OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Okaloosa County School Board, FL's (the district) bonds:

--Implied general obligation (GO) rating at 'AA+';
--\$2.8 million refunding and revenue bonds, series 2011 (state sales tax revenue bonds) at 'AA+';
--\$53.3 million certificates of participation (COPs), series 2006 and 2007 at 'AA'.

The Rating Outlook is Stable.

SECURITY
The revenue bonds are secured by an annual distribution of sales tax pursuant to Florida statutes section 212.20(6)(d).a.

The COPs are payable from lease payments made by the district, subject to annual appropriation of the school board under a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases on an all or none basis. In the event of a non-appropriation, the district must surrender possession of all leased facilities under the master lease to the trustee for disposition by sale or re-letting of its interest in the facilities.

KEY RATING DRIVERS

IMPLIED GO RATING: The implied GO rating of 'AA+' reflects the district's strong financials, underlying economic expansion, and very low debt levels which are expected to remain modest given the district's manageable capital needs.

REVENUE BOND RATING: The rating on the revenue bond is capped at the lower of the school district implied GO or one notch below the state's AAA GO rating.

COPS APPROPRIATION RISK: The one-notch rating difference between the district's implied GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. Master lease provisions including 'all or none' appropriation requirement and a leasehold interest on a significant number of essential schools serve to mitigate the potential for non-appropriation.

LOW DEBT LEVELS: Overall debt levels are affordable, and capital needs appear manageable. Amortization of outstanding principal is rapid.

STABLE LOCAL ECONOMY: The Okaloosa County economy remains limited but stable, anchored by Eglin Air Force Base and tourism along the Gulf of Mexico. Economic indicators compare favorably to national averages while housing and jobs slowly recover from the recession.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: A sharp decline in reserves could negatively impact the rating on all of the district's bonds.

REVENUE BONDS: The revenue bond rating is sensitive to changes in the credit quality of both the district as well as the state of Florida, as it pertains to the pledged revenue component comprising the annual distribution of funds to the district.

CREDIT PROFILE
Okaloosa County School Board is coterminous with Okaloosa County, located on the Gulf Coast of Florida's panhandle and bordered by Alabama to the north. The district serves approximately 30,000 students and operates 35 schools.

AMPLE FINANCIAL FLEXIBILITY, MAINTENANCE OF STRONG RESERVES
Finances continue to be capably maintained as exhibited by conservative budgeting, consistent operating surpluses, and sizable reserves and liquidity levels. The district reported net operating surpluses (after transfers) for six consecutive years between fiscals 2007 and 2013, expanding general fund balance by \$17.3 million or 36% over this period. Management was able to overcome steep recession-driven revenue declines totaling 14% with the use of stimulus funds and aggressive cost cutting.

The district reported a modest general fund net surplus of \$1.1 million for fiscal 2013. This result improves upon a projected \$8 million deficit anticipated by officials at the time of Fitch's last review and is attributable to significant under-spending relative to budget. The surplus nudged up fiscal 2013 general fund balance to \$64.8 million or 30% of spending. Unrestricted fiscal 2013 general fund balance of \$51.7 million accounts for a healthy 24.2% of spending. Liquidity levels are extensive as fiscal 2013 unrestricted cash and investments are sufficient to fund 3.5 months of spending.

The fiscal 2014 budget for the general fund proposed a \$17.3 million net operating deficit. The district budgets conservatively and typically outperforms budget. An 8.7% increase in state aid was offset by salary increases averaging about 4.5% and restoration of some services cut during the recession. Officials are projecting the final audit will show a manageable \$2 million end of year reduction in reserves.

The fiscal 2015 general fund budget benefits from increased state aid and a small uptick in property tax revenues. The budget incorporates across the board budgeted spending increases, including a 3.8% salary hike. While budgeted expenditures exceed budgeted revenues by \$23.9 million, Fitch expects actual results to substantially outperform the budget, consistent with historical trends.

STABLE MILITARY-BASED & TOURISM ECONOMY, POSITIVE INDICATORS
The area economy of Okaloosa County (implied ULTGO rated 'AA-') is somewhat concentrated but stable, anchored by Eglin Air Force Base, which plays a major role in national defense. The base serves as home to over 9,600 military and 5,800 civilian personnel, as well as numerous contractors. Eglin includes the 7th special-forces group, with approximately 6,000 military and dependents and the F35 training center. The seventh special forces group was added to the base as part of the 2005 Base Realignment and Closures Commission (BRAC). Significant downsizing at the base is unlikely in the near term given its size and import.

The district's location along the Gulf of Mexico makes tourism the second leading income source for the county. Residents and tourists are drawn by the county's natural attractions and recreational activities including several miles of beaches along the gulf. The tourist sector has rebounded strongly over the past several years as evidenced by annual gains in county tourist development tax collections of 13.9%, 2.7% and 9.3% in fiscals 2012, 2013 and 2014, respectively.

The county unemployment rate (4.6% as of September 2014) has trended consistently below state and national levels through both the economic downturn and recovery. The area housing market did not fall as far as the overall state average and is currently experiencing a gradual but steady recovery. Taxable assessed values (TAV) within the district fell by over 20% during the recession but have grown a total of 6% over fiscals 2013 and 2014. Officials expect TAV to surge by about 10% in fiscal 2015, which appears reasonable given a strong tourist season, significant construction activity and other positive economic events. Wealth levels are slightly higher than the state and on par with the national averages.

FAVORABLE DEBT PROFILE, AFFORDABLE CARRYING COSTS
Overall debt levels are low (.8% of market value (MV) and \$846 per capita), and no new debt is planned. Debt service for fiscal 2013 totaled \$9.2 million or an affordable 3.6% of general fund spending. Amortization of outstanding principal is rapid with over 94% retired in 10 years. The fiscal 2015-2019 CIP totals \$92.3 million net of COPs lease payments (an affordable 0.5% of MV) and focuses primarily on maintenance and repair projects.

Fitch considers the district's carrying cost burden manageable, as fiscal 2013 debt service and retirement costs represented 8.2% of spending. The district is a member of the well-funded state-administered Florida Retirement System and provides an implied subsidy for its other post-employment benefits (OPEB).

STATE REVENUE SOURCE FOR SALES TAX BONDS
The revenue bonds are payable solely from an annual distribution of \$190,750 to the board of state sales tax revenue, pursuant to Florida statute. The revenue is a substitute for racetrack revenues previously distributed. The district receives the annual fixed-dollar distribution from a portion of the 6% state sales tax, which is collected by the Florida Department of Revenue. The bonds benefit from a state pledge to take no action which would impair the board's receipt of sufficient revenues to pay debt service.

Coverage of maximum annual debt service (MADS) by the annual distribution is approximately 1.0 times (x), as is typical of debt secured by fixed sales tax distributions. While additional parity bonds are allowed, Fitch believes the sum sufficient coverage will prevent any further leveraging of the revenue stream.

LOW DEBT SERVICE LEVY FOR COPS
Lease payments on COPs are generally paid from revenue of the capital outlay levy but are ultimately payable from any legally available source. The capital outlay levy is authorized by state law up to 1.50 mills. Currently, up to three-fourths of the proceeds of the capital outlay levy is available for lease payments although the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009 (all of the district's lease agreements were entered prior to this date).

Like all Florida schools, the district will levy 1.5 mills for capital outlay in fiscal 2015, of which only 0.53 mills will be used for lease payments. The low debt cost requirements provide adequate capacity for pay-as-you-go financing of capital projects.

LIMITED APPROPRIATION RISK
Fitch believes the district has a strong incentive to appropriate for lease payments. In the event of non-appropriation, the district must surrender all leased facilities to the trustee. Approximately 18% of the district's educational facilities are included under the master lease, such as elementary schools and high schools, and would be subject to surrender to the trustee in the event of a non-appropriation. Furthermore, the district relies upon the issuance of COPS to finance most of its major long term capital needs.