Fitch Affirms Various Polk County School District, FL Debt Ratings
NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its ratings on the following Polk County School District, Florida's (the district) outstanding obligations:
--Implied unlimited tax general obligation (ULTGO) at 'AA-';
--$117 million sales tax revenue bonds series 2005, 2007, and revenue refunding bonds series 2004, at 'BBB+'.
In addition Fitch affirms the ratings on the following Polk County School Board Financing Corp., FL's outstanding certificates of participation (COPs):
--$54 million in refunding COPs series 2003B, 2010A and 2010B, at 'A+'.
The Rating Outlook on the implied ULTGO and COPs is Stable.
The Rating Outlook on the sales tax revenue bonds is revised to Positive from Stable.
The sales tax revenue bonds are secured by 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 secured by 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 by the Polk County School Board. 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 which financed or refinanced such projects.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: The implied ULTGO rating of 'AA-' reflects the district's history of sound financial management and budgeting practices contributing to adequate reserve levels. While the fiscal year 2014 budget assumes a large reserve draw-down, the district tends to budget conservatively and expects a more modest draw-down, with reserve levels remaining above state requirements and policy targets.
WEAK BUT IMPROVED SALES TAX COVERAGE: Following recessionary declines, sales tax revenues have grown annually since fiscal year 2011. The revision in sales tax bonds' Outlook to Positive reflects this steady improvement, resulting in improved coverage of debt service. Current fiscal year-to-date collections continue to show good growth.
ASSESSED VALUE IMPROVEMENT: The district has seen annual taxable assessed value (TAV) declines in recent years, but values returned to growth in fiscal year 2014, with continued growth projected.
BELOW AVERAGE ECONOMIC INDICATORS: Though the county unemployment rate has been declining, it remains above state and national rates. County income indicators are below average.
LOW DEBT BURDEN: District debt levels as well as carrying costs, including required pension payments, other post-employment benefits (OPEB) and debt service, are low. Debt levels should remain low given the absence of additional borrowing plans.
COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs rating incorporates the slightly enhanced risk associated with annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets, which are subject to surrender in the event of non-appropriation, temper this risk.
MAINTENANCE OF RESERVES: The county's history of maintaining adequate reserves while addressing operating and capital needs indicates continued rating stability. A decline in reserves to levels below policy targets would pressure the rating.
CONTINUES SALES TAX GROWTH: Continued sales tax growth and increased debt service coverage levels could lead to an improved rating on the sales tax revenue bonds.
Polk County lies on the Interstate 4 corridor, 25 miles east of Tampa and 35 miles southwest of Orlando. Its 2012 population of 616,158 represents an increase of 25% since 2000. District enrollment (about 95,000 students in 2014) has been steady, with modest growth in recent years, which management expects to continue.
SOUND FINANCIAL OPERATIONS
Financial operations have historically been sound and unrestricted fund balances have consistently exceeded the district's policy requiring an unrestricted balance at 5% of general fund revenues and transfers. Reserves increased in fiscal years 2010 and 2011, primarily as a result of the receipt of American Recovery and Reinvestment Act (ARRA) and Federal Education Jobs Bill funding, and with the plan to use the reserves to offset future revenue declines. The district did draw down reserves in fiscal years 2012 and 2013, but in lesser amounts than originally budgeted due to conservative revenue forecasts and prudent management of vacant positions and overall expenditures.
The fiscal year 2013 general fund unrestricted ending balance was $43.1 million or 6.4% of general fund expenditures and transfers out, down from $55.1 million or 8.5% of expenditures in fiscal year 2012. This follows unrestricted and unreserved fund balance levels of 9.8% and 8.7% in fiscals 2011 and 2010, respectively. The fiscal year 2014 budget assumes an additional $15.7 million spend down of the total general fund balance. However, based on current estimates reflecting lower than budgeted expenditure performance, the district projects a more moderate decrease of less than $2 million. The fiscal year 2014 unrestricted general fund balance is projected at about 6% of spending by year-end. The district has a history of actual results outperforming budgeted expectations and Fitch expects that this will be the outcome for fiscal year 2014.
IMPROVED SALES TAX PERFORMANCE
Sales tax collections have seen annual growth since fiscal year 2011. Fiscal year 2013 sales tax receipts increased by 5.4% to $34.1 million, following a 6.2% increase in fiscal year 2012. Coverage of maximum annual debt service (MADS) has improved to 1.22 times (x) and 1.29x in fiscal years 2012 and 2013, respectively, from coverage of 1.15x in fiscal year 2011. The sales tax is currently set to expire at the end of 2018, two months after the final maturity of the bonds, which guards against additional leverage.
Solid sales tax collection trends continue in fiscal year 2014. For the four month period of July through October 2013, revenues are up by 5.5% vs. the same period in the prior year. Tax collections can decline by approximately 22% from fiscal year 2013 levels before coverage of MADS falls to 1.0x. Fitch believes that a continued positive growth trend could result in an improved rating on the sales tax bonds.
STRONG COPS SECURITY
Legal provisions under the master lease are strong, requiring an all-or-none appropriation. In the event of non-appropriation, the district would relinquish rights to its pledged school facilities which represent over 20% of total facilities. Fitch considers this a strong incentive to appropriate.
While the district may use any legally available revenues for COP debt service, the district has used proceeds from the 1.5 mill capital outlay tax. 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 for lease payments. Effective July 1, 2012, the three-fourths limitation was waived for lease purchase agreements entered into prior to June 30, 2009, but the majority of the district's COP debt, and corresponding leases, were issued after this date. The district will use 0.795 mills, or 53% of the levy, for COPs debt service in fiscal year 2014. The district expects no additional new money COPs to be issued in the near future.
The district has variable-rate COPs debt outstanding totaling $124 million or 32% of total debt as of fiscal year 2013. The district's variable-rate position is hedged with derivative contracts with Citibank, N.A. (long-term IDR of 'A' by Fitch) with a negative net mark-to-market value of $25.4 million as of June 30, 2013, down from $34.8 million a year prior. This exposes the district to counterparty risks not commonly present for school districts with highly limited financial flexibility.
LOW DEBT AND OTHER LIABILITY BURDEN
Overall debt levels are low at 1.7% of market value and $944 per capita for fiscal year 2013. Annual debt service as a percentage of governmental spending was moderate at 5.7%. Amortization of all debt is rapid at 68.5% of par in 10 years as of fiscal year 2013. Debt levels are expected to remain low, as no additional long-term debt is presently being contemplated.
The district provides pension benefits through the state-administered Florida Retirement System (FRS) and funds 100% of its required contribution. Pension costs were a low 2.5% of total governmental spending in fiscal year 2013. The FRS funding ratio as of June 30, 2012 was 86.4% or 79.8% under Fitch's more conservative 7% discount rate assumptions. The district offers only an implicit subsidy for other post-employment benefits (OPEB) and funds the liability on a pay-as-you-go basis. The fiscal year 2013 OPEB contribution was 0.5% of governmental spending. Total debt service, required pension contribution, and OPEB payment requirements were modest, at 8.7% of governmental spending.
BELOW AVERAGE ECONOMIC INDICATORS; ASSESSED VALUE IMPROVEMENT
Citrus and phosphate mining have historically been key sectors for the county economy, though there has been diversification in recent years into insurance, health care, light manufacturing, and distribution. County residents benefit from the proximity of the Tampa and Orlando metropolitan employment centers. The county stands to benefit from various commercial development projects that are recently implemented or underway including the opening of the new Florida Polytechnic University campus and hotel facilities expansion associated with Legoland and the Streamsong resort, which are expected to increase tourism activity and benefit local sales tax collections.
County unemployment declined to 7.5% as of October 2013, vs. 9.2% a year prior, but still remains above average compared to state (6.6%) and national (7.0%) rates. Income and wealth indicators are below average.
Significant weakening in the local real estate market since 2008 decreased the district's TAV by about $11 billion (31%) by fiscal year 2013. After consecutive annual declines, TAV returned to growth (4.3%) in fiscal year 2014. Management projects additional moderate growth in the near term, which seems reasonable given on-going development and recent housing sector improvement including declining foreclosure activity and housing price increases.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates,S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria