TEXT - Fitch revises Florida's Manatee CSD outlook to negative
Feb 1 - Fitch Ratings has downgraded the following ratings on the Manatee County School Board, Florida (the district): --Implied general obligation (GO) bond rating to 'BBB+' from 'A+'; --$213.8 million of certificates of participation (COPs) to 'BBB' from 'A'; --$24.5 million sales tax revenue bonds, series 2003 and 2005 to 'BBB+' from 'A+'. The Rating Outlook is revised to Negative from Stable. SECURITY 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. An event of non-appropriation would result in the termination of the master lease, and the surrender to the trustee of all lease-purchased projects under the master lease. The sales tax revenue bonds are secured by the proceeds of the local government half-cent sales tax collected within the county, and distributed between the county and its incorporated municipalities based on a population driven formula. Limited additional security is also provided by a debt service reserve account satisfied by a surety bond. SENSITIVITY/RATING DRIVERS UNANTICIPATED OPERATING AND RESERVE DEFICIT: The district's already limited financial flexibility has been greatly compromised following a significant unbudgeted deficit in fiscal 2012, leaving the district with a negative year-end general fund balance. INTERNAL CONTROL DEFICIENCIES: The district's rapid fiscal deterioration is attributed to a series of failed budgeting practices and lack of oversight; corrective action is being spearheaded by a new superintendent and chief financial officer. ACTION PLAN INTRODUCED: The fiscal 2013 budget targets compliance with statutory reserve requirements. Revenue and expenditure assumptions appear realistic and management reports year-to-date results are on track, but Fitch remains concerned about the district's ability to meet its budget based on recent events. SALES TAX CAPPED AT GO: The rating on the sales tax revenue bonds is capped by the implied GO rating. Sales tax revenues increased modestly in fiscal 2012 improving coverage to about 1.4 times. COP APPROPRIATION RISK: The one-notch distinction between the implied GO and COP ratings reflects risk to annual appropriation. WHAT COULD TRIGGER A RATING ACTION RECURRENCE OF FINANCIAL INSTABILITY: Fitch will take additional negative rating action should the district fail to demonstrate operational stability and progress in improving financial reserves. POOR DISCLOSURE: Maintenance of the Fitch rating is dependent on the receipt of timely and accurate information. CREDIT PROFILE Manatee County is located on Florida's Gulf Coast, approximately 45 miles south of Tampa. The school district is coterminous with the county and has a current enrollment of about 45,000. FISCAL 2012 CONCLUDES WITH NEGATIVE FUND BALANCE Unaudited results for fiscal 2012 depict an operating deficit (after transfers) of $10.2 million resulting in a year-ending general fund balance deficit of $3.5 million or -1.1% of spending. The fiscal 2012 budget had forecast an operating surplus of $3.3 million that would have increased reserves to close to $10 million and narrowly maintained compliance with state statutory guidelines for general fund reserves. Liquidity levels remain on the low side with total of cash and investments across governmental funds of $51.8 million or 0.9x total liabilities. Management expects to issue tax anticipation notes this spring at about the same level as prior years - approximately $50 million or a sizable 15% of revenues. OPERATING DEFICIT UNDETECTED UNTIL YEAR-END Several factors contributed to the draw on reserves, most notably the absence of a position-control module and payroll encumbrance process to properly account for employee wages and benefits. According to district management and a report of an independent forensic auditor, the fiscal 2012 operating deficit was not detected by management until after the close of the fiscal 2012 year. The district superintendent and assistant superintendent for business services have since resigned. Under the direction of the interim superintendent and chief financial officer (hired in May 2012) a series of software programs to monitor employee positions, payroll encumbrances, and requisitions are in the process of implementation. A series of short-term fixes have been introduced to help prevent additional overspending in the interim, the effectiveness of which is difficult for Fitch to assess. FISCAL 2013 BUDGET RESTORES RESERVES TO MINIMUM REQUIREMENT Under Florida law school districts are required to maintain an unrestricted fund balance equal to at least 2% of general fund revenues. Any district that fails to meet this requirement may have a financial emergency board imposed by the Commissioner of Education unless it can submit an action plananticipated to avoid a financial emergency (including the non-payment of debt). The district has submitted a plan, which has reportedly been accepted as valid by the commissioner. At the end of fiscal 2013 the district is projecting a fund balance equal to $6.6 million or 2.1% of revenue (also equal to 2.1% of spending). The budget plan centers on a $6.9 million or 2.1% reduction in spending including $3.3 million in plant operation and maintenance and $1.2 million in instructional services. Revenues are expected to increase $3.3 million or 1% due to higher enrollment and an increase in the state funding formula. Management reports the budget is on track to date, but concerns exist given recent failed projections.