Fitch Upgrades Manatee County School Board, FL's COPs to 'BBB'; Outlook to Stable
--Implied unlimited tax general obligation (ULTGO) to
'BBB+' from 'BBB';
--$161 million certificates of participation (COPs) series 2005A (pre-refunded), 2007, 2008A, 2009, and 2011A to
'BBB' from 'BBB-';
--$6.1 million sales tax revenue bonds series 2005 to
'BBB+' from 'BBB'.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. Bondholders are further secured by a leasehold security interest in certain educational facilities.
The sales tax revenue bonds are payable from the proceeds of the local government half-cent sales tax collected within Manatee County and distributed between the county and its incorporated municipalities based on a population-driven formula. Limited additional security is also provided by a debt service reserve account satisfied by a surety bond.
KEY RATING DRIVERS
IMPROVED FINANCES AND CONTROLS: Actions taken to limit spending, improve internal controls and more accurately monitor district expenditures have led to a restoration of fund balance from a negative position to more adequate levels. The improved controls and strengthened balance sheet support Fitch's upgrade of the district's ULTGO rating and the change in the Rating Outlook to Stable.
IMPROVING ECONOMIC METRICS: Employment, taxable property values and population have shown favorable growth rates the past few years.
LOW DEBT: Key debt ratios are low, and further leveraging should not burden the district as it only uses a moderate portion (45%) of its capital outlay levy to service COPs debt service.
SALES TAX RATING CAPPED AT GO: The rating on the sales tax revenue bonds is capped by the implied ULTGO rating. Sales tax revenues continue to increase and coverage is sound at 1.8x (unaudited fiscal 2015). Bonds mature Oct. 1, 2017 three months prior to expiration of the tax.
APPROPRIATION RISK OF COPS: A single-notch distinction between the implied ULTGO and the COPs recognizes risk to annual appropriation, master lease provisions including an 'all or none' appropriation requirement, and a leasehold interest on a significant number of essential school facilities.
RATING SENSITIVITIES
SUSTAINED FINANCIAL STABILITY: Continued progress towards sustained budgetary control and maintenance of adequate fund balance levels is key to maintaining the current ULTGO/COPs rating and could lead to positive movement in the ratings.
ADEQUACY OF SALES TAX BOND COVERAGE: Fitch expects sales tax revenues to continue to provide adequate debt service coverage as economic metrics stabilize or improve.
CREDIT PROFILE
The Manatee County School Board shares the same geographic boundaries as Manatee County (the county), encompassing an area of 740 square miles on Florida's Gulf Coast, approximately 45 miles south of Tampa. The district operates 53 schools and has a current enrollment of approximately 47,300 students. The county has an estimated 2014 population of 351,746. The county seat and the largest municipality in the county is the city of Bradenton (Fitch implied ULTGO rating of 'AA').
FINANCIAL POSITION IMPROVES
The district had a poor financial profile with operating deficits in seven of eight years through fiscal 2013, and ultimately year-end accumulated deficits for fiscal 2012 and 2013. Results for fiscal 2014 were positive with the general fund experiencing an operating surplus (after transfers) of $21.9 million (a sizable 6.7% of spending). These results were achieved primarily through strong cost controls. The results also include $4.4 million from asset sales. The district's unrestricted fund balance improved to $11.1 million from a negative $8.6 million, and is a still-narrow 3.4% of spending.
Several factors contributed to the district's improved financial controls: active state involvement, extensive work with an outside internal auditor, staff training, improved systems and an apparent improved culture of accountability.
Fiscal 2014 operations are a contrast to the prior year when the district grossly missed projected results. In fiscal 2013 the district had forecast a positive ending balance of $6.6 million in a financial recovery plan submitted to and approved by the Florida Department of Education (DOE), but failed to meet the plan and deepened the accumulated deficit. Florida school districts are required to submit this plan if their unassigned and assigned fund balance is less than 2% of revenue. The district had previously failed to meet the state fund balance requirement for three straight years.
POSITIVE RESULTS PROJECTED FOR FISCAL 2015
The district's original fiscal 2015 budget had originally projected a $2.1 million increase in total fund balance. Unaudited fiscal year-end results show the general fund experiencing a $2.9 million surplus with an increase in unrestricted fund balance to $14.2 million or 4% of spending. The results reflect continued cost control measures practiced throughout the fiscal year including a spending freeze on certain non-critical items and a larger use of substitute teachers for open positions. Property tax revenues were also better than anticipated. Health insurance costs have been a primary cost driver and the general fund budget included a $5.9 million transfer to the district's self-insurance fund to cover projected costs.
LEVEL OF CASH FLOW BORROWING HAS DECLINED
While general fund liquidity levels have improved the district still relies on short term borrowing for cash flow purposes. After issuing $50 million in notes in July of fiscal 2014 with payment the following May, the district reduced its borrowing to $32 million during fiscal 2015 and expects to issue between $25 million and $30 million during fiscal 2016 (roughly 7% - 8% of general fund revenues). State aid accounts for approximately 50% of total sources and is received somewhat evenly over the course of the year.
MAINTENANCE OF RESERVES EXPECTED FOR FISCAL 2016
For fiscal 2016 general fund revenues are budgeted to increase by 5.8% to $397 million due primarily to a 5.5% increase in Florida Education Finance Program revenues reflecting growth in student enrollment. The district appropriated $2.9 million of total fund balance but is managing to maintain its fund balance at or slightly better than prior fiscal year levels. Results to date, according to management, have been positive and support this goal. The general fund budget included a $4.9 million transfer to the internal service fund to meet recommended fund balance requirements for the self-insurance plan.
Fitch expects current management to continue to prudently manage district operations in a way that achieves continued structural balance and maintenance of adequate reserves.
LOW DEBT BURDEN
Overall debt levels are estimated to be low at 1.1% of market value and $1,045 per capita inclusive of the outstanding obligations of underlying local government units and the county. Debt amortization is rapid with 67% of principal amortized in ten years. Carrying charges related to district debt, payments to the adequately-funded Florida Retirement System for pension, and other post-employment benefits (OPEB) are a manageable 15% of total fiscal 2014 governmental fund spending.
The district's fiscal 2015 - 2020 capital plan totals a manageable $298 million, net of debt service. Of the total spending, $123 million is reserved for future projects still to be determined. A capital needs assessment is being done by a third party and is expected to be presented to the board early this year. Future borrowing needs will be more fully developed after presentation of the assessment.
The district has no near term borrowing plans as the current capital program relies on property tax and sales tax funding. The sales tax was approved by voters for capital spending for a 15-year period ending on Dec. 31, 2017. As the voter-approved sales tax comes to expire there is some concern that the district's history of fiscal problems and generally tax-adverse residents could thwart an effort to gain voter approval for another sales tax.
SOUND SALES TAX COVERAGE; BONDS MATURE IN 2017
Sales tax performance has improved with ongoing stabilization of the local economy and employment base. Unaudited fiscal 2015 sales tax revenues of $28.2 million provide 1.8x coverage of maximum annual debt service (MADS) of $15.5 million. Sales tax revenues have seen annual growth since fiscal 2010 and grew 8.4% and 6.7% in fiscals 2014 and 2015, respectively. The sales tax bonds mature Oct. 1, 2017, three months prior to expiration of the tax.
AMPLE CAPACITY TO MAKE COP PAYMENTS FROM CAPITAL OUTLAY LEVY
While any legally available revenue can be used for COPs debt service the district has historically made payments from revenue generated by the 1.5-mill capital outlay tax. The district requires 0.68 mills to fund MADS of $19.9 million (occurring in fiscal 2018) based on fiscal 2016 taxable value and assuming a 96% tax collection rate.
MASTER LEASE ENHANCES INCENTIVE TO APPROPRIATE
In Fitch's view the master lease structure mitigates risk to non-appropriation. Essentially the district must choose to make rental payments on all or none of the lease schedules under the master lease purchase agreement. 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. District properties associated with the master lease include a total of 20 elementary, middle, and high schools, a technical institute, and a transportation and maintenance facility.
CONTINUED GROWTH IN TAXABLE VALUES
After experiencing modest growth the past few years taxable value in the district grew a notable 8.1% for fiscal 2016, although values are still down 18% from the fiscal 2008 highs. According to the Zillow Home Value Index, the growth in home values in Manatee County was up 10.4% year over year through October.
DIVERSIFIED COUNTY WITH SOUND SOCIOECONOMIC METRICS
The county's industry base is diversified among services, retail and manufacturing, complemented by tourism and agriculture. The top employers include the district and the county as well as Manatee Memorial Hospital, Tropicana Products, and Beall's Department Stores, which has its headquarters in Bradenton.
Median household income levels for the county are 104% and 92% of the state and national levels, respectively. The county's unemployment rate of 5.1% for Sept. 2015 improved from 5.9% a year prior due to job growth but is offset by a decline in labor force. The rate compares favorably to Florida's unemployment rate of 5.4% for the same period.
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