TEXT - Fitch revises Florida's Marion CSD rating outlook
Jan 28 - Fitch Ratings has downgraded the following ratings of the Marion County School Board, Florida (the school board, or district): --$99.5 million certificates of participation (COPs) to 'A' from 'A+'. In addition, Fitch downgrades the school board's implied general obligation (GO) rating to 'A+' from 'AA-'. The Rating Outlook is revised to Negative from Stable. SECURITY The COPs are payable from lease payments made by the district, subject to annual appropriation of the school board under a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases on an all-or-none basis. In the event of a non-appropriation, the district must surrender possession of all leased facilities under the master lease to the trustee for disposition by sale or re-letting of its interest in the facilities. SENSITIVITY/RATING DRIVERS IMPLIED GO DOWNGRADE: The downgrade of the implied GO to 'A+' reflects the substantial erosion of the district's reserves and concomitant loss of financial flexibility as a result of ongoing fiscal imbalances which have yet to be adequately addressed. Depletion of remaining federal stimulus funds and a failed referendum for an additional operating tax levy magnify the pressures upon operations. OUTLOOK REVISED TO NEGATIVE: The Outlook revision to Negative is based on Fitch's expectation that finances will weaken further over the near term as management grapples with a persistent budgetary deficit relying almost exclusively on additional cuts in spending. COPS APPROPRIATION RISK: The one-notch rating difference between the implied unlimited tax GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. Master lease provisions including an all-or-none appropriation requirement, a leasehold interest on a significant number of essential schools and reliance upon COPs financing serve to mitigate the potential for non-appropriation. CONTRACTING TAX BASE: Since fiscal 2008, the district's tax base has fallen by 31%, including a 6% drop in the present fiscal year, reflecting the severe slide in housing values. LOW DEBT LEVELS: District debt levels are modest and are expected to remain so given the absence of any plans to issue new debt and rapid amortization of existing bonds. LIMITED ECONOMY: The district's economic base remains somewhat limited and exhibits below-average levels of income and high unemployment. WHAT COULD TRIGGER A RATING ACTION BALANCED OPERATIONS: Failure of the school board to achieve fiscal balance by fiscal 2014 or if unrestricted general fund balance falls below the school board's minimum level of 3% of spending will result in negative rating action. CREDIT PROFILE The district's boundaries are coterminous with Marion County, located in central Florida about 65 miles north of Orlando. The current estimated population is about 336,000 and Ocala is the largest city within the county, with a population of 56,315. The district currently enrolls 41,400 students across 49 schools. Enrollment fell by about 1,500 or 3.6% between fiscals 2008 and 2010 due most likely to the stressed economy, but has since grown modestly. Officials expect student population to continue expanding through at least fiscal 2016. DETERIORATING FINANCES The district's financial position has been deteriorating since fiscal 2009, pressured by declines in the district's two largest sources of revenue - property taxes and state aid. General fund revenues have fallen by 12% since fiscal 2008, led by a 25% reduction in property tax revenues. State aid also decreased by 14% between fiscals 2008 and 2010 and remained below pre-recession levels until the current fiscal year. In fiscals 2010 and 2011, the district reported net general fund operating deficits of $1.1 million and $4.4 million, respectively, even with the receipt of significant stimulus funds during those years. The phase-out of the stimulus in fiscal 2012 prompted officials to implement severe spending cuts, including the elimination of over 200 full-time positions, which reduced one-year combined general operations spending by over 9%. Despite the budgetary reductions, the district reported a fiscal 2012 general fund net operating deficit of $8.3 million or nearly 3% of general fund spending. The consecutive operating deficits reduced the district's unrestricted general fund balance (the sum of committed, unassigned and assigned according to GASB 54) from $26 million or 9% of spending in fiscal 2010 to $14 million or 5% of spending in fiscal 2012. SCHOOL BOARD BUDGETS SIZABLE DEFICIT FOR FISCAL 2013 For fiscal 2013, the school board budgeted an $8.3 million net operating deficit for general fund operations. While the district tends to budget conservatively, officials are projecting year-end results to be in sync with the budget. The projected operating deficit slices remaining general fund balance by 45% and shrinks unrestricted general fund balance to $9.2 million or the district's minimum balance of 3.0% of spending. Given the magnitude of prior spending cuts and sizable deficit, the district will be challenged to further slash spending in order to balance operations in fiscal 2014. The fiscal stress has been exacerbated by the school board's decision not to levy the 0.25 mill critical needs tax authorized by the state legislature in 2009 compounded by the recent voter rejection of proposals for two additional half-mill property tax levies: one to supplement operations and the other for capital purposes. Each of the half-mill levies would have raised an additional $7 million in revenues. The failed referendums leave the school board with few viable options to raise additional funds. Fitch believes the school board will be challenged to balance fiscal 2014 operations given the current spending gap, an inflexible revenue base and the magnitude of spending cuts already made. MANAGEABLE DEBT LOAD The district's debt burden is modest at 1.1% of market value or $859 per capita. Direct debt consists primarily of COPs issued under the master lease. Principal amortization is very rapid with 74% of principal retired within the next 10 years. The school board's capital needs are manageable given the recent fall-off in enrollment and there are no plans to issue additional new money debt. MASTER LEASE STRUCTURE MITIGATES APPROPRIATION RISK All of the school board's COPs were issued as subleases under a master lease structure between the school board and the Marion County Leasing Corporation (the corporation), a non-profit entity set-up solely to facilitate the district's lease transactions. The school board's COPs payments under the master lease to the corporation are subject to annual appropriation. Appropriation risk, however, is mitigated by the provision that the school board must appropriate on an all-or-none basis for series of COPs or risk losing possession of all or parts of 11 schools subject to the master lease. While 11 schools compose only a minority of the district's total of 49 schools, they include 40% of the district's middle schools, four of the eight high schools and many of the district's newer facilities. The district utilizes its 1.5 mill capital outlay millage as its primary revenue source to make COPs payments. Based on fiscal 2013 assessed values for the district, the capital outlay millage provides an adequate 1.4x coverage of maximum annual debt service. RAPID GROWTH OVER THE PAST DECADE The county experienced rapid population growth during the early and mid-2000s but growth leveled off with the onset of the recession in late 2007. The influx was fueled mostly by retirees; the percent of county residents 65 years or older is 25% above the state average, although the school board indicates that recent growth has been more diversified. The 2.2% average annual population growth rate over the past decade is still almost 40% above the state rate during the same period. LIMITED ECONOMY WITH LARGE AGRICULTURAL COMPONENT The county's economy is somewhat limited with about 60% of total acreage designated for agricultural purposes. The area has historically been a major center for thoroughbred horse breeding. Non-agricultural major economic sectors include government services, retail trade, healthcare, manufacturing, and leisure and hospitality. Leading employers include the school board, Munroe Regional Medical Center, the state, and Wal-Mart. STEEP JOB LOSSES DUE TO THE RECESSION Overall economic activity was hit hard by the recession as employment fell by nearly 12% between 2007 and 2010. Unemployment soared past 13% in 2010 as manufacturing, construction and retail trade all experienced significant job losses. Employment rebounded modestly in 2011 and appears to be accelerating in 2012. October 2012 employment was up 3.5% year over year. Consequently, county unemployment rates fell from nearly 12% in October 2011 to the current 9.1%, but remain well above the state and national averages. Wealth indices are below average with 2010 median household income at only 85% and 78% of the state and national benchmarks, respectively. County income levels relative to the state and national averages have fallen over the past five years. Housing values as of the fourth quarter of 2011 fell over 52% from their peak in 2006 and are now equivalent to 1998 prices, according to Case Schiller. Recent prices are suggestive that the market is stabilizing. Foreclosure levels remain elevated compared with state-wide averages. TAXABLE VALUES CONTINUE TO FALL The county's tax base trends reflect the steep area housing downturn. Taxable values dropped by 26% between fiscals 2008 and 2012. Preliminary valuation for fiscal 2013 indicates a further 6% decline. The State of Florida Revenue Estimating Conference projects that the county's fiscal 2014 taxable assessed values will decline slightly, after which valuations should begin to recover, which appears to be reasonable given recent housing trends. Following a modest increase in fiscal 2010, property tax rates have remained stable. MANAGEABLE RETIREMENT OBLIGATIONS The district's retirement obligations are not a cost pressure. All employees participate in the Florida Retirement System, a statewide plan which administers two cost-sharing multiple employer retirement plans: a defined benefit plan and a defined contribution plan. The district's combined contribution to both plans for fiscal 2012 totaled $10.1 million, which represented a modest 3.5% of general fund spending. The district provides an implied subsidy for retiree healthcare benefits by allowing retirees to participate in the district's medical plan at the same rate as active employees. Fiscal 2012 district contributions to the plan, which were less than the annual required contribution (ARC), represented only 0.5% of general fund spending. If the fiscal 2012 ARC had been fully funded, the contribution would represent a still modest 1.4% of spending. Combined debt service, pension and OPEB spending for fiscal 2012 accounted for a very manageable 10% of general fund expenditures.
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