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TMCNet:  Fitch Affirms Bay County School Board, FL's COPs at 'A+'; Outlook Stable

[May 21, 2014]

Fitch Affirms Bay County School Board, FL's COPs at 'A+'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the following ratings on outstanding Bay County School Board, Florida (the district) bonds:

--Implied unlimited tax general obligation (ULTGOs) at 'AA-';

--$88.1 million certificates of participation (COPs) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease payments made by the Bay County School Board, subject to annual appropriation, to the issuer under a master lease purchase agreement. In the event of non-appropriation the trustee may force the school board to surrender possession of all leased facilities under the master lease to the trustee, for disposition by sale or re-letting of its interest in such facilities.

KEY RATING DRIVERS

IMPLIED GO RATING: The 'AA-' implied ULTGO rating reflects the district's sound financial position. Careful management and conservative budgeting have augmented solid reserves and ample liquidity.

IMPROVING ECONOMIC PROFILE: The local economy has shown solid improvement with employment indicators trending favorably to both the state and nation, though resident wealth remains slightly below average. The tax base has shown signs of stabilizing following several years of recessionary contraction.

LOW DEBT LEVELS: Debt levels are low and likely to remain so given the district's rapid amortization schedule and manageable capital needs. Retiree benefit costs do not pressure district finances, and overall carrying costs constitute a relatively small share of governmental fund spending.

COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs rating incorporates the risk associated with annual appropriation. The all-or-none appropriation feature of the master lease and the essential nature of leased assets (eight major facilities), which are subject to surrender in the event of non-appropriation, somewhat temper this risk.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and sound reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is located on Florida's panhandle and is home to Panama City and Panama City Beach, as well as Tyndal Air Force Base and Naval Support Activity Panama City (NSA PC). The district had a population of 171,903 in 2013, which has grown moderately in the last 10 years.

PRUDENT FINANCIAL MANAGEMENT

Financial management is strong as evidenced by historically prudent management of reserves, ample liquidity, and favorable budget to actual variances. Cost-saving measures, including the negotiation of labor concessions and the elimination of positions upon retirement, have yielded significant savings in recent years. As a result, the district posted a use of $5.4 million of fund balance in fiscal 2012, despite a budgeted draw of approximately $9 million related to the Education Jobs Bill.

Fiscal 2013 closed with an operating surplus of $3.3 million after transfers, or a modest 1.8% of spending. Favorable results were supported by conservative revenue forecasting and careful expenditure controls, reversing a budgeted $17.9 million deficit after transfers. Fitch views positively the consistency with which the district has outperformed projections, having expended on average only 93% of budget over the last five fiscal years. The district has realized these savings while remaining compliant with constitutionally mandated class size restrictions.

The district maintains ample reserve levels. Fiscal 2013 unrestricted general fund balance was $27 million, or a sound 15.3% of spending, of which $25 million (14.3% of spending) is unassigned; well-above the district's unassigned fund balance policy minimum.

2014 BUDGET MAINTAINS BALANCED OPERATIONS

Management anticipates fiscal 2014 general fund reserves will remain consistent with prior years despite a modest use of fund balance for non-recurring employee raises. Fiscal 2014 state funding is budgeted to increase by $13.8 million (17%) over fiscal 2013 actual results. Property tax revenue is budgeted to decrease (approximately 3.4% or $2.9 million) compared to the prior year, due to modest taxable assessed value (TAV) declines and a decrease of .174 mills in the required local effort millage.

Enrollment growth, the basis for the state funding formula, will be favorably affected in fiscal 2014 due to the relocation of military families to facilities within the district.

LOW COPS DEBT SERVICE MILLAGE

p> The district has historically paid COPs debt service with revenue from its capital outlay millage, although all legally available revenues are free for this purpose. The capital outlay millage is authorized by state law up to 1.5 mills. Up to three-fourths of the proceeds of the capital levy is available 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 but one of the district's lease agreements, series 2010A, were entered prior to this date. The series 2010A COPs were issued to refund outstanding COPs from 1999, and therefore may also be waived from the three-fourths limitation.

In fiscal 2014 the district levied 0.524 mills for COPs debt service, less than half of the allowed levy, leaving ample cushion beneath the state cap. The district's total capital outlay millage increased modestly in fiscal 2014, to 1.0 mills, all of which is used for designated capital purposes and debt service. Fitch views positively the district's conservative levy as preserving revenue flexibility below the 1.5 mill cap.

The master lease structure on the district's COPs is strong, requiring an all-or-none appropriation. In the case of non-appropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease, which would amount to approximately eight schools and education centers, or 22% of the district's total facilities. Fitch views as a credit positive the significant proportion of district facilities under the master lease agreement providing a strong incentive to appropriate.

RECOVERING ECONOMY AND TAX BASE

The local economy is comparatively limited with concentrations in tourism and military operations. The presence of Tyndal Air Force Base and NSA PC support major shipbuilding and marine manufacturing firms in the area, providing a degree of long-term stability to the local economy. Large private employers within the district include healthcare, tourism, and military support interests, which have remained stable in recent years.

Per capita income levels are slightly lower than the state and U.S. averages, consistent with historical trends. The county's unemployment rate as of March 2014 has declined to a low 5.8% relative to the state (6.4%) and nation (6.8%). Employment has shown stable growth throughout the recession, posting consistent gains in each of the last four years following a drop of 3.5% in 2009.

The district reports that tourism figures have shown continued growth. Improved economic activity is evidenced by growth in the district's one-half-cent sales tax (approved by voters in 2010 for a period of 10 years), up a strong 5.5% in fiscal 2013 to $16.5 million (9.2% of revenue). Fitch views positively the district's ability to secure voter approval of the one-half cent sales tax during a period of economic hardship as indicating strong community support for the district's management.

The housing market correction has challenged the district in terms of tax base declines. TAV has stabilized in recent years with modest growth of 1.3% in fiscal 2013 following three years of recessionary contraction. TAV remained essentially flat in fiscal 2014, with further growth of 4.6% projected for fiscal 2015, per the state. Management anticipates actual performance to be slightly higher, given recent trends. Fitch considers the district's expectations to be reasonable, as the district has historically out-performed state TAV projections.

LOW DEBT, AFFORDABLE CARRYING COSTS

Overall debt levels are low at 1.3% of TAV and $1,644 per capita. Annual debt service was $15.9 million in fiscal 2013, or an affordable 6.9% of governmental fund spending. Direct debt amortization is rapid, with 70% paid within 10 years. School facility needs are minimal and capacity is satisfactory. Debt service is expected to remain stable as the district has no plans to issue additional debt in the next two years.

The district's future capital improvement needs are modest and the likelihood of future borrowing is limited. The district closed five school facilities at the outset of the recession, repurposing two others for modified use. Fitch views favorably the district's proactive response to enrollment pressures, as these actions preserve capacity for expected future growth.

Pension obligations are limited to the district's participation in the Florida Retirement System (FRS), a cost sharing multiple-employer plan. For fiscal 2013 the district's annual contribution was $6 million, equal to a modest 2.6% of governmental fund spending. Fitch estimates that FRS is adequately funded at 78.9%, based on the 7% investment rate of return used by Fitch.

The district offers an implicit subsidy for other post-employment benefits (OPEB) as required by state law. The district continues to fund the liability on a pay-as-you-go basis with a fiscal 2013 contribution of $589,000, or a very low 0.3% of governmental fund spending. The annual required contribution (ARC) had been overfunded in prior years and the unfunded actuarial accrued liability (UAAL) is a modest $5 million.

Total carrying costs, including debt service, pension ARC and OPEB contributions, equaled a low 9.7% of governmental fund spending in fiscal 2013. Fitch expects carrying costs to remain affordable, given limited debt plans and the adequate FRS funding level.

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.

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=831203

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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