OREANDA-NEWS. Fitch Ratings has assigned a 'AA' rating to the following Hillsborough County School Board Leasing Corporation's (the corporation) certificates of participation (COPs):

--$156,670,000 refunding COPs series 2015A.

In addition, Fitch assigns a 'A-' rating to the Hillsborough County School District's, FL (the district) following sales tax revenue bonds:

--$66,030,000 sales tax revenue refunding bonds series 2015B.

Fitch has also affirmed the following ratings:

--Implied unlimited tax general obligation (ULTGO) of the district at 'AA+';
--$798 million outstanding corporation COPs at 'AA';
--$187 million outstanding community investment tax (CIT) sales tax revenue bonds at 'A-'.

The Rating Outlook for the implied ULTGO and COPs is revised to Negative from Stable. The Rating Outlook on the sales tax bonds is Stable.

SECURITY

The COPs are payable from 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.

The sales tax revenue bonds are backed by a first lien on 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.

KEY RATING DRIVERS

WEAKER FINANCIAL PROFILE: District management is projecting deficit operations for fiscal 2015 primarily as a result of unbudgeted increases in employees' compensation. Fitch has revised the Rating Outlook to Negative as a result of this projection which will lead to the fourth year of deficit operations, and a reduction in overall financial flexibility compared to historical levels.

BUDGET CHALLENGES PERSIST: Management has outlined a number of savings initiatives which are projected to eliminate the large structural imbalance for fiscal 2016 (roughly $75 million or 4.5% of spending). Achieving balanced operations next fiscal year may prove difficult due to the size of the imbalance and lack of control over revenues.

IMPROVING SALES TAX COVERAGE: CIT sales tax revenues have experienced a five-year upward trend resulting in strengthening debt service coverage. Coverage on pro-forma maximum annual debt service after this refunding is good at over 1.4x from fiscal 2015 revenues.

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 is a single-notch below the implied ULTGO rating reflecting additional structural risk inherent in the annual appropriation of lease payments tempered by a good incentive to appropriate based on the master lease structure and essentiality of leased assets.

RATING SENSITIVITIES

STABILIZATION OF OPERATIONS; RESERVE REPLENISHMENT: The district's implied ULTGO rating and COP rating is sensitive to management's ability to make progress in achieving and maintaining structural balance. Maintenance of the current rating would require a restoration of reserves to more robust levels nearer to historical levels.

COVERAGE FROM PLEDGED CIT REVENUES: The sales tax bonds' rating is sensitive to changes in debt service coverage from pledged revenues and/or additional debt issuance. Fitch expects coverage levels to remain stable.

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).

FISCAL 2015 PROJECTIONS SHOW FOURTH CONSECUTIVE DEFICIT

District management has projected an operating deficit for fiscal 2015 of approximately $75 million (5% of the original approved budget). The financial projection contrasts notably with the expectation for balanced operations offered by management earlier this year. The district failed to implement sufficient cost saving measures to offset the financial impact of newly negotiated salary raises and bonuses. Other costs tied to state mandates and transportation also contributed to the imbalance even as state revenues increased due to continued enrollment growth and higher per pupil funding. This fourth consecutive deficit is projected by Fitch to reduce unrestricted reserves to approximately 6%-7% of budgeted spending.

Management has proposed a number of savings initiatives planned for the upcoming fiscal 2016 budget to help eradicate its structural imbalance and begin restoration of its fund balance closer to previous levels. Completion of the budget and subsequent approval in early September is pending. If a return to structural balance is not achieved a downgrade of the district's implied ULTGO and COP ratings is likely

RESERVE LEVELS LOWER BUT STILL ADEQUATE

For fiscal 2014, the district experienced a $39.6 million operating deficit after transfers 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 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 has consistently complied with.

SALES TAX COVERAGE CONTINUES TO IMPROVE

CIT sales tax revenues have continued the upward trend that began in fiscal 2011. Annual increases have averaged between 3% and 6.5% through fiscal 2015. Fiscal 2015 revenues covered MADS (in 2026) by 1.34x versus 1.26x for the previous fiscal year. Coverage improves to over 1.4x based on pro-forma MADS after the refunding. Fitch expects coverage to improve moderately as the economy continues to expand following 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.

Bond documents restrict additional debt through a lenient 1.2x pro-forma MADS additional bonds test. District officials have indicated they do not have any additional debt plans at this time. The debt service reserve fund is funded by surety policies from Ambac and Assured, neither of which are rated by Fitch.

BROAD EMPLOYMENT BASE CONTINUES RECOVERING

Hillsborough County 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. Unemployment rates improved to 4.9% in April down from 5.5% the prior year, although labor declined slightly by 0.4%. 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.

FAVORABLE DEBT PROFILE

Overall debt levels are low at $1,428 per capita and 2.0% of market value. Variable rate debt equals an approximate 18% of total district debt, which Fitch considers to be a moderate level of risk due to its lack of revenue control.

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 0.929 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.