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TEXT - Fitch revises Florida's Marion CSD rating outlook
January 28, 2013 / 5:21 PM / 5 years ago

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.


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.


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.


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.


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. 


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.  


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.   


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 


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.  


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.  


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.  


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.  


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.  


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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