News Column

Fitch Rates Flagler County School Board, FL's $43,76MM COPs 'A+'; Outlook Stable

June 5, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'A+' to the following certificates of participation (COPs) to be issued by the Flagler County School Board, Florida:

--$43,760,000 refunding COPs, series 2014A.

The COPs will be sold via negotiation during the week of June 23. Proceeds will be used to refund the outstanding COPs, series 2005A. The refunding will yield an estimated net present value savings of $2.1 million or 4.6% of refunded principal.

In addition, Fitch affirms the ratings on the following outstanding Flagler County School Board, Florida (the district) obligations:

--$49.4 million COPs, series 2005A, at 'A+';

--$10.4 million refunding COPs, series 2005B, at 'A+'.

--Implied unlimited tax general obligation rating (ULTGO) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease rental payments made by the district subject to annual appropriation. Lease rental payments are payable from any legally available funds of the district.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: Fitch's assessment of the district's financial position considers its modest fund balance position, satisfactory historical operating performance, and dependence on state sources for operations.

FAVORABLE DEBT POSITION: Outstanding debt obligations are very affordable, debt ratios are low and future capital needs are manageable and largely funded from pay-go sources including revenue from a voter-approved sales tax. No new debt is expected.

LIMITED ECONOMIC BASE: The regional economy is relatively limited in terms of industry and employment opportunities and unemployment remains high. Resident income metrics are below the state and nation. Importantly, enrollment has been on the decline which has had a direct negative impact on state funding levels.

RATING DIFFERENTIAL FOR COPS: A one-notch rating distinction between the COPs and the implied ULTGO reflects annual appropriation risk, the absence of a specific pledge of revenue, and the inability to increase taxes specifically to repay the obligation. The master lease structure tempers appropriation risk as a large share of existing educational facilities would be subject to forfeiture in case of non-appropriation.

RATING SENSITIVITIES

STRUCTURAL BALANCE: The rating is sensitive to the district's ability to reverse a recent trend of operating deficits given its already modest reserve position.

CREDIT PROFILE

The geographic boundaries of the district are coterminous with Flagler County, which is located on Florida's Atlantic coast approximately 70 miles south of Jacksonville and 30 miles north of Daytona Beach. The district operates 13 schools with a current enrollment of 12,512 students.

MODEST FUND BALANCE POSITION

The district's unrestricted general fund balance provides a moderate cushion against budgetary demands. The balance stands at $5.8 million or 6.1% of operating expenditures and transfers out at the close of fiscal 2013. The district has a formal fund balance target equal to 5% of revenue, whereas the state requires a minimum of 2%.

FISCAL 2014 DEFICIT ANTICIPATED FOLLOWING FAILED REFERENDUM

At a June 2013 referendum voters rejected a 0.50 mill operational levy to replace the 0.25 mill critical needs levy which expired at the end of fiscal 2013. If passed the tax would have generated slightly more than $3 million in annual revenue for the district. Without this revenue the district is forecasting an operating deficit of approximately $1.3 million this year, which would lower the unrestricted portion of the fund balance to the 5% policy level.

HEALTHIER REVENUE ENVIRONMENT BUT CONCERN ABOUT ENROLLMENT

Operations are predominantly funded through the state education funding formula with extremely limited revenue raising discretion. State allocations for K-12 education funding have improved moderately in recent years but tempered by specific designations of additional funding for wage increases.

The district is also beginning to benefit from additional local capital outlay and discretionary millage revenue due to tax base growth. The taxable assessed valuation (TAV) for fiscal 2014 improved a modest 0.9% but preliminary estimates for fiscal 2015 depict a 4.2% increase to almost $7.3 billion.

The district's enrollment trend is of some concern. The 2014 enrollment of 12,512 is down 3.7% from 2010, and the state forecasts enrollment falling to 11,728 by 2019. District officials are more optimistic citing growth in sales and impact fee collections as signs of an improved economy and home building activity.

The district is forecasting a return to stable operating results in fiscal 2015. Management has guided the district to satisfactory financial results relative to the budget over the last five fiscal years. Additionally, its maintenance of fund balance at the policy level would be deemed satisfactory for the current rating.

LOW DEBT AND MANAGABLE CAPITAL NEEDS

Overall debt is low at 1.8% of market value and $1,541 per capita. District debt is amortized at a healthy pace with approximately 65% of principal repaid in 10 years. The current five-year capital plan totals $60.7 million (excluding debt service) and is funded by local ad valorem taxes and impact fees and a 1/2-cent voter-approved sales tax to be collected through December 2022. Sales tax revenue totaled $4.4 million in fiscal 2013 and is budgeted at $4.6 million in the current year reflecting continued improvement in area economic activity. There are no plans to issue additional bonds.

Pension and other post-employment benefits do not represent a burden on the district budget. Consequently, carrying costs associated with retiree benefits and debt service is very low, consuming about 11% of governmental spending.

LOCAL OPTION MILLAGE EARMARKED FOR COP REPAYMENT

Florida school districts may levy up to 1.5 mills for new construction, maintenance, and site acquisition among other capital expenses. The local option millage is also the primary source of funding for lease rental payments on the district's COPs. Maximum annual debt service on the COPs is $6.3 million. This compares to estimated revenue of $10 million based on a 96% collection rate and certified fiscal 2014 TAV of $6.98 billion.

MASTER LEASE OFFERS STRONG INCENTIVE TO APPROPRIATE

Lease payments are made by the district under a master lease program that 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. Approximately 46% of the district's students attend classes in a facility leased under the master lease. Master lease projects include the Matanzas High School, Rymfire Elementary School, an administrative office and adult education center, and various school renovations and improvements.

LIMITED AREA ECONOMY

Flagler County participates in a relatively limited regional economy. The Deltona-Daytona Beach-Ormond Beach metropolitan statistical area (MSA) reports approximately 241,000 total non-farm jobs, with above average representation from the education and healthcare and leisure and hospitality sectors. Outside of the district the county's largest employers include Florida Hospital - Flagler, Publix, and Wal-Mart. Subscription fulfillment provider, Palm Coast Data, is another large employer. However, Palm Coast Data has recently reported some financial and operational difficulties that bear watching going forward. The county rate of unemployment remains high at 9.3% in March despite a very favorable rate of job growth over the last 12 months. Various income metrics lag the state and national averages.

Additional information is available at 'www.fitchratings.com'.

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, and IHS Global Insight.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833227

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Michael Rinaldi

Senior Director

+1-212-908-0833

Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004

or

Secondary Analyst

Kevin Dolan

Director

+1-212-908-0538

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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