurance claims).
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's 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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