News Column

Fitch Affirms Florida College System's Capital Improvement Revs at 'AA-'; Outlook Stable

February 11, 2014

Fitch Ratings has affirmed the 'AA-' rating on approximately $102.7 millionState of Florida Department of Education (DOE) college system capital improvement revenue bonds.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by and payable from a first lien of certain Capital Improvement Fees (CIF) collected by the eight Participating Florida College Institutions (PFCI). CIFs are assessed to all students per credit hour at PFCIs for college credit instruction or non-college-credit college preparatory courses. Currently eight of the 28 Florida College System (FCS or the system) colleges are classified as PFCIs and participate in the capital improvement revenue bond program. The lack of a debt service reserve is not concerning given the depth and breadth of pledged revenue sources.

KEY RATING DRIVERS

PLEDGED REVENUES SUPPORT SOLID COVERAGE: The 'AA-' rating continues to be primarily supported by consistent growth in CIF revenues and sound coverage of related debt service. Fitch believes further comfort is provided by the passage of recent legislation that enhanced CIF rate-setting flexibility to 20 percent of hourly tuition, from 10 percent previously.

KEY FACILITATOR OF HIGHER EDUCATION: The college system is made up of 28 community colleges and maintains an integral role within Florida's public higher education system, while benefiting from strong oversight and support from the state of Florida (GO bonds rated 'AAA' with a Stable Outlook by Fitch).

IMPROVING ECONOMY DRIVES ENROLLMENT SHIFT: Similar to many community colleges nationwide, improving economic conditions has driven modest declines in per credit hour enrollment at the PFCIs and the system at large, though Fitch notes positively that enrollment at both remains well above historical levels. Additionally, in the aggregate, the pricing differential between the education system and the state university system has widened considerably in recent years (to the benefit of the former), which Fitch believes is likely to support enrollment stability going forward.

CREDIT STRENGTH OF PFCIs: For fiscal year-end 2012 and 2013, all member institutions, as required per state statute, maintained at least break-even operating results (excluding depreciation) and a fund balance of at least 5 percent. The system has historically received considerable support from the state toward meeting capital needs, which has contributed to, on an aggregated basis, a low debt burden and a solid level of financial resources relative to long- term debt. In Fitch's view, the receipt of state capital support serves as an offset to a track-record of negative GAAP-based margins, which are primarily driven by an annual depreciation expense that is not budgeted by the PFCIs.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: Although unanticipated, any substantial weakening of PFCI pledged debt service coverage could cause negative rating pressure.

CREDIT STRENGTH OF PFCIs: A material weakening in the aggregate financial or operational profile of PFCIs could adversely impact the credit rating on CIF-supported debt.

CREDIT PROFILE

The FCS includes 28 community colleges spread across the state with the intent to provide a post high-school education within commuting distance for more than 90 percent of the state's population. Since 2002, certain FCS colleges have received approval from the state department of education to offer four-year baccalaureate degrees. Approval for baccalaureate degrees is tied closely to an FCS management assessment of local market demand for certain degrees. In 2010, the state legislature renamed the Florida Community Colleges as the Florida College System in recognition of their expanded offerings.

For fiscal 2013, total CIF revenues collected from the PFCIs was approximately $31 million, which provided solid 3.4 times (x) coverage of pro forma maximum annual debt service (MADS) and compared favorably to coverage levels in fiscal years 2012 and 2011 of 3.1x and 2.8x, respectively. Coverage for fiscal 2014 is estimated to be 4.0x based on academic year 2013-2014 CIF rates and the three-year average full-time equivalent (FTE; fiscals 2011- 2013). Following record enrollment gains, FTE enrollment trended downward in fiscal 2013, to 119,819 at the PFCIs (5.4 percent year- over-year decline) and 330,193 at the system (5.5 percent year-over- year decline). Importantly, current enrollment levels remain well- above historical figures (the lowest FTE figures over the past decade were 88,145 in fiscal 2007 and 244,199 in fiscal 2006 for the PFCIs and the system, respectively). Furthermore, Fitch expects the system to benefit from a favorable pricing position relative to the state's public university system, the latter of which had to institute significant tuition rate escalations (on a percent basis) to counter a challenged state funding landscape. In fiscal 2014, the average tuition/fee based on 30 semester credit hour was $3,124 for the state college system relative to $6,336 for the state university system.

Fitch notes that growth in debt service coverage materialized despite enrollment declines due to CIF rate adjustments. CIF rates benefitted from a recent statutory change that revised the cap on CIF rates not to exceed 20 percent of tuition for resident students or 20 percent of the sum of tuition and out-of-state fees for non- resident student (both were previously capped at 10 percent). Based on fiscal 2014 data, the average CIF rate as a percentage of tuition for resident students, who have historically constituted around 95 percent of total FTE enrollment at each PFCI, was 11.9 percent for resident students, underscoring the system's flexibility to enhance debt service coverage. At present, there are no plans to issue additional debt secured by CIF monies. Importantly, the governor recently created a new, more stringent process for community colleges in Florida seeking to become a PFCI, which provides added comfort to Fitch.

While no additional funds from the PFCIs is pledged to the CIF bonds, Fitch analyzes the general financial and operating health of member institutions as these factors have direct implications on student demand, which ultimately fuels the generation of revenues used to pay debt service on the bonds. On a combined basis, the system continued to benefit from several credit strengths, including a strong market position as the state's primary provider of technical, certificate, and associate degree programs, relative stability in senior leadership, a low debt burden (0.9 percent of fiscal 2012 unrestricted operating revenues) and a solid level of financial resources relative to long-term debt (191.6 percent in fiscal 2012). These factors are somewhat counterbalanced by a track- record of generally negative GAAP-based operating margins (-4.7 percent in fiscal 2012). Based on Fitch's review of preliminary unaudited information, these metrics remained relatively steady in fiscal year-end 2013.

Fitch notes that its calculation of annual financial performance includes the classification of depreciation as an operating expense, which is not budgeted by the PFCIs due, in part, to state support for capital projects. The economic downturn led to a significant decline in state capital support and it remains to be determined whether historical funding levels will be restored, although Fitch notes positively that the recent increase in the cap on raising CIF will help to generate additional dollars for capital funding. Fitch will monitor this aspect of the credit in future reviews.

Additional information is available at fitchratings.com.

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013);

--Fitch Rates Florida College System Capital Improvement Revs 'AA- '; Outlook Stable (Feb. 12, 2012);

--'Fitch Affirms Florida GO Bonds at 'AAA'; Outlook Revised to Stable (Aug. 23, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=819858

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