Fitch Rates St. Lucie County School Board Sales Tax Bonds 'A'; Outlook Stable
--\$85,340,000 sales tax refunding revenue bonds, series 2015.
The bonds are expected to sell via negotiation on April 7.
In addition, Fitch affirms the following ratings:
--\$157.9 million certificates of participation (COPs) series 2005, 2011A, 2011B, 2013A and 2015A at 'A+';
--\$90.2 million (pre-refunding) sales tax revenue bonds, series 2006 at 'A';
--Implied unlimited tax general obligation (GO) bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The sales tax bonds are payable from the proceeds of the one-half cent school capital outlay sales tax. The bonds will have a debt service reserve funded with a surety.
The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. The master lease requires the district to appropriate funds for all outstanding sub-leases on an 'all or none' basis. An event of non-appropriation would result in the termination of the master lease and the surrender to the trustee of all lease-purchased projects under the master lease.
KEY RATING DRIVERS
ADEQUATE SALES TAX COVERAGE: The 'A' rating on the sales tax bonds reflects the adequate coverage levels on the outstanding bonds.
FINANCIAL CONTROL: The district benefits from a strong experienced management team which practices conservative budgeting and prudent fiscal planning. Reserves are adequate and management has instituted spending cuts to maintain fiscal balance when warranted.
STRONG MASTER LEASE PROVISIONS: The 'A+' rating on the COPs is based on the district's general creditworthiness and the COPs' sound legal structure and available capital millage. The master lease structure requires all or none appropriation and the 1.5 mill capital millage outlay typically used for lease payments provides more than sufficient revenues to meet debt service requirements.
LOW CARRYING COSTS: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are very manageable and no material changes are expected.
HISTORIC TAX BASE VOLATILITY: Taxable values have shown some recovery over the past two years although values are still well below the prerecession peak. The local economy is growing although limited; wealth levels are below average and unemployment exceeds the national rate.
RATING SENSITIVITIES
ADEQUATE RESERVES: The COPs and implied GO ratings are sensitive to changes in the district's financial profile. Failure to maintain adequate reserves could pressure the rating. The sales tax bond rating is sensitive to changes in debt service coverage.
CREDIT PROFILE
St. Lucie County, whose boundaries are coterminous with those of the school district, is located along the east coast of Florida and had a year round 2013 population of 286,832. Encompassing 76.7 square miles, the largest city in the county is Port St. Lucie (GOs rated 'AA'/Stable Outlook by Fitch) with a population of 164,000.
PROACTIVE FINANCIAL PLANNING
The district benefits from a strong and knowledgeable management team which prudently focused on building reserves in the anticipation of recessionary revenue declines. During fiscal years 2010 and 2011, the district added \$18 million to reserves by implementing a nearly \$30 million expenditure reduction, increasing transfers from the capital improvement fund, and the levying of a 0.25 mill critical needs millage (which expired in fiscal 2013).
In fiscal 2013, the district originally budgeted to use \$12.8 million of general fund reserves, but through expenditure control actual results were a more moderate \$7.7 million operating deficit (2.7% of spending). Expenditures were held constant from the prior year and revenues increased a minimal \$2 million, but the transfer from the capital improvement fund declined by approximately \$5 million. The general fund closed with unrestricted reserves of \$19.8 million, a satisfactory 7.1% of spending. Florida school districts receive their state aid evenly throughout the year. The district does a modest amount of short-term cash flow borrowing in anticipation of property tax collections.
Fiscal 2014 unaudited expenditures increased a modest 1.7%, while revenues grew 5.4%. State aid increases accounted for 86% of revenue growth, with most of the state aid increase restricted for teacher salary increases. The district budgeted for using \$2.9 million of reserves to balance the budget, but closed with essentially balanced operations. The unaudited unrestricted balance of \$18.4 million is an adequate 6.5% of expenditures, within the district's informal policy level to maintain an unassigned balance of 5% of revenues. The district allows students school choice, which eases class size restrictions and the district was in compliance with state requirements in school year 2014.
The fiscal 2015 budgeted general fund appropriations and transfers out totals \$293.8 million, a 3% increase over prior year unaudited spending. The budget is balanced with a \$6.5 million appropriation of reserves. Further use of operating reserves could pressure the rating.
ADEQUATE SALES TAX COVERAGE
Fiscal 2014 pledged revenues of \$13.91 million (adjusted to include accruals to fiscal 2014 that were reported in 2013) provide 1.46x coverage of estimated maximum annual debt service (MADS; \$9.5 million). Year to date monthly revenues are up a strong 6.8% over prior year actuals. Collections are still well off the \$15.1 million peak recorded in fiscal 2006. The maximum one year decline in revenues occurred in fiscal 2009 with an 11.9% decline, although the decline is far less severe than the fall in real estate value, partially reflecting the broad-based nature of the sales tax.
The bonds will also be secured by a debt service reserve account funded through a surety policy with Assured Guaranty (not rated by Fitch), sized to cover a standard three prong test. The additional bonds test is weaker with a test of 1.2x coverage, although the district has no borrowing plans.
MANAGEABLE CARRYING COSTS
Direct debt levels are low at 1.3% of market value and \$1,010 per capita. Amortization of direct debt is average with approximately 51% of principal retired within 10 years. Overlapping debt is high, pulling up the total debt burden to 4.2% of market value, which is still considered midrange. Debt levels are expected to remain stable, as no additional long-term debt is presently contemplated.
Pension benefits are provided through the state run Florida Retirement System (FRS) and total annual pension contributions were manageable at 4.4% of expenditures in 2013. The FRS Fitch-adjusted funded ratio is 78%.
OPEB is currently funded on a pay-as-you-go basis representing a very low 0.3% of fiscal 2013 government spending. Carrying costs including debt service, pension and OPEB were a very manageable 12.1% of total fiscal 2013 government expenditures.
LIMITED LOCAL ECONOMY
The county's economy, historically driven by its sizable residential base, is also led by service sector activities with concentrations in tourism and construction. The county was hard hit by the housing downturn with taxable property values falling 38% from peak to trough. Taxable values are showing some recovery and values increased 5% and 4% in fiscal years 2014 and 2015, respectively. The Zillow Group reported county median home value as \$138 thousand. While still the prerecession peak, home values have gone up 16.3% over the past year and Zillow predicts they will rise 9.3% within the next year.
The tax base is concentrated as the largest taxpayer is Florida Light and Power, accounting for 11.6% of the tax base. The Lucie nuclear power plant is in the county and the operating licenses for the two units runs to 2036 and 2043. In 2012, plant modifications increased the plant's electric output. The essential nature of the plant and expected continued operations helps offset concerns over tax base concentration.
The Torrey Pines Institute of Molecular Studies, the Vaccine and Gene Therapy Institute, and the Mann Research Center provide a small but growing life science cluster in the area, providing both jobs and diversification to the underlying economy. Education levels in the county exceed the statewide averages.
Income levels are below average, with median family income equal to 93% of the state average and 82% of the national. Unemployment rates continue to show improvement due to favorable job growth. The December 2014 rate of 6.2% is still above both the state and nation (both 5.4%).
STRONG MASTER LEASE PROVISIONS
Lease payments are payable from any legally available source. However, on a budget basis, payments are made from the district's capital millage outlay which can be levied up to 1.5 mills for lease payments for COPs issued before 2009. For bonds issued post 2009, state law limits the amount to be used for COPs repayment to 75% of the 1.5 mill levy or 1.125 mills. The fiscal 2015 levy of 1.5 mills, at a 96% collection rate, is expected to generate \$24.87 million. MADS of \$14.82 million utilizes a moderate 59.6% of the levy. While the lease payments are subject to appropriation, the 'all or none' payment requirement under the master lease would result in the loss of all or parts of nearly 30% of the district's schools which are covered under the lease should the district fail to appropriate. The 'all or none' appropriation feature provides significant enhancement to the credit.
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