|[March 11, 2014]
Fitch Affirms Palm Beach County School Board, FL COPs at 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the following ratings on Palm Beach County School
Board, Florida (the district):
--$1.8 billion certificates of participation (COPs) at 'AA-';
--Implied general obligation (GO) at 'AA'.
The Rating Outlook is Stable.
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
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.
AFFORDABLE DEBT LEVELS: Key debt ratios are considered low by Fitch.
Capital demands are manageable with no additional borrowing needs
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
Fitch's key assumption supporting the Stable Rating Outlook is the
expectation for a balanced budget in fiscal 2015 with no further draw on
reserves. Results inconsistent with this expectation could apply
negative pressure on the rating.
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
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; 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 modest
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.
Fitch expects the district's fiscal 2015 to reflect stable reserve
levels. The governor's budget includes a small increase in state aid for
the district and the district is considering moving to a full choice
school model which would open up expenditure flexibility under the
state's class size restrictions. 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 nd magnet programs funded with the dedicated millage.
The district's overall level of financial flexibility should benefit
over time with increasing capacity under the under the capital outlay
millage capped at 1.5 by state law. The district currently utilizes
roughly 70% of the levy to fund debt service on the COPs with the
remainder funding other maintenance needs. Limited construction needs,
absence of plans for additional COP issuance, and prospects for tax base
growth should result in declining utilization of capital millage for
debt service, freeing up additional funds for operations.
The taxbase increased a sizable 4.5% for fiscal 2014 and the state
projects 6.1% growth for fiscal 2015, with local estimates as high as
8%. For fiscal 2015 budget preparation, the district is using 6.1%.
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
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.
Moreover, 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 employee health
The district's $519 million in variable rate debt outstanding equals 28%
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 four derivative contracts with a notional amount of $514
million and a negative mark to market of -$92 million. 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 November 2013
unemployment rate of 6.4% is below the national rate of 6.6%. 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 $1.8 billion in principal amount outstanding
at the close of fiscal 2013.
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 (News - Alert) 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
U.S. Local Government Tax-Supported Rating Criteria
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