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TMCNet:  Fitch Assigns Initial 'AA-' Rating to Escambia County School Board, FL COPs; Outlook Stable

[April 17, 2014]

Fitch Assigns Initial 'AA-' Rating to Escambia County School Board, FL COPs; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings assigns an 'AA-' rating to the following Escambia County School Board, Florida certificates of participation (COPs):

--$20.3 million refunding COPs, series 2014.

The COPs are expected to price through negotiation the week of May 5. Proceeds will be used to refund a portion of the series 2004 COPs for debt service savings.

In addition, Fitch assigns an initial 'AA' implied unlimited tax general obligation (ULTGO) rating to Escambia County School District, FL (the district).

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs ratings incorporates the slightly elevated risk of annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets, which are subject to surrender in the event of non-appropriation, temper this risk.

STRONG FINANCIAL RESERVES: The accumulation of sizable financial reserves has enabled transition through the national economic downturn. With continued conservative budgeting, moderate further use of reserves and balanced operations by fiscal 2016, a strong financial position is expected to be maintained over the longer term.

RELATIVELY STABLE TAXBASE: Unlike most of Florida, Escambia County's taxbase declines have been moderate. The presence of a large military installation as well as a sizable regional power plant fosters economic stability.

MODEST DEBT POSITION: The district's debt levels are low and all debt is rapidly retired. Borrowing needs are minimal and overall carrying costs are low.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit quality including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Escambia County is located in the extreme northwest corner of the state, bordering the state of Alabama and the Gulf of Mexico. The 2013 population of the county is 302,715 and the land area is 661 square miles. The district served 40,340 full-time equivalent students in fiscal 2013. The county seat is Pensacola.

SIZABLE FINANCIAL RESERVES

The district's strong financial position is highlighted by strong reserves and ample liquidity. The $40.3 million unrestricted general fund balance at the close of fiscal 2013 was a sizable 14.4% of expenditures and transfers out. Cash and investments in the general fund and across all governmental funds totaled $47 million and $156 million, respectively. The general fund quick ratio (cash divided by liabilities net of deferred revenue) is a strong 5.6 times. Fiscal 2013 non general fund liquidity includes $79 million held in the capital projects fund which accounts for the receipt of the district's local option sales tax. While those proceeds are dedicated to capital improvements, the reserves provide sizable cash flow liquidity. Furloughs and layoffs were not utilized during the economic downturn and the district gave raises in every year except one.

Similar to many Florida school districts, Escambia school district built up reserves in fiscal years 2010 ($12.4 million operating surplus) and 2011 ($16.8 million operating surplus) from receipt of federal stimulus funds to enable planned drawdowns in subsequent years. In fiscal years 2012 and 2013, the district relied on reserves of $11.4 million and $4.9 million, respectively. The district is expecting a more moderate $3 million to $3.5 million use of reserves in fiscal 2014 and another moderate use of reserves in fiscal 2015, but expects a return to balanced operations by fiscal 2016. The district's board policy is to maintain a general fund unreserved balance of at least 3.5% of general fund revenues, although the perecession reserves exceeded the policy. Given the district's projection for moderate use of reserves, Fitch expects the district will manage operations well above the stated policy largely through expenditure controls.

AMPLE CAPITAL MILLAGE FOR COPS DEBT SERVICE

While any legally available revenue can be used for COPs debt service, the district has historically made payments from the capital outlay real property tax. The capital outlay millage is authorized by state law up to 1.5 mills and the district levies the full millage. Up to three-fourths of the proceeds of the capital levy is available, but not pledged, for lease payments. Effective July 1, 2012, the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009. All of the district's outstanding lease agreements were originally entered into prior to this date. The district's capital outlay millage is expected to generate $21.8 million in fiscal 2014 while maximum annual debt service (MADS) on outstanding COPs is only $4.8 million. After payment of debt service, the millage provides a substantial source of funding for pay-go capital funding.

Under an event of non-appropriation the district is required to surrender the leased facilities. The trust estate for the series 2014 COPs includes an elementary school, which is a magnet school for the arts with a waiting list, and portions of four other schools. These facilities represent less than 3% of total facilities, but the district reports all the facilities in the trust estate are anchor schools. Overall, fiscal 2014 utilization of these facilities is very high.

LOW DEBT WITH RAPID RETIREMENT

District debt levels are extremely low and a high 98% of debt matures in 10 years. The debt burden is a low 0.6% and debt per capita is only $457. Of the district's $37 million of direct debt, $4 million is variable rate and swapped to fixed. The variable rate debt matures in 2018.

District capital needs are funded through both the excess capital outlay millage as well as a voter approved discretionary sales surtax. The sales tax is dedicated to capital spending and was approved for ten years, expiring Jan. 1, 2018. In fiscal 2013, the tax generated $20.9 million. The district is planning to go to the voters this fall to seek renewal of the sales tax for an additional 10 years. If renewed, the district is considering issuing sales tax bonds secured by the tax renewal.

MILITARY PRESENCE STABILIZES ECONOMY

The local economy is dependent upon the military, with the Naval Air Station Pensacola providing employment for 23,400 uniformed and civilian jobs. The base was not affected during the 2005 base realignment and closure (BRAC) and no cuts at the base are currently pending. Health care and tourism are two other major sector employers. Employment growth over the past year contributes to a decline in unemployment and the November 2013 rate is a low 5.9%. Federal Navy Credit Union is undergoing a 342,000 square foot expansion, representing a capital investment of $200 million and is expected to create 1,500 new jobs. The construction contract for phase I was awarded earlier this year.

County population was flat from 2000 to 2010 and has grown a modest 1.6% through 2013. Wealth levels trail the state and national medians, partially reflecting the large military presence. Poverty is slightly above the national rate.

TAXABLE PROPERTY VALUES

From peak to trough (fiscal 2009 to 2013), taxable assessed values (TAV) declined 8.8%, a modest amount relative to the rest of the state. The fiscal 2014 TAV shows a modest increase of just under 1%. Officials expect stable values for fiscal 2015. According to the Zillow Home Value Index, the growth in home values in Escambia County is continuing as housing prices for were up 5.5% in the past 12 months. Moreover, the total value of permit activity in 2013 is at the highest level in the past six years.

MODEST CARRYING COSTS

Carrying costs (debt service, pension and other post-employment benefits [OPEB]) are a modest 4.4% of government spending. The district has no borrowing plans. Student enrollment has been generally stable over the past five years, alleviating the need for capital construction needs. All district employees participate in the state operated retirement system, a relatively well funded plan. Pension and OPEB costs are affordable. The district self-insures for medical coverage and is in compliance with state guidelines for reserves in the internal service fund. Excess internal service funds can be used for catastrophic purposes.

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, Zillow.com, 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=827186

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 (News - Alert) 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.


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