Fitch Rates $37 Million in Manatee County School Board, FL COPs; Outlook Stable
--$37 million refunding COPs, series 2016A.
Proceeds of the series 2016A COPs will be used to refund the outstanding series 2009 COPs.
In addition, Fitch has upgraded the following:
--the district's Long-Term Issuer Default Rating (IDR) to 'A-' from 'BBB+';
--$130 million in COPs to 'BBB+' from 'BBB';
--$6 million in sales tax revenue bonds, series 2005 to 'A-' from 'BBB+'.
The Rating Outlook is Stable.
The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases under the master lease on an all or none basis. Bondholders are further secured by a leasehold security interest in certain education facilities.
The sales tax revenue bonds are payable from the proceeds of the half-cent school capital outlay sales surtax collected within Manatee County and distributed to the district by the State of Florida Department of Revenue. Limited additional security is provided by a debt service reserve account which is covered by a surety.
KEY RATING DRIVERS
The upgrade of the Long-Term IDR to 'A-' from 'BBB+' reflects both the application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016, and an improvement in credit quality. Application of the revised criteria results in an increased recognition of the district's revenue growth prospects, moderate carrying costs, and low long-term liability burden. Credit improvement is evidenced by the district's greater fiscal monitoring and spending controls, which resulted in an improvement in reserves consistent with policy levels, providing an adequate cushion to manage through unexpected budgetary challenges going forward.
Economic Resource Base
The Manatee County School Board is coterminous with Manatee County (IDR 'AAA'), encompassing 740 square miles on the Florida Gulf Coast with a 2015 population of 363,369. The school board operates 53 schools and has experienced relatively steady growth in enrollments.
Revenue Framework: 'a' factor assessment
The district's revenue framework reflects its favorable revenue growth prospects driven by continued expansion of its population and enrollment. The positive growth factors are tempered by the district's dependence on state-determined revenues and the absence of independent revenue raising ability.
Expenditure Framework: 'a' factor assessment
The district's instructional costs are the major driver of spending. The district has been constrained by the state class size requirements which have been a source of pressure with rising enrollments. Fixed costs associated with debt and retiree benefit liabilities are moderate at 12% of spending.
Long-Term Liability Burden: 'aaa' factor assessment
The district's liability burden should remain low given manageable debt plans, rapid debt repayment and its participation in the adequately funded state pension plan.
Operating Performance: 'bbb' factor assessment
The district has experienced a period of recurring net operating deficits that resulted in a notable decline in reserves. District management has enacted measures to control costs, improve internal controls and more accurately monitor budgetary spending, which has resulted in the restoration of fund balance providing for enhanced gap closing ability going forward.
STRONG COVERAGE; RATING CAPPED: The rating on the sales tax revenue bond is capped by the District's IDR at 'A-' as Fitch does not view the pledged school capital outlay sales surtax as special revenues under section 902(2) of the bankruptcy code. Pledged revenues cover maximum annual debt service (MADS) on the District's outstanding sales tax bonds by 1.8x. Fitch considers the cushion strong when evaluated against the largest historical decline and the Fitch Analytical Statistical Tool (FAST) output in a moderate economic downturn. There is minimal risk of additional leverage given the short remaining term of the sales tax authorization (2017).
APPROPRIATION RISK OF COPS: The COPS are rated one-notch lower than the IDR, recognizing the risk to annual appropriation; however, master lease provisions, including an 'all or none' appropriation requirement, and a leasehold interest on a significant number of essential school facilities, mitigate this risk.
FINANCIAL FLEXIBILITY: The rating is sensitive to the maintenance of reserves at a level to maintain sufficient gap-closing ability. A prolonged deterioration in the district's financial resilience could pressure the rating. Conversely, Fitch could consider an upgrade of the ratings should there be a sustained improvement in the district's overall financial flexibility.
The local economy is diversified among services, retail, manufacturing, agriculture and a rising presence of tourism, supported by robust population growth and a sizeable retiree population. The county population has grown by 12% since 2010, exceeding state and national trends. The county's unemployment rate of 3.9% in June 2016 improved from 11.9% in 2009 due to continued positive employment trends and tourism and construction activity. Wealth levels exceed the state average but trail the nation. Housing values declined by nearly 50% from the peak in 2006 through 2012 but have since rebounded with current home values up 9% over the past year through August 2016, according to the Zillow Group.
The Florida Education Finance Program (FEFP) is the primary mechanism for funding the operating costs of Florida school districts. The FEFP process determines a base per student funding level split between state funds, largely derived from statewide sales tax revenue, and local funds via the required local millage rate established pursuant to state statutory procedure. In fiscal 2015, state funding comprised about 50% of the district's general fund revenues and the property tax was about 46%.
Historical general fund revenue growth has outpaced national GDP over the past decade. Fitch expects revenues to grow at a strong pace due to expectations for positive enrollment trends attributable to population growth and ongoing economic development. State funding continues to rise, albeit at a slower pace than in recent years. The 2017 adopted budget includes a 1% increase in the level of FEFP funding.
Although Florida school districts have a limited ability to independently increase general fund revenues, Fitch does not believe this limitation is a significant factor given the recognition of K-12 education as a fundamental state responsibility and the strong foundation of state support for education funding.
School instruction costs comprise the largest component of school spending. These costs grew in recent years due to state mandates regarding classroom size and other program funding requirements.
Fitch expects the pace of spending to generally be in line with or slightly exceed revenue trends going forward, as spending needs driven by rising enrollment are funded by a similar rise in state funding and growth in local revenues attributable to tax base expansion. Improved budgetary monitoring and controls will enable the district to better manage its spending needs.
Wages and benefits are collectively bargained between the school district and the unions representing teachers and support staff. The district is currently in negotiations with both unions, as contracts expired in June 2016. Until new agreements are ratified, employees will continue to operate under the previous agreements. Under Florida law a bargaining impasse is ultimately resolved by action of the governing body of the local government following the conclusion of a non-binding mediation process.
The district's employee costs are subject to Florida's class size legislation, which imposes minimum student teacher ratios at various grade levels. Future staff reductions may not be practically possible, which could restrict the district's expenditure flexibility in the event of another downturn. The district is in compliance with current class size requirements.
Spending for debt service, pension and retiree health benefits consume a moderate 12% of total governmental fund spending. Fitch expects carrying charges to remain relatively stable given the district's rapid debt repayment, modest pension ARC and manageable debt plans.
Long-Term Liability Burden
The long-term liability is low, equal to less than 4% of personal income. The district's direct debt comprises less than half of the metric with nearly 65% of principal to be rapid within 10 years.
The district's capital plans are largely funded through a combination of the local capital outlay millage and proceeds of a sales tax. School Board officials are seeking voter approval to extend the existing sales tax levy in a November 2016 referendum, as the current 15-year authorization is set to expire on Dec. 31, 2017. The sales tax levy currently brings about $28 million annually, supporting school maintenance and growth projects. The district's borrowing plans are predicated upon the extension of the sale tax levy. In the event the voters do not approve the extension, the district has indicated that it would adjust capital spending and debt issuance accordingly.
In fiscal 2016, impact fees were reinstated for collection, providing the district with over $6 million in revenues for capital projects. The district retains the capacity to seek additional impact fee revenues although the use of these funds is restricted to only growth projects.
Fitch's Analytical Sensitivity Tool (FAST) depicts a low 1% revenue volatility in response to a moderate economic downturn. The relative stability of the district's general fund revenues is supported by a combination of favorable state funding trends and solid enrollment history. Over the past 15 years, the district experienced only a single year of enrollment loss, a mild 0.4% reduction in 2006 before returning to consistent annual growth averaging over 1% annually through fiscal 2015. Given the district's inherent budget flexibility, Fitch expects the district will maintain reserves at a level in compliance with its 3% policy and state mandated requirement given its ability to better monitor and manage the budget. This level is consistent with the reserve safety margins for a 'bbb' level financial resilience assessment.
Under the guidance of a new management team, the district has made considerable efforts to restore operational balance and rebuild reserves in compliance with its 3% policy and state mandated requirement. With the implementation of a series of cost-cutting measures, a pay and spending freeze, budgetary monitoring and controls, and asset sales, the district achieved a positive fund balance in fiscal 2014 following two years of negative fund balances. The district has since maintained reserves at a level that exceeds historical levels. Per district management, current fiscal 2016 estimates indicate a third year of positive results following its recent history of poor budgetary monitoring and the absence of spending controls and mismanagement of resources that resulted in a period of recurring deficits. The district's fiscal 2017 adopted budget is 2% higher than the prior year's reflecting an increase in FEFP funding and local property tax revenues attributable to the expanding student population and taxable property values. Going forward, Fitch expects the district to continue to manage operations in a manner sufficient to maintain adequate reserves throughout economic cycles.