News Column

Fitch Affirms Palm Beach County School Board, FL COPS at 'AA-'; Outlook Stable

July 25, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'AA-' to certificates of participation (COPs) to be issued by Palm Beach County School Board (the district):

--$33.3 million COPs, series 2014C.

The COPs will be privately placed with a closing on July 29. The fixed-rate COPs will be used to refund a portion of the series 2007A COPs.

In addition, Fitch affirms the following ratings:

--$1.7 billion COPs at 'AA-';

--Implied general obligation (GO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease payments subject to annual appropriation by the Palm Beach County School Board under a master lease-purchase agreement. Upon certain events of default or the school board's failure to appropriate funds, leases for all 91 facilities under the master lease will terminate and the district is required to immediately surrender possession of all facilities subject to the master lease.

KEY RATING DRIVERS

SOUND MANAGEMENT: The key credit strength supporting the 'AA' implied GO rating is the district's long track record of strong financial management including conservative budgeting and maintenance of adequate reserves.

AFFORDABLE DEBT LEVELS: Fitch considers key debt ratios to be low. Capital demands are manageable with no additional borrowing needs anticipated.

FAVORABLE ECONOMIC PROFILE: Long-term economic prospects remain favorable given the county's desirable quality of life, above-average wealth indicators, strong population growth projections, and a diversifying economy fueled by recent investments in the biotechnology sector.

STRONG APPROPRIATION INCENTIVE: The district has a strong incentive to appropriate lease payments given the large share of educational facilities captured under the master lease program and its reliance on certificate indebtedness to finance capital needs.

RATING SENSITIVITIES

Fitch's key assumption supporting the Stable Outlook is the expectation for adherence to a balanced budget in fiscal 2015 with no further draw on reserves. Results inconsistent with this expectation could apply negative pressure on the rating.

CREDIT PROFILE

This district is located in south Florida on the Atlantic coast and serves the entire county, which had a 2013 population of 1.4 million. The district is the fifth largest in the state and the 11th largest in the nation.

ACCUMULATED RESERVES ENABLED FLEXIBILITY

The district's financial performance over the last few years has benefited significantly from one-time revenues received in fiscal 2011 which built balances to a strong 12.3% of spending. The district has executed planned draws on these higher reserves through fiscal 2014 to weather the economic downturn. Fitch expects the district to maintain its financial cushion longer term at roughly the same level estimated for fiscal 2014, which is in excess of 6% of spending.

The fiscal 2013 budget was balanced with a $115 million draw on reserves but audited results show a smaller $35 million decline equal to a moderate 2.4% of spending. Conservative budgeting and cost controls resulted in a smaller use of fund balance than anticipated. Unrestricted general fund balance of $94.1 million was an adequate 6.7% of spending, including the 3% contingency reserve required by board policy.

Fitch believes the district will be slightly more challenged in the current fiscal year (2014) to significantly outperform its budget as the district has begun budgeting for receipt of delinquent property taxes. However, the budgeted use of $19 million, which represents 1.3% of fiscal 2013 spending, should leave still adequate balances.

STABILIZATION EXPECTED

Fitch expects the district's fiscal 2015 performance to reflect stable reserve levels. Failure to achieve budget balance and stabilize the erosion of financial reserves would weaken credit quality. In November of 2014, the district will be seeking voter approval to renew the .25 mills designated for the fine arts and choice programs; the four-year millage expires after the levy for fiscal 2015. In fiscal 2014, the levy is expected to raise $33 million (2.3% of revenue). The district states loss of these revenues would result in elimination of the music, arts and magnet programs funded with the dedicated millage rather than erosion of financial position.

The district's overall level of financial flexibility should benefit over time with increasing capacity under the capital outlay millage capped at 1.5 by state law. Estimated maximum annual lease payments district requires roughly 73% of the fiscal 2014 levy with the remainder of the levy funding maintenance needs. Limited construction and debt needs, and prospects for tax-base growth should result in declining utilization of capital millage for debt service, freeing up additional funds for maintenance related operations.

The tax base increased a sizable 4.5% for fiscal 2014 and a robust 8.3% in fiscal 2015. While a final budget is not yet adopted, the current proposal does not include salary increases for employees nor does it include any use of reserves for structural balance.

Competition from charter school expansion as well as expenditure needs from federal mandates contribute to the need for enhanced accountability and responsiveness. The district is looking ahead to operational reforms for fiscal 2016 to achieve these aims.

LOW DEBT; ABOVE-AVERAGE VARIABLE-RATE EXPOSURE

District debt ratios are expected to remain low given the absence of new issue borrowing plans. Overall debt is just 1.6% of market value and under $2,000 per capita. The district's fiscal years 2014 to 2018 capital improvement plan identifies $82 million in construction projects, $78 million for non-construction capital needs, and $431 million for transfers to the general fund for maintenance improvements. The district believes existing school capacity will serve the needs of the district for at least the next 10 years.

Long-term liabilities related to pension and other post-employment benefits (OPEB) are manageable. The district participates in the Florida Retirement System, a relatively well-funded statewide defined benefit pension plan.

Total county carrying costs (debt service, pensions and OPEB) are a low 10.8% of total government expenditures. The OPEB unfunded accrued liability is $130.2 million, a modest .1% of fiscal 2013 market value. The OPEB liability essentially calculates the implicit subsidy of offering retirees the ability to purchase health insurance at the group rate. The district does not otherwise fund retiree health insurance.

The district has $352 million in variable-rate debt outstanding equaling 21% of total direct debt, structured as floating-rate notes absent a put feature, eliminating the need for liquidity support. Interest rate risk is hedged via three derivative contracts with a notional amount of $356 million and a negative mark-to-market of -$76 million as of July 14, 2014. The elevated variable-rate exposure is mitigated by the district's active financial and debt management practices and swap terms that do not require collateral posting in any event.

SOUND ECONOMIC GROWTH PROSPECTS

The Palm Beach County economy continues to recover with favorable employment gains in each of the past three years. The April 2014 unemployment rate of 5.6% is below the national rate of 5.9%. High resident wealth levels help fuel recovery in service and retail sectors and per capita wealth gains have outpaced growth statewide. The county poverty rate of 13.3% trails the national rate of 14.4%. The county's educational attainment levels exceed the national and state averages, fostering the growth of more highly skilled, higher wage jobs.

Global Insights (GI) projects strong gains in population and healthy consumer spending in South Florida, ahead of the national average for the next five years, with employment growth driven by professional and business services. The county's list of top employers is dominated by health care networks such as Tenet Healthcare, Hospital Corporation of America, Bethesda Memorial Hospital and Boca Raton Community Hospital. Research within the healthcare sector is a growing presence, anchored by the Scripps Research Institute (biomedical studies) and the Max Planck Florida Institute for Neuroscience. The county's educational attainment profile surpasses the state and nation, with a notable 12% of residents holding advanced degrees.

LIMITED APPROPRIATION RISK

Fitch believes the district has a strong incentive to appropriate for lease payments. An event of non-appropriation would terminate all current leases under the master lease and allow the trustee to repossess a total of 91 school buildings acquired pursuant to the master lease, representing approximately 46% of the educational facilities space available to the district. An event of non-appropriation could also impair the district's ability to issue additional COPs, the primary mechanism for funding long-term capital needs, with nearly $1.7 billion in principal amount outstanding.

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, IHS Global Insight, National Association of Realtors.

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=841656

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

Patricia McGuigan

Director

+1-212-908-0675

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Michael Rinaldi

Senior Director

+1-212-908-0833

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations:

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

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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