Fitch Affirms Orange County School Board, FL's COPs at 'AA'; Outlook Stable
--Approximately $1.2 billion certificates of participation (COPs) at 'AA'.
Fitch has also affirmed the 'AA+' Issuer Default Rating (IDR) on the Orange County School District.
The Rating Outlook is Stable.
The COPs are payable by lease payments equal to debt service on the COPs to be made by the Orange County School Board, subject to annual appropriation, to the Orange County School Board Leasing Corporation under a master lease purchase agreement. In the event of non-appropriation the trustee may force the school board to surrender possession of all leased facilities under the master lease for disposition by sale or re-letting of its interest in such facilities.
KEY RATING DRIVERS
The 'AA+' IDR reflects the district's superior financial strength combined with a relatively modest long-term liability load. Fiscal operations are supported by solid spending flexibility and superior reserves. These features plus the district's ability to procure voter approved supplemental revenues offset a very restrictive revenue framework.
The COPs rating is one notch below the IDR reflecting appropriation risk of lease payments from which debt service is paid.
Economic Resource Base: The growing health and education sector of the county, which is coterminous with the school district, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based in tourism. Fitch expects the above-average growth rate of area employment to lift county income indicators, which are currently below national levels.
Revenue Framework: 'a' factor assessment
The school board has very limited discretion over revenues as per capita funding levels are set by the state. However, district revenues show steady, solid growth, despite cuts in state funding in fiscal 2012, due to strong enrollment increases which are expected to continue.
Expenditure Framework: 'aa' factor assessment
The school board demonstrates strong flexibility to adjust spending to revenue trends, most notably during the past recession. This flexibility is enhanced by the district's low carrying costs. Spending is likely to be generally in line with revenue growth over time.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is relatively low, with most of the district's debt consisting of COPs. This burden is expected to remain stable given the district's ability to fund a sizable capital program, which includes the construction of 17 new schools over the next five years, on a pay-go basis, limited debt plans of overlapping jurisdictions including the county and the City of Orlando, and an adequately funded pension system.
Operating Performance: 'aaa' factor assessment
The district's spending flexibility and ability to secure additional revenues through voter referendum have enabled it to maintain superior reserve levels despite a harsh recessionary environment. Fitch expects district management to continue such policies during future downturns.
RESERVE STRENGTH: The district's high reserves are a principal consideration in the 'AA+' IDR rating, as they establish a sound level of financial flexibility in the event of state school funding changes.
The Orange County School District's geographic boundaries are coterminous with central Florida's Orange County (IDR 'AAA', Outlook Stable). The district operates 186 schools with a pre-K through 12 enrollment of about 197,000 in fiscal 2016.
The leisure and hospitality sector continues to be a major component of the local economy, making up about 20% of total area employment. Disney is the dominant player, employing about 74,000 or more than 10% of the total county workforce while Universal Orlando reports 19,000 employees. Both corporations continue to make substantial investments in their parks. The county has experienced positive job growth for six straight years while unemployment rates are below the state and national benchmarks.
Common to Florida school districts, revenues are derived almost entirely from a combination of property taxes and state aid. The state determines the overall level of funding for each school district and then allocates total funding between property taxes levied within the district and state aid. Typically, the larger a district's tax base, the higher proportion of revenues sourced from property taxes. In fiscal 2015, state revenues accounted for 53% of total district revenues while property taxes comprised 45%.
Historical growth has exceeded the pace of both inflation and national GDP due in large part to rapid enrollment growth as revenues are distributed on a per pupil basis. Prospects for future robust revenue expansion are favorable due to projected increases in student enrollment driven by rapid population growth.
The district has no ability to raise revenues outside of some minor fees. The state establishes the district's per student revenues under its Florida Educational Finance Program (FEFP) equalized per student funding formula. Overall funding for the district in any year is then determined by enrollment.
FEFP allocations per student fell significantly in fiscal 2012 after federal stimulus funds were exhausted. Since then, FEFP funding levels have steadily risen. The district's FEFP per student allocation for fiscal 2017 still does not exceed the pre-recession peak and represents a modest $72.60 or 1% increase over fiscal 2016 allocations.
About two-thirds of the district's spending is instruction-related with the most important components being teacher salaries and benefits. Instructional spending has increased rapidly growing by 20% between fiscals 2012 and 2015.
The pace of spending growth has generally matched revenue trends until the last two fiscal years when spending accelerated to fund various non-recurring items. Spending trends going forward are expected to be in line with revenue growth as increased spending demands fueled by enrollment growth are funded by correspondingly rapid revenue expansion.
The district's fixed costs of carry for debt, pensions and other post-employment benefits (OPEB) are modest at 7.6% for fiscal 2015 affording it significant spending flexibility. Management reduced instructional staff by over 1,100 or 9% between fiscals 2008 and 2010 in order to curtail expenditures. Since then, the district has steadily added back teaching personnel, which now exceeds fiscal 2008 levels. State class size requirements can impinge upon personnel decisions although the penalties for non-compliance are modest. The district is currently meeting its minimum class size mandates.
Long-Term Liability Burden
The district's overall liability load, including debt and the unfunded pension liability, is modest in relation to personal income at 9.3%. Direct debt consists primarily of COPs issued under the master lease structure. Most of the burden, however, is attributable to debt of overlapping or underlying jurisdictions, particularly the county and the City of Orlando (IDR 'AAA', Outlook Stable). It should be noted that almost half of the overlapping debt consists of bonds payable from the tourist development taxes (hotel taxes) which are mostly paid by visitors.
Neither the county nor the city have plans for substantial new debt. Reedy Creek Improvement District (IDR 'AA-', Outlook Stable), which encompasses Disney World, plans on issuing over $300 million over the next two fiscal years but nearly all of Reedy Creek's debt is paid by Disney.
Amortization of direct debt is relatively slow with only about 40% of principal retired within the next 10 years. Given the limited debt plans of the district and overlapping jurisdictions, debt levels are expected to stay moderate. Capital improvements are funded from a combination of existing reserves in the capital projects fund, proceeds from the voter-approved capital outlay sales tax, property taxes and impact fees, minimizing the need for additional debt despite an aggressive capital program to meet future enrollment demand.
The district participates in the adequately-funded Florida Retirement System.
The district's variable rate debt comprises about 16% of its debt portfolio. This position is considered manageable due to the district's strong liquidity and history of market access. All of the positions are hedged and despite a negative valuation of $58 million as of June 14, 2016, the district is not exposed to collateral posting.
The district proved exceptionally resilient during the severe downturn in Florida beginning in 2007, reporting positive general fund results throughout the recession, despite a falloff in state per student funding levels. The strong results were primarily attributable to the district's spending flexibility - general fund spending fell by 16% between fiscals 2008 and 2011 - and rapid revenue escalation since fiscal 2010 and voter approved discretionary revenues have enhanced revenues. Management has secured an additional discretionary 1 mill for operations which was renewed by voters in fiscal 2014 for four years. The 1 mill provided approximately $92.9 million in supplemental operating funds in fiscal 2015 (6.3% of fiscal 2015 general fund revenues).
In a moderate economic downturn, Fitch expects the district to respond to a decline in revenues similarly as in the past by taking actions to reduce spending in order to rebalance operations while maintaining a high level of fundamental financial flexibility throughout.
While the district has incurred general fund deficits in fiscals 2014 and 2015, the deficits were driven primarily by non-recurring employee bonuses and the upfront payment of the two-year salary increase negotiated for fiscal 2015-2016. Despite the deficits, fiscal 2015 unrestricted general fund reserves represented a robust 22% of spending. Officials are projecting balanced operations for fiscal 2016 as several projects scheduled for fiscal 2016 have been postponed. Going forward, Fitch expects the district to maintain reserves at or above 15% of spending which is well above its 3% of spending contingency reserve policy.