NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following actions on Osceola County School Board, Florida (the district) outstanding debt:
--$153.4 million certificates of participation, series 2007, 2009A, 2010A and 2013A affirmed at 'A+'.
In addition, Fitch has taken the following actions on Osceola County School District outstanding debt:
--$51.7 million sales tax revenue bonds, series 2007A and 2007B upgraded to 'AA-' from 'A';
--Issuer Default Rating (IDR) affirmed at 'AA-'
The Rating Outlook is Stable.
SECURITY
The district's 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 on an all or none basis, subject to annual appropriation by the district.
The sales tax revenue bonds are payable by the district's 25% share of a one-cent local government sales surtax and a debt service reserve fund satisfied by a surety bond.
KEY RATING DRIVERS
The 'AA-' IDR reflects the district's solid revenue growth prospects and expenditure flexibility, strong financial resilience and a low liability burden, offset by a very limited legal ability to raise revenues.
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 upgrade to 'AA-' from 'A' on the sales tax bonds reflects the application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016, and specifically the enhanced analysis of the pledged revenue stream's resilience to scenario-estimated revenue declines. The rating also considers the pledged revenue streams' solid growth prospects, and the high likelihood that the revenue stream will not be leveraged down to the 1.2x maximum annual debt service (MADS) additional bonds test (ABT), significantly enhancing overall resilience.
Economic Resource Base
The school district, which is coterminous with Osceola County, is located in east central Florida within the Orlando MSA, approximately 15-20 miles from Walt Disney World Resorts and Universal Studios. The leisure and hospitality sector remains the key driver of economic activity, but continued expansion within the fields of medical research and technology could serve as the gateway to a more diverse and higher wage economy. The district has experienced significant population growth, with a 2015 population of approximately 324,000 that has grown about 21% since 2010. Enrollment for fiscal year 2016 is approximately 61,231, about a 5% increase over the prior year. Growth is projected to range from 2% to 3% annually over the next few years. The district operates 52 school facilities.
Revenue Framework: 'a' factor assessment
District operations are funded through a combination of state aid and local property taxes. The district's 10-year general fund revenue growth rate (through fiscal 2015) exceeded GDP growth. Fitch believes the district's revenue growth prospects will be slightly tempered based on Fitch's expectation that Florida's revenue growth prospects will be below GDP but above inflation. Enrollment growth projections similar to past trends also support solid revenue growth expectations. The district has very limited independent ability to raise revenues.
Expenditure Framework: 'aa' factor assessment
The district's natural pace of spending growth is expected to be close to or marginally above that of revenue. Enrollment growth and staffing costs are the main expenditure drivers. The district has good control over employee-related expenditures, with some constraints related to class size requirements and maintenance of adequate staff compensation levels. Carrying costs associated with debt service and retiree costs are moderately low.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch expects the district's long-term liability will remain low even with the possibility of moderate future debt issuance. The district participates in the adequately-funded Florida Retirement System (FRS).
Operating Performance: 'aaa' factor assessment
The district has historically maintained sound financial flexibility, despite four years of planned general fund drawdowns for operational needs. Fitch believes that the district, supported by its solid expenditure flexibility, would maintain a satisfactory reserve safety margin in a moderate economic decline scenario.
Issuing Entity Exposure: Fitch believes the ratings on the sales tax revenue bonds are capped by the IDR of the district, as the pledged revenues do not constitute special revenues under Chapter 9 of the U.S. Bankruptcy Code.
RATING SENSITIVITIES
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility, low long-term liability burden, and expectations for maintenance of adequate reserve levels through a typical economic cycle.
Sales tax coverage: A material contraction of revenues or further leveraging of the revenue stream that decreases debt service coverage could pressure the rating.
CREDIT PROFILE
Proximity to Disney World, Universal Studios and other local attractions underpin the county's tourist and service-based economy. Within the county are numerous hotels and resorts providing more affordable lodging than in neighboring Orange County for theme park guests. The tourism sector continues to perform strongly; leisure and hospitality employment in the Orlando MSA increased 21.7% from fiscal years 2010-2015. The leisure and tourism sector accounts for 21% of nonfarm employment in the MSA. Both Disney and Universal are making substantial investments in their parks including new Star Wars themed attractions at Disney and a new hotel and water park at Universal that should further boost these favorable trends.
Osceola County experienced steep declines in jobs, housing values, and building permit activity during the last recession. Resident per capita personal income is very low compared to state and national averages. Incomes reflect the high concentration of jobs in the lower wage service sector, which accounts for more than 40% of total employment in the county.
Efforts to diversify the economy and attract higher wage jobs are evident, including the county's collaboration with nearby higher education institutions and Florida's High Tech Corridor Council to build the Florida Advanced Manufacturing Research Center (FAMRC), intended to promote the research and development of smart sensors. Expansion of SunRail from Orange County through major population centers in Osceola County (including Kissimmee and Poinciana) could stimulate private sector investment and also stabilize home prices in areas previously underserved by transit.
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 69% of the district's fiscal 2015 revenues (prior to transfers in), with about 27% 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 the district's natural pace of revenue growth to be milder (above inflation but below GDP) than what has been experienced in the past (above GDP), which is in-line with Fitch's expectation for Florida's revenue growth prospects. Fitch's expectations of continued solid enrollment gains averaging about 2-3% per year over the next several years also support this assessment.
Charter school expansion has captured much of the growth within the district over the past several years, with total charter school enrollment representing a moderately high 17% of total district enrollment in fiscal 2016, a 6% increase over the past five years. The district has historically encouraged charter schools to open in growth areas of the county, which has tempered the need to construct new schools. As a result, there has been an absence of new traditional school openings during this period of strong charter school growth. Nonetheless, traditional enrollment has continued to grow modestly each year. Fitch believes that this trend, in tandem with the construction of additional traditional schools over the next several years, bodes well for continued growth in traditional enrollment.
State revenue performance has returned to steady growth, which should benefit FEFP funding levels absent education funding policy changes. The enacted state budget for fiscal 2017 includes a roughly 1% increase in the level of per pupil 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.
Expenditure Framework
Instructional related expenditures, including salaries and benefits, comprise the bulk of the district's general fund spending.
The pace of spending growth is expected to match or marginally exceed revenue growth, reflecting enrollment-driven spending needs largely funded by related increases in state-controlled per-student funding.
Carrying costs related to debt service, pensions and OPEB are low at about 9% of governmental spending for fiscal 2015, affording the district spending flexibility. Factors limiting flexibility include class size requirements that can dictate staffing levels and the need to maintain adequate salary and benefit levels. The district is currently meeting its minimum class size mandates. Additionally, the district is now designated as a CHOICE district and can meet class size at the school-wide average rather than class by class. This allows the district to generate savings as a result of teacher allocations and related salary expenditures.
Wages and benefits are collectively bargained between the district and unions representing 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, related to debt and the district's share of the net pension liability of the FRS, is estimated by Fitch to be low at about 8% of personal income in fiscal 2015. The bulk of the estimated liability is overlapping county debt (about 53%), followed by the district's direct debt, which amortizes at an above average rate (59% of principal retired in 10 years).
County voters approved a half-cent sales tax increase in the November 2016 referendum. The tax increase takes effect Jan. 1 2017, will sunset in 20 years, and is expected to generate approximately $25 million annually. Revenue generated from the half-cent sales tax will be used for school facility reconstruction and improvement projects, including safety and security, technology upgrades, and other capital facilities projects. Management indicated they plan to start bonding this half-cent sales tax immediately to meet its reconstruction and renovation needs; preliminary plans call for approximately $300 million of debt issuance over the next several years. Fitch expects the debt burden to remain moderately low even with the anticipated debt issuance.
The district's fiscal 2017 to fiscal 2021 capital improvement plan (CIP) totals approximately $435 million, the bulk of which pertains to the construction of four new schools and school maintenance needs. The district plans to fund the CIP primarily through a combination of capital outlay revenue, sales taxes, and impact fees.
Pensions are provided through the well-funded state run FRS. The reported asset-to-liability ratio was 86.5% as of the July 1, 2014 valuation or an estimated 80.7% when adjusted by Fitch to assume a 7% rate of return (compared to the 7.75% assumption used by FRS).
Operating Performance
Healthy fund balances, low revenue volatility, and moderate budget flexibility create a strong capacity to maintain adequate reserves, even if a moderate economic downturn were to result in revenue stress. Available balances outside the general fund, specifically capital funds, augment flexibility.
The district built up reserves in anticipation of the end of the federal stimulus program and the expiration of a $7 million annual critical needs tax after fiscal 2011. In order to absorb the revenue losses and maintain service levels, management instituted a controlled spend-down of the district's substantial fund balance between fiscals 2012 and 2015. Unrestricted reserves dropped to $44.7 million or 10.5% of spending in fiscal 2015 from $74.4 million or 21% of spending in fiscal 2011, as a result of this plan. The district remains compliant with its formal unassigned reserve fund policy equal to 6% of revenues.
Preliminary unaudited estimates for fiscal 2016 indicate a slight surplus, increasing unrestricted reserves to $45.8 million, a level of spending consistent with the prior year. Budget estimates for fiscal 2017 indicate another, slightly larger surplus.
Certificates of Participation
The district has historically paid COPs debt service with revenue from its capital outlay millage, although all legally available revenues are available for this purpose. Current legislation allows Florida school districts to levy 1.5 mills for capital outlay. Three-fourths (1.125 mills) of the 1.5 mills levy is available for COPs debt service associated with new issuance after 2009. For fiscal year 2017, the district expects to use about .90 mills of the capital outlay millage for COPs MADS.
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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