Fitch Rates Seminole County Schools, FL $52MM COPs 'AA-'; Outlook Stable
--$52.4 million, series 2016C.
In addition, Fitch affirms the following ratings:
--$85.9 million of parity COPs at 'AA-';
--Issuer Default Rating (IDR) at 'AA'.
The COPs are scheduled to sell the week of Sept. 26 via negotiated sale. Proceeds will be used for school facility and equipment spending needs.
The Rating Outlook is Stable.
SECURITY
The district's COPs are secured by lease payments made to the trustee and pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, subject to annual appropriation by the Seminole 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 facilities under the master lease for the benefit of owners of the COPs which financed or refinanced such projects.
KEY RATING DRIVERS
The 'AA' IDR reflects the district's good revenue growth prospects, limited independent ability to raise revenues, solid expenditure flexibility, and an adequate reserve position. Carrying costs associated with pension, other post-employment benefits (OPEB), and debt service spending are moderate, as are long-term debt and pension liabilities. There are currently no near-term plans to issue additional debt. The 'AA-' rating on the COPs is one notch below the IDR, reflecting the slightly higher degree of optionality associated with lease payments subject to appropriation.
Economic Resource Base
The school district, which is coterminous with Seminole County, is located in the central portion of the state near the Atlantic coast in the Orlando metropolitan statistical area (MSA). The county's 2015 population is 449,144, up about 20% since 2000. Enrollment has grown recently after flat performance in prior years, and continued growth is projected. Major county employers include the school district, the Orlando Sanford Airport, as well as employers in the telecommunications, financial, insurance, business services, health, local government, and education sectors. The county is home to a number of corporate headquarters. County employment has been growing, resulting in declining unemployment rates that remain below comparable state and national levels. County income and wealth levels compare favorably to state and national averages.
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 2014) exceeded national inflation, but was lower than GDP growth. Continued revenue growth is expected, given recent economic improvement, enrollment growth projections, and a modestly improved environment for state school funding. 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 moderate and are expected to remain so even with the current debt issuance.
Long-Term Liability Burden: 'aaa' factor assessment
The district's long-term liability is low at about 2.7% of personal income. This is largely related to district debt, which amortizes rapidly. The district participates in the adequately-funded Florida Retirement System (FRS). There are no near-term additional debt issuance plans.
Operating Performance: 'aa' factor assessment
The district has historically maintained sound fund balance levels, with recent declines largely related to capital spending. Fitch believes that the district, supported by its solid expenditure flexibility and adequate reserves, would maintain a satisfactory safety margin in a moderate economic decline scenario.
RATING SENSITIVITIES
Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility, moderate debt and overall long-term liabilities, and maintaining adequate reserve levels through a typical economic cycle.
CREDIT PROFILE
The two largest county employers are the school district and the Orlando Sanford Airport, which continues to expand. The county is also home to the corporate headquarters of the American Automobile Association (AAA), Mitsubishi Power Systems, Scholastic Book Fairs, and Sears Home Improvement Products. Recent county business expansion includes the 2015 opening of a Deloitte technology facility which created about 1,000 jobs. Within the greater MSA (which also consists of Orange, Osceola, and Lake Counties) large private employers include Walt Disney World, Florida Hospital, Publix Super Markets, Universal Studios - Florida, Orlando Regional Healthcare, and Lockheed Martin.
Recent county employment performance has been positive. Unemployment rates have been declining (4.5% in July 2016 vs. 5.0 % a year prior) and remain below comparable state and national rates.
County wealth levels exceed state and national averages and county income indicators are close to or in excess of state and national figures. The district's tax base experienced a significant decline between fiscal 2009 and fiscal 2013, with taxable assessed value (TAV) falling almost 24%. TAV is now showing sustained improvement and annual growth has exceeded 5% in recent years.
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 61% of the district's fiscal 2015 revenues (prior to transfers in), with about 38% generated by property taxes.
District general fund revenue growth over a ten year period (through fiscal 2014) was just above inflation, but just below GDP growth. Going forward, the natural pace of revenue growth is expected to continue on a positive trajectory given recent enrollment growth and projections for continued modest enrollment gains. Following a long trend of flat performance through 2014, enrollment grew by about 2% in 2015, with another 1.4% growth estimated for 2016. The district expects continued modest annual growth (averaging about 1%) for the near term, which seems reasonable given recent and ongoing economic expansion. In addition, 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 essentially 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
Salaries and benefits make up the bulk of district general fund expenditures. On a combined basis, they accounted for about 80% of general fund spending in recent years.
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 funding and increased local revenues driven by TAV growth.
Carrying costs related to debt service, pensions and OPEB benefits are modest at about 8.4% of governmental spending for fiscal 2015 affording the district spending flexibility. 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 meeting its minimum class size mandates. 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 modest at about 2.7% of personal income in fiscal 2015. It is made up largely of the district's outstanding debt, which amortizes rapidly (about 84% in 10 years). Fitch expects the long-term liabilities and carrying costs to remain moderate even with current additional debt issuance. No additional new money debt issuance is planned for the near term.
Operating Performance
The three-year scenario revenue estimate generated by Fitch's analytical sensitivity tool (FAST) indicates that in an unaddressed scenario associated with a moderate economic downturn, revenue declines would lead to significant fiscal stress. However, Fitch expects the district to respond to a decline in revenues similarly as in the past, by taking actions to reduce spending and rebalance operations while maintaining an adequate level of fundamental financial flexibility. Fitch believes that the district, supported by its solid expenditure flexibility and good reserves, would maintain a satisfactory safety margin in a moderate economic decline scenario. Unaudited estimates for fiscal 2016 indicate a general fund operating surplus that would increase reserves.
The district weathered the most recent economic downturn well, drawing on reserves as needed, but also implementing spending controls and maintaining adequate ending balances. Faced with state aid reductions and tax base declines, the district incurred deficits in fiscal years 2012 and 2013, respectively. Fiscal 2014 was essentially balanced, even with significant capital spending and the general fund transferring $7.5 million to a new self-insurance fund. A new voter approved increase in property taxes (up to one-mill) used for non-recurring capital and operational spending needs, aided financial operations. The tax expires at the end of fiscal 2017. Voters also approved a one-cent county sales tax increase (expiring in 2024) dedicated to infrastructure needs. The district receives 25% of the tax revenue, which does not flow into the general fund, but to district capital funds.
Fiscal 2015 ended with an unrestricted general fund balance of $37.4 million or 7.8% of spending. This represented a decrease from $40.8 million or 8.7% in fiscal 2014, reflecting one-time capital spending. Unaudited fiscal 2016 figures indicate a surplus of $11.6 million that would increase the unrestricted ending balance to $46.9 million or about 9.5% of spending. The fiscal 2017 general fund budget is balanced with a $22.7 million use of fund balance, but current estimates indicate a surplus due to lower than expected spending. This seems reasonable given the district's practice of conservative budgeting, and resulting better than budget performance.
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. The series 2016C COPs are subject to this limitation.
The district has determined that 2016C debt service associated with two projects (Millennium Middle School construction and an addition to the Midway Elementary School) is not eligible to be paid from the capital outlay millage. As with all other COPs, all legally available revenues are available for payment of this debt service. However, the district expects that it will pay this 2016C debt service from other capital revenue sources, including impact fees and the temporary infrastructure sales tax. The 2016C debt is structured so that maximum annual debt service (MADS) decreases substantially after the expiration of the infrastructure sales tax.
The district expects to use about 0.7 mills of the capital outlay millage for COPs MADS that is eligible to be paid from the capital outlay millage. This amount is well below the state cap.
The master lease structure on the district's COPs is strong, requiring an all-or-none appropriation. In the case of nonappropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease. The district currently operates about 63 schools, of which 20 schools and school additions are under the master lease. With regard to the 2016C issuance, school buses, equipment and a $1 million addition to Midway Elementary school are excluded from the master lease.
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