|[May 30, 2014]
Fitch Affirms Martin County School Board, Florida's COPs at 'A'; Outlook Negative
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the following ratings for Martin County
School Board, Florida (the district):
--$33.1 million certificates of participation (COPs) at 'A';
--Implied general obligation at 'A+'.
The Rating Outlook is Negative.
The COPs are payable from lease rental payments made by the district,
subject to annual appropriation, pursuant to a master lease purchase
agreement. The district is required to appropriate funds for all
outstanding leases under the master lease 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.
KEY RATING DRIVERS
NEGATIVE OUTLOOK MAINTAINED: The Negative Outlook reflects Fitch's
concern over the district's inability to regain structural balance,
despite the implementation of cost savings. Measures taken in fiscal
2014 are projected to restore unassigned fund balance to a minimally
satisfactory level while not materially improving the district's
FAVORABLE ARBITRATION DECISION: A favorable arbitration outcome enabled
the district to institute furlough days which generated a large share of
expenditure savings. Further labor concessions will be necessary to
realize additional savings in fiscal 2015.
LOW DEBT, AFFORDABLE CARRYING COSTS: 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.
LIMITED ECONOMY: The local economy is primarily residential and somewhat
limited. Wealth levels are above average, and unemployment approximates
state and national averages.
COPS APPROPRIATION RISK: The one notch rating distinction on the
district's COPs is based on the risk of non-appropriation inherent in
the lease structure. The appropriation risk is not tempered by the
master lease structure as only one school, a middle school, is subject
to the lease.
ADEQUATE FUND BALANCE: Failure to maintain unassigned reserves at the
minimum state required level through balanced operations will lead to a
The district is coterminous with Martin County (implied ULTGOs rated
'AA' by Fitch) is a 556 square mile area located on the eastern coast of
Florida approximately 45 miles north of Palm Beach. The county is home
to approximately 148,000 residents in 2011 and is primarily residential
with a somewhat limited economy concentrated in agriculture, healthcare
REPORTING INACCURACIES REVEAL WEAK POSITION
The district's credit was challenged by financial reporting inaccuracies
in fiscal 2012 which significantly overstated reserve levels and
underpinned Fitch's June 2013 downgrade of the COPs rating to 'A' from
'AA-'. The errors and reserve declines led to the departure of the
district's finance director and much lower than projected reserve levels
for fiscal 2013. New district management has implemented a corrective
action plan, which is projected to yield favorable year-end results for
Reserves were overstated in fiscal 2012 by $2.6 million (1.9% of general
fund spending). The error reflected improper transfer of local capital
projects fund monies to the general fund and the failure to accrue
termination pay for retirees during the fiscal year.
BUDGETARY SURPLUS; WEAKENED LIQUIDITY
Restatement of the district's fiscal 2012 results occurred late in
fiscal 2013 hampering the district's ability to adjust spending to
offset the lower reserve levels before year-end. The fiscal 2013 budget
included a planned operating deficit of approximately $4 million,
yielding an ending fund balance of an acceptable 5.6% of spending.
Instead, despite a $1.8 million budgetary surplus, the fiscal 2013
year-end unassigned fund balance declined to $3.2 million (a low 2.3% of
spending, as a result of the error). Fiscal 2013 reserves were below the
state's unassigned fund balance minimum of 3% of budgeted spending,
requiring state notification and the development of a corrective action
Liquidity has tightened but remains adequate. The district issued and
repaid $9.9 million in tax anticipation notes (TANs) in fiscal 2014,
representing a moderate 6.7% of fiscal 2014 general fund spending.
Management plans to issue TANs of the same amount in fiscal 2015.
EXPENSE CONTROL MUST DRIVE FISCAL RECOVERY
The district's new management team implemented a plan for restoration of
unassigned general fund balance to 3% of spending as part of the fiscal
2014 budget process. The solution must largely be driven by expenditure
control given the school districts' lack of revenue control. The plan
includes measures to trim spending, such as furlough days, program cuts,
and department reorganization. These efforts are projected to yield $2.5
million in savings (1.7% of spending) in fiscal 2014, due largely to the
implementation of furlough days, which ultimately required state
arbitration of a grievance filed by the district's teachers' union.
The district projects an operating deficit (after transfers) of
$131,000, or a low 0.1% of spending, for fiscal 2014 despite the
implemented savings. The district continues to rely on transfers from
the local capital improvement tax fund of approximately $6.4 million (a
moderate 4.3% of spending) to reimburse general fund for capital
expenditures in fiscal 2014.
District projections for fiscal 2014 unassigned fund balance reaching
the state minimum required 3% of budgeted spending results from
rearranging funding categories within its existing fund balance. Future
rating stability will reflect the district's demonstrated ability to
maintain this cushion through balanced operations.
LOW DEBT BURDEN; AFFORDABLE CARRYING COSTS
The district's overall debt levels are very low at $749 per capita and
0.5% of full market value. Amortization is average with 53% of
outstanding principle repaid within 10 years. Debt levels are expected
to remain stable as the district has limited long-term borrowing plans.
The district participates in the state-run Florida Retirement System
(FRS), which Fitch estimates to be adequately funded at 78.9% based on
the 7% investment rate of return used by Fitch. The district's actuarial
required contribution (ARC) was $6.3 million, or an affordable 3.3% of
governmental fund spending in fiscal 2013.
Other post-employment benefits (OPEB) are limited and currently funded
on a pay-as-you-go basis. The unfunded liability represents a manageable
0.8% of market value. Carrying costs including debt service, pension
ARC, and OPEB contribution were a low 7.4% of governmental fund spending
in fiscal 2013.
LIMITED ECONOMY; RECOVERING TAX BASE
The district is home to a large retiree population which contributes to
a healthy per capita income 30% to 35% higher than state and national
averages. The local economy is based mainly in health care, agriculture,
and tourism, stabilized by a large government presence, which
constitutes 50% of jobs among top employers. The largest private sector
employer in the county is Martin Memorial Health Systems, with 2,783
employees. The 6.5% unemployment rate in March 2014 was down from 7.4% a
year prior, approximating the state (6.4%) and nation (6.8%).
The housing market shows signs of recovery following recessionary tax
base declines. Property value losses through fiscal 2013 have been
consistent but moderate, declining 13% since fiscal 2009. Signs of
stabilization are evident, as the district's taxable assessed value
(TAV) grew by a modest 1.5% in fiscal 2014 following four years of
recessionary contraction. Management projects stronger growth of
approximately 6% in fiscal 2015, as per the state.
SOUND LEASE PROVISIONS
Lease payments are payable from any legally available source, although
on a budget basis payments are made from the district's capital outlay
millage. The capital millage can be levied up to 1.5 mills for lease
payments for COPs issued before 2009 and 1.125 mills for COPs issued
post 2009. The district uses a very low 0.159 mills of the levy to meet
MADS leaving considerable flexibility.
The lease payments are subject to appropriation and a failure to
appropriate would require the district to surrender use of the one
middle school (out of 27 district facilities) covered under the master
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
U.S. Local Government Tax-Supported Rating Criteria
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