Fitch Rates Lee County School Board's (FL) $73MM COPs 'AA-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following certificates of participation (COPs) of Lee County School Board, Florida (the school board):
--$72.9 million COPs, series 2014A.
The COPs will be sold on a negotiated basis on Aug. 13, 2014. Proceeds will be used to advance refund a portion of outstanding COPs for debt service savings.
In addition, Fitch affirms the rating on the following outstanding COPs:
--$334.3 million COPs at 'AA-'.
Fitch also affirms the school board's implied general obligation (GO) rating at 'AA'.
The Rating Outlook is Stable.
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 school board. The district is required to appropriate funds for outstanding leases on an all or none basis.
KEY RATING DRIVERS
IMPLIED GO RATING: The 'AA' implied GO rating reflects the district's solid financial position and maintenance of ample reserves, with a return to balanced operations projected for fiscal 2014.
FAVORABLE DEBT BURDEN: District debt levels are expected to remain modest given the absence of any plans to issue new debt and above average amortization of existing COPs. Carrying costs for long-term liabilities are low.
IMPROVING ECONOMIC PROFILE: Taxable assessed value (TAV) increased solidly in fiscals 2014 and 2015, after a period of significant contraction. Unemployment has improved significantly year-over-year and is now below the state and national averages.
COPS APPROPRIATION RISK: The one notch rating difference between the implied GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. 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.
The rating is sensitive to shifts in fundamental credit characteristics, including the school board's strong financial management practices, conservative budgeting, and maintenance of ample reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The school district, which is coterminous with Lee County (implied ULTGO rating of 'AA' with a Stable Outlook by Fitch), is located on the Gulf Coast of Florida. Incorporated municipalities within the district include Fort Myers and Cape Coral. The district enrolled approximately 87,256 students in fiscal 2014, an increase of 2.0% from the prior year. Enrollment has demonstrated steady growth since 2010 and officials expect this trend to continue.
AMPLE RESERVES DESPITE DRAWDOWNS IN FISCALS 2012 and 2013
After a $22 million general fund operating deficit in fiscal 2012 (3.6% of spending), fiscal 2013 ended the year with a planned $18.6 million deficit (2.9% of spending), resulting in an unrestricted general fund balance of $111 million equal to a still ample 17% of spending.
The 22% ($43.1 million) growth in state sources (41% of general fund revenue) in fiscal 2013 was offset by a 4.5% increase in general fund expenditures, mainly a result of a 5.8% ($23.3 million) increase in instruction-related expenses. Additionally, property tax revenue declined by 4% ($14.5 million), which comprises over 50% of total general fund revenue.
SURPLUS PROJECTED FOR FISCAL 2014
Unaudited fiscal 2014 results show a return to balanced operations, with a slight general fund surplus of $1.2 million projected at year-end, increasing the total general fund balance to a level (19%) consistent with the prior year's. Results are expected to be enhanced by increases in state funding of approximately $27.2 million (11.2%) and property tax revenue ($15.8 million or 4.7%) due to improving taxable assessed value (TAV), compared to results in fiscal 2013. Continued enrollment growth, the basis for the state funding formula, benefited the district in fiscal 2014.
ADDITION TO FUND BALANCE PROJECTED FOR FISCAL 2015
The fiscal 2015 tentative budget totals $1.3 billion, a 2% decrease ($21.8 million) over the prior year's original budget. In the general fund, state funding is budgeted to increase slightly (less than 1% or $2.5 million) and property tax revenue is budgeted to increase by 4.5% ($16.2 million) due to continued growth in AV.
The school board typically budgets the use of a significant amount of reserves, but actual results usually outperform the budget due to conservative budgeting. Fitch believes the district retains a fair amount of expenditure flexibility allowing it to reduce spending further if needed.
Management anticipates results similar to fiscal 2014, with a moderate general fund surplus of $1 million to $2 million at year-end 2015, which Fitch views as reasonable given the school board's history of conservative budgeting. The maintenance of high reserves is key to credit stability.
CONTINUED IMPROVEMENT IN REGIONAL ECONOMY
After losing approximately 42% of its value since 2008, TAV improved solidly in fiscals 2014 and 2015, with growth of 4.2% and 8.4%, respectively.
The June 2014 unemployment rate improved significantly year-over-year, falling 21% to 6.1%, below the state and national rates. Wealth indices remain slightly above the state average and on par with national averages.
LOW DEBT BURDEN, AFFORDABLE CARRYING COSTS
Overall debt levels are modest at $1,257 per capita and 1.2% of TAV. Principal amortization is above average with 60% of principal retired within the next 10 years. Management indicates there are no plans to issue additional debt.
The district's fiscal 2014-2018 capital plan totals $243 million excluding debt service and transfers. Maintenance, renovations, and technology account for the majority of needs. The CIP is fully funded through prior year carry-over balances and local revenues. The school board will be focused on capacity issues as student enrollment continues to grow, and may need to seek alternative sources of revenue for capital funding in lieu of issuing additional debt.
Pension obligations are limited to the district's participation in the well-funded statewide multiple-employer pension plan (FRS). The district's contribution in fiscal 2013 totaled $30 million, which represented a modest 3.5% of governmental funds spending.
The district offers an implicit subsidy for other post- employment benefits (OPEB). Fiscal 2013 pay-as-you-go contributions, which are less than the annual required contribution (ARC), represented only 0.2% of governmental funds spending. If the fiscal 2013 ARC had been fully funded, the contribution would represent a still modest 0.6% of spending. Carrying costs (including debt service, pension and OPEB costs) are low at less than 9% of spending.
MASTER LEASE STRUCTURE MITIGATES APPROPRIATION RISK
The district continues to pay COPs debt service with revenue from its 1.5 capital outlay millage, although all legally available revenues can be used for this purpose. The capital outlay millage provides ample 2.2x coverage of maximum annual debt service based on fiscal 2013 TAV.
The master lease structure on the COPs is strong, requiring an all or none appropriation. In the case of non-appropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease, which would amount to approximately 33% of the district's total facilities. Fitch considers this a strong incentive to appropriate.
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, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria