OREANDA-NEWS. Fitch Ratings takes the following rating action on the Hillsborough County School District, FL (the district) outstanding obligations:

--\$187 million outstanding community investment tax (CIT) sales tax revenue bonds upgraded to 'A-' from 'BBB+'.

The Rating Outlook on the sales tax bonds is revised to Stable from Positive.

In addition, Fitch affirms the following ratings:

--Implied unlimited tax general obligation (ULTGO) at 'AA+';
--\$758 million outstanding Hillsborough County School Board Leasing Corporation's certificates of participation (COPs) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are secured by the district's share of a one-half cent local infrastructure sales tax or CIT, levied and collected by Hillsborough County (the county). The CIT was approved by voters for a 30-year period ending Dec. 1, 2026, two months after the final maturity of the bonds. The district receives 25% of total revenue collected within the county according to an interlocal agreement between the county and the district.

The COPs are secured by lease payments made by the district to the trustee pursuant to a master lease purchase agreement. Lease payments are made from legally available funds of the district, subject to annual appropriation by the Hillsborough County FL School Board. In the event of less than full appropriation, the trustee may force the district to surrender possession of all leased facilities under the master lease to the trustee for disposition by sale or re-letting of its interest in such facilities.

KEY RATING DRIVERS

IMPROVING SALES TAX COVERAGE: The upgrade of the CIT sales tax revenue bonds reflects continued strengthening of debt service coverage, with fiscal 2014 CIT revenues generating 1.26x MADS coverage. Revenues have experienced a four-year upward trend and are reportedly trending higher in fiscal 2015 as well, as the economy continues its robust growth.

STRONG FINANCIAL MANAGEMENT: The district's adherence to its fiscal policies, combined with conservative budgeting and expenditure controls, have contributed to sound reserves despite recent declines due to certain state mandates, equipment purchases and security upgrades.

DIVERSE ECONOMY: Hillsborough County, which includes the city of Tampa, serves as the economic anchor of western Florida, with significant employment in the professional, business, education and health services. Signs of economic stabilization are evident as employment levels have seen significant improvement and sales tax revenues continue an upward trend.

LOW DEBT BURDEN: The district's debt burden is low, and debt service requirements do not pressure the financial profile. The district has no immediate near term borrowing plans.

COPS SUBJECT TO APPROPRIATION: The 'AA' COPs rating reflects the district's general credit quality, the district's obligation to make annually appropriated lease payments under a master lease structure, and the essentiality of leased assets.

RATING SENSITIVITIES

COVERAGE FROM PLEDGED CIT REVENUES: The sales tax bonds' rating is sensitive to debt service coverage from pledged revenues. Fitch expects coverage levels to remain close to or better than current levels.

CONTINUED STRONG FINANCIAL MANAGEMENT: The district's ratings are sensitive to shifts in fundamental credit characteristics, including the district's strong financial management practices and maintenance of strong reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is coterminous with Hillsborough County (GOs rated 'AAA'/Outlook Stable) and is located on central Florida's western coast and includes the city of Tampa (implied ULTGO of 'AA'/Outlook Stable).

IMPROVING SALES TAX COVERAGE
CIT sales tax revenues have continued the upward trend that began in fiscal 2011, with annual increases of 3.7%, 4.2%, 4.5%, and 4.9% through fiscal 2014. Fiscal 2014 revenues covered MADS (in 2026) by 1.26 times (x) versus 1.20x for the previous fiscal year. Coverage of fiscal 2014 annual debt service was comparable at 1.30x. Fiscal 2015 monthly sales tax reports show collections through December are 5.3% higher than the same period for fiscal 2014. Fitch expects coverage to improve moderately as the economy continues to rebound from the recession. District and county officials report numerous commercial and residential projects underway or planned for the near future which is expected to promote additional sales tax revenues.

The district's residual CIT revenues total \$37 million (equivalent to 146% of MADS of \$20.5 million). These residual revenues are available if necessary to compensate for any deficiency in the current year's pledged revenues, although they are not pledged to bondholders.

Bond documents restrict additional debt through a 1.20x pro forma MADS additional bonds test, limiting the likelihood of new debt at this time. The debt service reserve is funded by a surety policy from Ambac (not rated by Fitch).

BROAD EMPLOYMENT BASE CONTINUES RECOVERING
Hillsborough County (GO bonds rated 'AAA' with a Stable Outlook by Fitch) serves as the economic center for Florida's Gulf Coast. Major economic sectors include business services, health care and education. Signs of recovery from the recession for this historically strong and diverse economy are evident. An uptick in employment has driven down the November 2014 unemployment rate to 5.6%, an improvement from 6.3% the prior year. Wealth levels are slightly above the state average and just below national levels.

Rapid population growth has historically driven corresponding enrollment increases in the district. Recent enrollment growth has become more moderate with a 1.7% increase in fiscal 2015. The district expects moderate enrollment gains to continue for the next few years.

RESERVE LEVELS LOWER BUT SOUND
The district has managed a decline in state funding and the recently imposed unfunded state operating mandates through the use of built up reserves and expenditure cuts. Financial performance for fiscals 2012, 2013 and 2014 resulted in deficit operations and draws on general fund reserves, most of which were planned.

For fiscal 2014, the district experienced a \$39.6 million net operating deficit due to a combination of expenditure items related to new equipment needed for various state required programs, expenses related to the replacement of aging school buses, and continued security upgrades. This follows a fiscal 2013 deficit of \$29.4 million mostly as a result of the one-time expenses associated with equipment, technology and security upgrades, as well as various state-mandated expenditures. The district ended fiscal 2014 with an unrestricted general fund balance of \$193 million or a still solid 12.4% of spending. The district has a fund balance policy requiring maintenance of an unassigned reserve equal to or greater than 5% of total anticipated revenue for the following year plus carry-forwards which it continues to comply with.

FISCAL 2015 BUDGET
The district has benefited from the increase in the state's education funding for fiscal 2015 coupled with its growing enrollment. Employee costs and state mandated programs are the primary expenditure drivers. Expenditure controls include a continued 90 day hiring freeze for non-teacher staff and renegotiations of its vendor contracts.

Management has indicated its intention to maintain fund balance levels in excess of its policy. The recent state-mandated spending is generating some pressure on operations, but Fitch believes the district retains the ability to adjust outlays to offset these directives. Management's history of prudent fiscal controls suggests that the district's sound financial profile will be maintained.

FAVORABLE DEBT PROFILE
Overall debt levels are low at \$1,577 per capita and 2.2% of market value. Variable rate debt equals a manageable 18% of total district debt.

The district's facilities are reportedly in good shape, with capital needs greatly reduced after a building push earlier in the decade driven by escalating enrollment and state mandated class size requirements. The district uses excess revenue from the 1.5 mill capital outlay levy, after COPs debt service, for the majority of its capital and maintenance needs. No additional borrowing is planned presently.

COPS DEBT SERVICE
The district has historically made COPs debt service payments from the 1.5 mill capital outlay tax, although any legally available revenue can be used. With the district's taxable assessed value (TAV) for fiscal 2015 of \$74.8 billion, a 92.9 mill rate generates sufficient revenues, assuming a 96% tax collection rate, to cover fiscal 2015 COPs debt service of \$66.7 million.

The master lease structure on the district's 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 20% of the district's facilities. Fitch considers this requirement a strong incentive to appropriate.

MANAGEABLE RETIREMENT COSTS
All district employees participate in the state operated retirement system which Fitch considers adequately funded. Pension and OPEB costs are affordable. Total carrying costs for pension, OPEB pay-go and debt service equaled an affordable 8% of total fiscal 2014 governmental spending.