TEXT-Fitch upgrades some ratings for Okaloosa County School Board, Fla.
Jan 31 - Fitch Ratings has upgraded the following ratings for Okaloosa County School Board, FL's (the district) bonds: --Implied general obligation (GO) rating to 'AA+' from 'AA'; --$2.8 million refunding and revenue bonds, series 2011 (state sales tax revenue bonds) to 'AA+' from 'AA'; --$63.4 million certificates of participation (COPs), series 2003, 2006 and 2007 to 'AA' from 'AA-'. The Rating Outlook is Stable for the implied GO and COPs. The Rating Outlook is Negative for the revenue bonds. SECURITY The revenue bonds are secured by an annual distribution of sales tax pursuant to Florida statutes section 212.20(6)(d).a. The annual distribution is equal to debt service obligations. The COPs are payable from lease payments made by the district and are 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 UPGRADE: The upgrade of the implied GO to 'AA+' reflects the district's strengthened financials, improved economic environment, and very low debt levels. Fitch expects debt levels to remain modest given the district's manageable capital needs. REVENUE BOND RATING: The upgrade on the revenue bonds reflect their cap at the lower of the school district implied GO (one notch below the state's GO rating). At this time, one notch below the state's GO rating of 'AAA' with a Negative Outlook is the lower of the two options. COPS APPROPRIATION RISK: The one-notch rating difference between the district's implied GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. Master lease provisions including '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. LOW DEBT LEVELS: Overall debt levels are affordable while capital needs appear manageable. Amortization of outstanding principal is rapid. STABLE LOCAL ECONOMY: The Okaloosa County economy remains limited but stable, anchored by Eglin Air Force Base and tourism along the Gulf of Mexico. Economic indicators compare favorably to national averages, though the housing market remains depressed. CREDIT PROFILE Okaloosa County School Board is coterminous with Okaloosa County, located on the Gulf Coast of Florida's panhandle and bordered by Alabama to the north. The district serves approximately 30,000 students and operates 37 schools. AMPLE FINANCIAL FLEXIBILITY, MAINTENANCE OF STRONG RESERVES Strong financial management is the hallmark of this credit, as reflected in the district's ability to achieve net operating surpluses (after transfers) for five consecutive years despite a pressured operating environment. Generating surpluses each year from fiscal 2007 through 2011, the district augmented its fund balance to from $63.6 million (31.6% of spending) from $47.5 million (20.8% of spending). The unrestricted portion of fund balance was $51.6 million at the end of fiscal 2011 (equal to a high 25.7% of spending). Liquidity has also increased to high levels over this time period. Cash and investments covered liabilities over 22 times at the end of fiscal 2011. The district's success has been driven by its conservative budgeting habits and ability to achieve structural balance. Unlike many school districts in the state, Okaloosa County School Board has not undertaken layoffs, implemented furlough days, decreased employee pay, or cut expensive student programs. As a result, the district has ample flexibility to reduce spending further. UNAUDITED FISCAL 2012, BUDGET FISCAL 2013 Unaudited results for fiscal 2012 show a modest $129,000 (0.1% of spending) net operating surplus (after transfers). Despite surplus operations, unrestricted fund balance decreased marginally to $50.2 million (a still strong 24.5% of spending). The district plans to draw down total fund balance in fiscal 2013 by $8 million (3.4% of spending) as part of a planned use of education jobs funds. Unrestricted fund balance is expected to increase by $500,000 regardless of the planned drawdown. Fitch does not believe that this reduction in total reserves will materially decrease financial flexibility. STABLE MILITARY-BASED AND TOURISM ECONOMY, POSITIVE ECONOMIC INDICATORS The area economy of Okaloosa County (implied ULTGOs rated 'A+' by Fitch) is somewhat concentrated but stable, anchored by Eglin Air Force Base, which plays a major role in national defense. The base serves as home to over 10,000 military and 4,000 civilian personnel, as well as 3,000 contractors. Eglin recently added the seventh special-forces group, with approximately 6,000 military and dependents and the F35 training center. Significant downsizing at the base is unlikely in the near term given its size and import. The district's location along the Gulf of Mexico makes tourism the second leading income producing source for the county. Residents and tourists are attracted by the natural attractions and recreational activities within the county including several miles of beaches along the gulf. The tourism sector within the county continues to recover from the Gulf oil spill in 2010. County unemployment rates (5.7% as of October 2012) have remained consistently below state and national levels (8.2% and 7.5%, respectively) through the economic downturn. The county has experienced some loss of population over the past few years, although the rate of decline appears to be lessening. Wealth levels are slightly higher than state and national averages. LOW RISK DEBT PROFILE, AFFORDABLE CARRYING COSTS Overall debt levels are low at 1% of market value (MV) and $787 per capita, with no new debt planned. Debt service for fiscal 2012 totaled $9.2 million or an affordable 3.7% of general and other governmental funds spending. Amortization of outstanding principal is rapid with over 95% retired in ten years. The district has no exposure to variable-rate, derivative or short-term debt instruments. The fiscal 2013-2017 CIP totals $126.2M (an affordable 0.9% of MV) and focuses on maintenance and repair projects. The district believes it has sufficient capacity over the next few years to accommodate projected enrolment growth (200 students per year through fiscal 2016). As such, the district has no near-term plans to build additional schools. Debt service and retirement costs for fiscal 2012 represent 7% of spending, a burden that Fitch deems manageable. The district is a member of the state-administered Florida Retirement System and provides an implied subsidy for its other post-employment benefits (OPEB). STATE REVENUE SOURCE FOR SALES TAX BONDS The revenue bonds are payable solely from an annual distribution of $190,750 to the board of state sales tax revenue, pursuant to Florida statute. The revenue is a substitute for racetrack revenues previously distributed. The district 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 legislature of 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 board of sufficient pledged revenues to pay debt service on the bonds. Coverage of maximum annual debt service (MADS) by the annual distribution is approximately 1.0 times (x), as is typical of debt secured by fixed sales tax distributions. Additional parity bonds are allowed to be issued as long as MADS does not exceed the $190,750 annual distribution. Fitch believes that the slim current coverage will prevent any further leveraging of the security. LOW DEBT SERVICE LEVY FOR COPS Lease payments on COPs are generally paid from revenue of the capital outlay levy, but are ultimately payable from any legally available source. The capital outlay levy is authorized by state law up to 1.50 mills. Currently, up to three-fourths of the proceeds of the capital outlay levy is available for lease payments (effective July 1, 2012). The three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009 (all of the district's lease agreements were entered prior to this date). An additional 0.25 mills may be levied in lieu of an equivalent amount of the discretionary mills for operations determined annually by the legislature (currently 0.748 mills). Like all Florida schools, the district levied 1.5 mills for capital outlay in fiscal 2012, of which 0.56 mills are used for lease payments. The capital outlay levy necessary to service the district's lease payments is considered low by Fitch. This provides capacity for pay-as-you-go financing of capital projects. LIMITED APPROPRIATION RISK Fitch believes the district has a strong incentive to appropriate for lease payments. In the event of non-appropriation, the district must surrender all leased facilities to the trustee. Approximately 18% of the district's educational facilities, such as elementary schools and high schools, are included under the master lease. Fitch also notes that an event of non-appropriation could impair the district's ability to issue additional COPs. These debt instruments serve as the district's primary mechanism for funding long-term capital needs, representing 89% of its total direct debt burden. Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria