TEXT - Fitch rates Florida's St. Lucie Cty School Board COPs

Tue Feb 12, 2013 2:06pm EST

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Feb 12 - Fitch Ratings has assigned an 'A+' rating to the following St.
Lucie County School Board, Florida's (the board or district) 
obligations:

--$75 million refunding certificates of participation (COPS) series 2013A.

The bonds are expected to sell via negotiation during the week of February 18th.

In addition, Fitch affirms the following ratings: 

--$105.4 million COPS series 2005, 2011A and 2011B at 'A+';
--$108.8 million sales tax revenue bonds, series 2006 at 'A';

--Implied unlimited tax general obligation bonds at 'AA-'.

The Rating Outlook is 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 master 
lease requires the district to appropriate funds for all outstanding sub-leases 
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 bonds are secured by the proceeds of half cent school capital 
outlay sales tax. 

KEY RATING DRIVERS

FINANCIAL FLEXIBILITY: The district benefits from a strong experienced 
management team which practices conservative budgeting and prudent fiscal 
planning. Adequate reserves and options for spending cuts provide the district 
with satisfactory financial flexibility.

STRONG MASTER LEASE PROVISIONS: The 'A+' rating on the COPS is based on the 
district's general creditworthiness and the COPs' sound legal structure and 
available capital millage. The master lease structure requires all or none 
appropriation and the 1.5 mill capital millage outlay typically used for lease 
payments provides more than sufficient revenues to meet debt service 
requirements.

ADEQUATE SALES TAX COVERAGE: Sales tax revenues have improved over the past two 
years and the 'A' rating reflects the narrow but adequate coverage levels on the
outstanding bonds. 

LOW CARRYING COSTS: Carrying costs including debt service, pension and other 
post-employment benefits (OPEB) are very manageable and no material changes are 
expected. 

LIMITED LOCAL ECONOMY: The district's economic base remains somewhat limited 
despite recent diversification and exhibits below average levels of income and 
high unemployment.

RATING SENSITIVITIES

STRUCTURAL IMBALANCE: If the district is unable to eliminate the fiscal 2014 
structural deficit and maintain reserves at close to forecast levels, there 
could be negative rating action. 

CREDIT PROFILE

St. Lucie county, whose boundaries are coterminous with those of the school 
district, is located along the east coast of Florida and has a year round 
population of approximately 280,000. Encompassing 76.7 square miles, the largest
city in the county is Port St. Lucie (Fitch rated 'AA' with Stable Outlook) with
a population of 164,000. 

PROACTIVE FINANCIAL PLANNING 

The district benefits from a strong and knowledgeable management team which 
prudently focused on building reserves in the anticipation of upcoming budgetary
shortfalls. Over the two year period of fiscal 2010 and 2011 the district added 
$18 million to reserves by implementing a nearly $30 million expenditure 
reduction, increasing transfers from the capital improvement fund, and the 
levying a temporary 0.25 mill critical needs millage (expires in fiscal 2013).

As a result of these measures as well as the receipt of Federal stimulus funds, 
general fund balance grew to approximately $28 million (11.7% of expenditures) 
in fiscal 2011. Unaudited fiscal 2012 results indicate an operating deficit of 
just under $4 million (1.4% of expenditures) and a still ample unrestricted 
general fund balance to spending of 9.8%. 

FINANCIAL CHALLENGES AHEAD

Consistent with its budget, the district plans on using $13 to $15 million of 
general fund balance in fiscal 2013 as Federal stimulus funds dry up and the 
district reduced transfers in to the general fund from the capital improvement 
fund to their former levels. The use of available reserves will reduce total 
general fund balance to approximately $17 million (6.1% of expenditures) at the 
end of fiscal 2013, which remains above the informal target of 5% of 
expenditures which Fitch believes provides an adequate amount of financial 
flexibility for the rating level. 

The district faces a $15 million revenue shortfall in fiscal 2014. Management 
has identified over $20 million in possible expenditure reductions including 
privatization of custodial services, a 10% reduction in board contribution to 
employee health insurance and the closure of two schools. The identified 
reductions do not need voter approval and the board's past willingness to 
implement the necessary reductions makes it reasonable to believe that the board
will act prudently to restore fiscal balance to the general fund. 

The budget gap reflects increased costs as well as the redirection of 
approximately $5 million from the capital improvement fund that had supported 
operations (general maintenance and other projects) in recent years and the loss
of revenue from the 0.25 mill critical needs levy in 2014 ($3.75 million). 

The district plans to implement budget cuts in order to maintain total general 
fund balance at or slightly below the informal policy level of 5% of 
expenditures. The Stable Outlook is based on Fitch's expectation that management
will implement sufficient expenditure reductions to fund operations going 
forward, preserving the districts stable financial position. 

CARRYING COSTS ARE MANAGEABLE

Overall debt levels are moderate at 3.5% of market value and $2,566 per capita; 
amortization of direct debt is average with 54% of principal retired within 10 
years. Debt levels are expected to remain stable, as no additional long-term 
debt is presently contemplated. 

Pensions are provided through the state run Florida Retirement System (FRS) and 
total annual pension contributions were a manageable at 5% of expenditures in 
2011. FRS is well funded at 80% and as such costs are not expected to increase 
materially. 

OPEB is currently funded on a paygo basis and the unfunded liability represents 
a very low 0.04% of market value. Carrying costs including debt service, pension
and OPEB were a very manageable 12% of total fiscal 2011 expenditures. 

IMPROVEMENT IN SALES TAX REVENUES

Fiscal 2012 sales tax receipts increased 2.2% over the prior year to $12.7 
million or 1.25 times (x) maximum annual debt service (MADS). Collections peaked
at $15.1 million or 1.5x MADS in fiscal 2006 then declined through fiscal 2010 
due to the poor economic conditions. With the uptick in economic activity, Fitch
expects sales tax to continue to expand over the next two or three years. 

The debt service reserve account which had been satisfied by a surety from 
National Public Finance Guarantee, formerly MBIA has been replaced with a Letter
of Credit from JP Morgan which will expire in 2014. The district has a balance 
of $411 thousand in surplus sales tax collections that, if retained, can be used
to meet debt service or other capital needs.

LIMITED LOCAL ECONOMY

The county's economy, historically driven by its sizable residential base, is 
also led by service sector activities with concentrations in tourism and 
construction. The county was hard hit by the housing downturn beginning in 2007.
Home values dropped by over 60% from 2006, the largest decline of any county in 
Florida according to Case Schiller. More recent data indicates tentative 
stabilization in the housing market, but home values remain well below their 
former highs. 

The opening of the Torrey Pines Institute of Molecular Studies in Port St. Lucie
in 2008 has fostered a small but growing biotech hub in the area, providing both
jobs and diversification to the underlying economy. Recent developments include 
the opening of Martin Memorial Health Systems and the Vaccine and Gene Therapy 
Institute with additional biomedical projects scheduled to open in 2014. 

Income levels are below average, with per capita money income equal to 87% of 
the state average and 83% of the national. Unemployment rates remained high at 
10.5% in November 2012 above both the state (8%) and nation (7.4%) in the same 
month. Improvements in year over year unemployment were mainly attributable to a
decline in the labor force. 

ASSESSED VALUE DECLINES ARE SLOWING

The district experienced large assessed value (AV) declines reflecting the 
housing meltdown; however the pace of tax base devaluation has slowed more 
recently to 4.2% and 1% in fiscals 2012 and 2013, respectively. Fitch believes 
that tax base stabilization is imminent as housing begins to rebound. While 
Fitch notes that Florida school districts are less dependent on the tax base 
than other local entities, tax base losses do lessen revenues available for 
capital needs as well as critical discretionary millage revenues. Property tax 
collection rates remain slightly above the 96% budgeted rate, despite 
significant economic pressures. 

STRONG MASTER LEASE PROVISIONS

Lease payments are payable from any legally available source; however, on a 
budget basis, payments are made from the district's capital millage outlay which
can be levied up to 1.5 mills for lease payments for COPs issued before 2009. 
For bonds issued post 2009, state law limits the amount to be used for COPs 
repayment to 75% of the 1.5 mill levy or 1.125 mills.  In fiscal 2012, the 1.5 
mill levy provided ample revenues to meet MADS. While the lease payments are 
subject to appropriation, the 'all or none' payment requirement under the master
lease would result in the loss of all or parts of nearly 30% of the district's 
schools which are covered under the lease should the district fail to 
appropriate. The 'all or none' appropriation feature provides significant 
enhancement to the credit.
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