OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Escambia County School District, Florida (the district) sales tax revenue bonds (the bonds):

--$75.0 million sales tax revenue bonds, series 2016.

The bonds are expected to price through negotiation the week of Jan. 4. Proceeds will be used to finance certain capital improvements and educational facilities within the district.

In addition, Fitch affirms the following district ratings:

--$19.8 million refunding certificates of participation (COPS), series 2014 at 'AA-';
--Implied unlimited tax general obligation (ULTGO) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The sales tax bonds are payable from the proceeds of a voted one-half cent school capital outlay discretionary sales surtax (capital outlay sales tax) levied within the district. The sales tax extends through Dec. 31, 2027.

The COPs are supported by lease payments subject to annual appropriation by the school board under a master lease-purchase agreement with the Florida School Boards Association. Upon certain events of default or the school board's failure to appropriate funds all leases under the master lease will terminate, and the school board is required to immediately surrender possession of all facilities subject to the master lease.

KEY RATING DRIVERS

ROBUST COVERAGE WITH POTENTIAL DILUTION: Sales tax bond debt service coverage is ample at nearly 4x maximum annual debt service (MADS). However, a weak 1.25x MADS additional bonds test allows for substantial additional issuance, which would weaken debt service coverage.

STRONG FINANCIAL RESERVES: Despite some recent operating deficits, the district's financial reserves remain strong. Balanced operations are projected in fiscal 2016, and Fitch expects the district to maintain a strong financial position over the longer term.

STABLE TAX BASE: Taxable values have increased steadily since fiscal 2013 following a moderate recession-induced contraction. The presence of a large military installation as well as a sizable regional power plant fosters economic stability.

MODEST DEBT POSITION: The district's debt levels are low, and all debt is rapidly retired. Current borrowing needs are minimal and overall carrying costs are affordable.

COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs ratings incorporates the slightly elevated risk of annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets, which are subject to surrender in the event of non-appropriation, temper this risk.

RATING SENSITIVITIES

STRENGTH OF MANAGEMENT: The rating is sensitive to shifts in fundamental credit quality including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE
Escambia County is located in the extreme northwest corner of the state, bordering the state of Alabama and the Gulf of Mexico. The 2014 population of the county is 310,659 and the land area is 661 square miles. The district served 40,167 full-time equivalent students in fiscal 2015. The county seat is Pensacola.

SOLID SALES TAX GROWTH BOOSTS COVERAGE
Capital outlay sales tax collections have experienced five consecutive years of growth since fiscal 2010, aggregating to a 24% increase over that period. The growth follows significant declines of nearly 19% between fiscals 2006 and 2010 reflecting the effects of the recent recession. Fiscal 2015 sales tax collections were up 4.8% over the prior year. Three-month fiscal 2016 sales tax receipts are 4.7% higher than same period collections in fiscal 2015, suggesting continued expansion in the near term.
As the capital outlay sales tax has not been bonded until this issue, pro forma coverage of MADS is very strong at 3.8x. Although there are no immediate plans to further leverage the capital outlay sales tax, a weak 1.25x MADS additional bonds test and dedication of sales tax proceeds for capital (and associated debt service) only could lead to significant future issuance. A debt service reserve fund is also provided but will likely be fulfilled with a surety.

The capital outlay sales tax was implemented in fiscal 1998 for five years and has since been extended several times by voter approval. The most recent extension was on Nov. 4, 2014 when voters, with over 70% in favor, approved an extension of the sales tax through Dec. 31, 2027. The sales tax levy is limited to a maximum consumer purchase of $5,000 on any one item.

SIZABLE FINANCIAL RESERVES AND LIQUIDITY
The district's financial position remains strong despite recent planned drawdowns, highlighted by solid reserves and ample liquidity. The district's board policy is to maintain a general fund unreserved balance of at least 3.5% of general fund revenues, although informally, management would like to target unrestricted general fund balance within the 12% to 15% range.

The $34.8 million unrestricted general fund balance at the close of fiscal 2014 was an ample 12.0% of expenditures and transfers out. Cash and investments in the general fund and across all governmental funds in fiscal 2015 totaled $48.6 million and $141.3 million, respectively on approximately $409 million of governmental expenditures. The general fund quick ratio (cash divided by liabilities net of deferred revenue) is a very strong 7.9x. Fiscal 2015 non general fund liquidity includes $69.8 million held in the capital projects fund that accounts for the receipt of the capital outlay sales tax. While those proceeds are dedicated to debt service on the bonds and capital improvements, the reserves provide sizable flexibility.

Similar to many Florida school districts, Escambia school district built up reserves in fiscal years 2010 ($12.4 million operating surplus) and 2011 ($16.8 million operating surplus) from receipt of federal stimulus funds to enable planned drawdowns in subsequent years. In fiscal years 2012 and 2013 the district relied on reserves of $11.4 million and $4.9 million, respectively, to fund operations.

Although management had projected a deficit for fiscal 2014, the district reported a $2.9 million surplus. The positive outcome was supported in part by the unbudgeted receipt of close to $3 million of back taxes by the district, due to a 2014 court decision in the district's favor as well as actual spending that was well below budget.

FISCAL 2015 GENERAL FUND OPERATIONS
The fiscal 2015 budget incorporated a $7 million (5.4%) increase in Florida Education Finance Program (FEFP) funds over amounts received in fiscal 2014 and about a $4 million increase in general fund revenues overall. A rise in spending was due in part to a 4% across the board increase in employee salaries, which added about $8 million to $9 million in additional costs. The overall budgeted general fund deficit totaled approximately $10 million.

According to the district's unaudited annual financial report to the state for fiscal 2015, property tax collections were $4 million above budget as the district continued to receive back taxes stemming from the 2014 court decision. Also collected were $3.3 million in unbudgeted FEMA reimbursements for costs incurred from storm damage in fiscal 2014. Spending came in at $1.8 million under budget. Despite these positive factors, general fund results show a modest $2.2 million draw on reserves (0.7% of spending). Unrestricted fund balance remained solid at 12.2% of spending.

The fiscal 2016 budget assumes an $11.6 million increase in FEFP monies (8.7%) driving $4.4 million of year over year general fund revenue growth. The budget includes a 2% employee salary hike totaling $5.5 million. Similar to the fiscal 2015 budget, a $10.2 million general fund drawdown is budgeted although management is projecting balanced year-end results which maintain reserves at current levels. Fitch expects the district will manage operations and keep reserves within the informal target range.

AMPLE CAPITAL MILLAGE FOR COPS DEBT SERVICE
While any legally available revenue can be used for COPs debt service, the district has historically made payments from the capital outlay real property tax. The capital outlay millage is authorized by state law up to 1.5 mills and the district levies the full millage. Up to three-fourths of the proceeds of the capital levy is available, but not pledged, for lease payments. Effective July 1, 2012, the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009. All of the district's outstanding lease agreements were originally entered into prior to this date. For fiscal 2016, the district is levying the capital outlay millage at 1.37 mills, which is expected to generate $21.5 million while MADS on outstanding COPs is only $5.1 million. After payment of debt service, the millage provides a substantial source of funding for pay-go capital funding.

Under an event of non-appropriation the district is required to surrender the leased facilities. The trust estate for the outstanding COPs includes four elementary schools and portions of numerous other schools.

LOW DEBT WITH RAPID RETIREMENT
District debt levels are extremely low and a high 86% of debt matures in 10 years. The debt burden is a low 0.8%, and debt per capita is only $668. Of the district's $83 million of outstanding direct debt, $9 million is variable rate. The district terminated the associated swap in 2015 and while the variable rate debt is currently unhedged, the bonds fully mature in 2018.

MILITARY PRESENCE STABILIZES ECONOMY
The local economy is dependent upon the military, with the Naval Air Station Pensacola providing employment for 23,400 uniformed and civilian jobs. The base was not affected during the 2005 base realignment and closure (BRAC) and no cuts at the base are currently pending. Health care and tourism are two other major sector employers. Employment growth has been consistent since 2009 contributing to a sizable drop in unemployment rates over that period. However, in 2015 year over year growth has slowed with average employment up only 0.1%. September 2015 unemployment rate dropped to 5.2%, in line with Florida (5.2%) and national averages (5.1%). However, most of the decline in unemployment rates was attributable to labor force attrition rather than job growth. Federal Navy Credit Union is continuing to expand, announcing that an additional 5,000 jobs will be created along with $350 million of capital investment by 2026.

Tourist activity has been robust. Tourist development tax collections with the county were up 15% in fiscal 2015 over collections in the prior fiscal year.

County population was flat from 2000 to 2010 and has grown a modest 2.4% through 2014. Wealth levels trail the state and national medians, partially reflecting the large military presence. Poverty is slightly above the national rate.

RISING TAXABLE PROPERTY VALUES

Taxable assessed values have rebounded strongly from a relatively modest recession-led decline between fiscals 2009 through 2013. Total decline during that period was 8.8%, which is far less than in most Florida localities. Since fiscal 2013, taxable assessed values have steadily increased with aggregate growth of $2.9 billion or 21%. Taxable values expanded by 3.7% in fiscal 2016. The tax base is relatively diverse with the top 10 taxpayers accounting for 10.3% of total values.

According to the Zillow Home Value Index, the growth in home values in Escambia County continues as housing prices were up 3.0% in the past 12 months. Housing values have been rising gradually since 2012.

MODEST CARRYING COSTS

Carrying costs (debt service, pension and other post-employment benefits) are a modest 5.4% of government spending. The district has no borrowing plans. Student enrollment has been generally stable over the past five years, alleviating the need for capital construction needs. All district employees participate in the state operated retirement system, a relatively well funded plan. Pension and OPEB costs are affordable. The district self-insures for medical coverage and is in compliance with state guidelines for reserves in the internal service fund. Excess internal service funds can be used for catastrophic purposes.