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Fitch Affirms Marion County School Board, FL's COPs at 'A'; Outlook StableFitch has affirmed the following Marion County School Board (the district), FL ratings: --$93.7 million refunding COPs at 'A'. In addition, Fitch has affirmed the district's Issuer-Default Rating (IDR) at 'A+'. The Rating Outlook is Stable. SECURITY The district's COPs are payable by lease payments made to the trustee and pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, subject to annual appropriation by the Marion County School Board. KEY RATING DRIVERS The 'A+' IDR reflects the district's solid revenue growth prospects, low long-term liability burden, and adequate gap-closing capacity to maintain financial flexibility. The 'A' rating on the COPs is one notch below the IDR, reflecting the slightly higher degree of optionality associated with lease payments subject to appropriation. Economic Resource Base The district, which is coterminous with Marion County, covers 1,663 squares miles and is located 65 miles north of Orlando in the center of the state. The population grew rapidly during the early 2000s, but has since leveled off to its current estimated population of 343,000. Healthcare, manufacturing, and retail are major county economic sectors. Traditional enrollment in fiscal year 2016 is approximately 41,000 with an additional 500 students in charter school. The district expects enrollment to remain steady in the near future for both traditional and charter schools. Revenue Framework: 'a' factor assessment District general fund operations are funded through a combination of state aid and local property taxes. Fitch anticipates a continuation of the district's revenue performance that is above inflation and slightly below GDP due to traditional school enrollment growth, increasing taxable assessed values, and the state of Florida's growth prospects for improved state school funding. The district has very limited independent ability to raise revenues. Expenditure Framework: 'aa' factor assessment Spending growth expectations trend at a pace marginally above revenue growth. The district benefits from low carrying costs associated with debt service and retiree costs. Management also maintains reasonable control over staffing, wages, and benefits. Long-Term Liability Burden: 'aaa' factor assessment Limited capital plans, participation in a well-funded pension plan and rapid debt amortization support long-term liabilities that are low compared to personal income. Operating Performance: 'a' factor assessment Fitch expects the district, supported by expenditure flexibility, would maintain a satisfactory safety margin in a moderate economic decline scenario. Management recently rebuilt reserve levels above targeted levels after falling below in the past. Future projections by the district estimate meeting targeted fund balance levels in both fiscal years 2016 and 2017. RATING SENSITIVITIES Sustained Positive Operations: There is potential upward rating momentum should the district successfully maintain positive operations and an elevated safety margin. CREDIT PROFILE The district is supported by a diverse economy that has strongholds in healthcare, retail, and manufacturing. Private sector manufacturing plants are currently being built in the district, providing job growth in the near future. The fast growing population contributed to steep increases in the taxable assessed value (TAV) throughout the district but was susceptible to high volatility during the Great Recession. The district experienced five years of TAV decline between 2008 and 2013 but has been on a healthy, upward trajectory since 2014. The district's unemployment numbers, while currently declining, are higher than the state's average. Income levels trend lower than the state levels. Revenue Framework The Florida Education Finance Program (FEFP) is the primary mechanism for funding the operating costs of Florida school districts. The FEFP process determines a base per-student funding level. The funding is split between the state funds, largely derived from statewide sales tax revenue, and local funds via the required local millage rate established pursuant to state statutory procedure. Discretionary taxes for operations and capital/maintenance are also levied by the district, and currently lie at the statutory maximum of 0.748 mills and 1.5 mills, respectively. State aid comprised roughly 57% of revenues and property taxes were another 38% of revenues. A 1-mill voted referendum is set to expire on June 30, 2019. This millage currently generates approximately 5% of revenue. Fitch's view of school district revenue prospects considers the revenue performance of the state as a starting point given its fundamental responsibility for public education funding. Fitch believes Florida's revenue prospects will grow at a pace that is above the rate of inflation but below U.S. economic performance based on a resumption of population growth and stronger economic expansion. School district revenue expectations are somewhat tempered by the state's education funding commitments which have been variable in recent history with annual changes in the base student allocation as low as a 1% increase for fiscal 2017. Enrollment trends and expectations are the second key determinant of a school district's revenue growth prospects and are based on Fitch's view of the local economy, demographic patterns, and competition from non-traditional public schools, among other factors. Fitch anticipates the district will follow similar growth prospects as the state of Florida, especially considering the district has also performed above inflation but below GDP. Traditional school enrollment numbers reflected modest increases over the past several years and the district projects this trend will likely continue. Charter school enrollment represents a minimum, approximately 1%, amount of enrollment. Due to the state funding mechanism, Florida school districts essentially have very limited ability to independently increase general fund revenues. However, this limitation as a factor in the revenue framework assessment is somewhat offset by the recognition of K-12 education as fundamentally a state responsibility and the strong foundation of state support for education funding. Expenditure Framework Salaries and benefits are the largest expenditure items for the distrct. These two items combined accounted for approximately 78% of general fund spending in fiscal 2015. Fitch expects the pace of spending to generally match or slightly exceed revenue trends for the near future, reflecting enrollment driven spending needs largely funded by the state funding formula. Wages and benefits are collectively bargained and the district has relatively good control over employee related expenditures. The district is currently ratifying a contract for fiscal 2017 with the teachers union and is in bargaining talks with the trades and services union. In the event of an economic downturn, the district has the capacity to reduce spending by not filling vacant positions and reducing discretionary spending on materials and supplies. Carrying costs related to debt service, pensions, and OPEB were low at 8% of total government spending in fiscal year 2015. Long-Term Liability Burden The district's long-term liability burden, related to debt and the district's share of the net pension liability of the Florida Retirement System, is low at 1.8% of personal income in 2015. The district's debt amortizes rapidly at 91% in 10 years. The current fiscal 2017-2021 $44 million capital improvement plan funds school infrastructure repairs by pay-go. The district expects no additional debt issuance. Pensions are provided through the state run FRS and costs are manageable. FRS is well-funded at a reported 86.5% as of July 1, 2015 or an estimated 80.7% when adjusted by Fitch to assume a 7% rate of return, and as such costs are not expected to increase materially. Operating Performance The three-year scenario revenue estimate generated by Fitch's analytical sensitivity tool (FAST (News - Alert)) indicates that revenues would decline modestly in the 1% GDP decline. Fitch expects the district to address a revenue downturn as it has in the past, by taking adequate measures to reduce spending and limit the use of reserves to maintain an adequate level of financial flexibility. Available balances outside of the general fund, specifically capital funds, augment flexibility. District reserves have recovered to the 5% to 7% fund balance target after dropping during fiscal years 2012 and 2013. Decreased revenues had prompted the fund balance drawdown, although reserves remained above the state's requirements. Current projections indicate a reserve build up in fiscal 2016, although the $350.2 million fiscal 2017 budget incorporates a fund balance appropriation. The district anticipates meeting its fund balance target for both years. The district has historically paid COPs debt service with revenue from its capital outlay millage, although all legally available revenues are available for this purpose. Current legislation allows Florida school districts to levy 1.5 mils for capital outlay. Three-fourths (1.125 mills) of the 1.5 mills levy is available for COPs debt service associated with new issuance after 2009. The district currently levies 1.5 mills and expects to use .851 mills of the capital outlay millage for COPs MADS. This amount is 57% the state cap. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools. 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