OREANDA-NEWS. Fitch Ratings has downgraded its ratings on the following Clay County School Board, Florida (the district) obligations:

--$35.1 million certificates of participation (COPs), series 2005B and 2012 to 'A' from 'A+';
--$2.5 million state sales tax revenue bonds, series 2010 to 'A+' from 'AA-';
--Implied unlimited tax general obligation (ULTGO) rating to 'A+' from 'AA-'.

The Rating Outlook is revised to Stable from Negative.

SECURITY
COPs are secured by undivided proportionate interest in lease payments made, subject to appropriation, by the district under a master lease purchase agreement.

The revenue bonds are payable solely from an annual $223,250 distribution to the district from state sales tax revenues, pursuant to Florida statutes; the revenue is a substitute for racetrack revenues previously distributed.

KEY RATING DRIVERS

ONGOING FINANCIAL WEAKNESS: The downgrade of the district's implied GO and linked ratings reflect its continued subpar financial performance characterized by very low reserves. Despite district projections for improvement, unrestricted reserves remain thin at around 2% of revenues, just above Florida's minimum threshold for triggering state oversight.

COPS SUBJECT TO APPROPRIATION: The downgrade of the COPs' rating to 'A' from 'A+' reflects the district's decline in general credit quality. Fitch maintains a one notch rating distinction between the COPs and the implied GO rating due to inherent appropriation risk partly offset by the master lease structure and the essentiality of leased assets.

REVENUE BOND RATING CAP: The revenue bond rating reduction is tied to the downgrade of the district implied GO. The sales tax rating is capped at the lower of the district's implied ULTGO rating (currently 'A+') or one notch below the state GO rating. The state's GO rating is 'AAA'.

OUTLOOK REVISION TO STABLE: The Rating Outlook revision to Stable from Negative reflects recent stabilization of the district's financial position, albeit at narrow margins.

LOW CARRYING COSTS: The overall debt burden is low as are overall carrying costs, debt service, pension and other post-employment benefits (OPEB). Amortization is very rapid.

RATING SENSITIVITIES

CHANGES IN FINANCIAL POSITION: Further declines in financial reserves would likely result in an additional downgrade of the rating. Conversely, restoration of reserves to more historical levels would be viewed positively.

CREDIT PROFILE
Located in the northeastern area of the state bordering the city of Jacksonville, Clay County is a largely residential area with an estimated 2014 population of 199,798. The district enrolls about 36,600 with student counts expected to grow moderately over the next few years.

WEAK FINANCIAL OPERATIONS
The district's previously strong financial position was substantially weakened following planned sizable use of reserves in fiscals 2012 and 2013. The successive drawdowns reduced unrestricted general fund balance from $19.7 million representing 9.7% of spending in fiscal 2011 to $5.1 million in fiscal 2013 or a very low 2% of spending. The minimal balance violates the state's minimum assigned and unassigned balance target of 3% of projected revenues, requiring district notification to the Florida Department of Education. A further decline below 2% triggers a requirement that the district develop a plan subject to state approval to restore balances above 3%.

A slim $179,000 net general fund operating surplus was reported for fiscal 2014 nudging up unrestricted fund balance to a still low 2.2% of spending. Property tax receipts were close to $2 million under the original budget partially balanced by higher than budgeted transfers in from the capital projects fund and modest underspending. Including a $136,000 negative fund balance adjustment for a decrease in inventory reserve, ending balances were barely above those of the prior year.

The district budgeted a $2.2 million operating surplus in fiscal 2015; however, unaudited actuals indicate a $600,000 year-end deficit. Revenues were well under budget, property tax receipts by $1.1 million while state aid was negatively affected by mid-year proration, overly optimistic enrollment projections, and higher than expected scholarships. Expenditures came in modestly under budget. Unrestricted balance dropped to $5.1 million or 2% of spending (2.1% based on revenues). General fund liquidity levels remain somewhat tight with available cash and investments sufficient to cover about two weeks of operations. However, the district does have significant cash in its capital projects fund which could be used to cover a temporary funding gap, if necessary.

The fiscal 2016 budget proposes a $3.3 million surplus which would bring unrestricted balance up to $6 million or 2.35% of spending. Revenues are bolstered by a $9.9 million (5.3%) increase in state aid over fiscal 2015 actual receipts. Spending is slated to rise by $7.4 million or 3% stemming in part from salary increases. The district budgets some modest reductions in teacher and institutional support staff positions and improved its expenditure management capabilities.

Fitch remains concerned over the district's thin financial margins and its continued failure to achieve targeted reserve levels. At the agency's last review in January 2014, the district expected to comply with the 3% state fund balance guideline by fiscal 2014 or fiscal 2015. Although finances appear to have stabilized, unrestricted reserves continue to hover around 2% of spending. In response, officials have pushed back the projected date of compliance to fiscal 2018. Fitch will continue to monitor the district's progress towards meeting its financial objectives.

FAVORABLE SOCIOECONOMIC PROFILE
Resident wealth levels compare favorably to the state and nation. The median household income is 108.4% of the national median and the county poverty rate is a moderate 11.3%. The county unemployment rate at September 2015 was 4.8%, below both the state (5.2%) and national (5.1%) rates. Many residents commute to nearby Jacksonville, the largest city in the state.

STATE SALES TAX PLEDGE
The revenue bonds are payable solely from an annual $223,250 distribution to the district of state sales tax revenue, pursuant to Florida statutes. The revenue is a substitute for racetrack revenues previously distributed. The county receives the annual fixed-dollar distribution from a portion of the 6% state sales tax, which is collected by the Florida Department of Revenue.

The state may not lawfully modify the statutory scheme for the distribution of sales tax revenues in a manner that would impair the receipt by the district of sufficient pledged revenues to pay debt service on the bonds. Coverage of maximum annual debt service (MADS) by the $223,250 distribution is only slightly greater than 1.0 times (x), as is typical of debt secured by fixed state sales tax distributions.

SOUND LEASE PROVISIONS
Florida school districts may levy 1.5 mills for capital outlay and these funds are used (but not pledged) for payment of COPS debt service. Fiscal 2015 collections were $13.8 million relative to lease payments of approximately $5.3 million. The district is levying the full 1.5 mills.

Up to three-fourths of the levy can be used for lease payments entered into after June 30, 2009, with no restriction on earlier leases. None of the district's agreements were entered into after June 30, 2009. The district has no plans to issue additional COPs.

LOW LONG-TERM FIXED COSTS
Total debt service and employee benefit costs are low, representing only 7.4% of total governmental spending in fiscal 2015. Key debt ratios are also below average, with debt per capita of only $444 and debt burden at a modest 0.7% of market value. Debt payout is rapid with 85% of debt paid off in 10 years. In 2014, the district issued privately placed COPs to refund the outstanding series 2005A COPs. The district has a large number of portable classrooms but has no plans to construct new buildings. The fiscal 2016 to 2020 educational facilities plan identifies a moderate level of needs to be funded through current revenues.

The district participates in state-administered pension plans. Total fiscal 2015 district pension contributions were $14.6 million, a moderate 4.9% of total district governmental spending. At the close of fiscal 2015 the unfunded actuarial accrued liability for OPEB was $7 million.