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Fitch Rates Hernando County School Board, FL's Refunding COPs 'A+'; Outlook Stable
[May 27, 2016]

Fitch Rates Hernando County School Board, FL's Refunding COPs 'A+'; Outlook Stable


Fitch assigns an 'A+' rating to the following Hernando County School Board, FL's (the board) certificates of participation (COPs):

--$85,580,000 refunding COPs, series 2016A.

The COPs are scheduled to price via negotiation during the week of June 6. Proceeds will be used to refund the board's outstanding series 2005 COPs for savings.

In addition Fitch affirms the Hernando County Florida School District's Long-Term Issuer Default Rating (IDR) at 'AA-' and the board's outstanding series 2005 COPs at 'A+'.

The Rating Outlook is Stable.

SECURITY

The COPs are payable from lease payments made by the district to the trustee pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, subject to annual appropriation. The district is required to appropriate funds for all outstanding leases on an all or none basis. In the event of non-appropriation, all leases will terminate, and the district would, at the trustee's option, have to surrender all lease-purchased projects for the benefit of owners of the COPs which financed or refinanced such projects.

The COPs are rated one notch below the district's IDR, reflecting the slightly higher degree of optionality associated with payment of appropriation debt.

KEY RATING DRIVERS

The 'AA-' IDR reflects the district's low long-term liability burden and manageable expenditure framework, offset by reduced financial flexibility following four consecutive years of operating deficits that have significantly eroded a historically sound reserve cushion. The rating incorporates Fitch's expectation that planned operational changes and recent growth in state financial aid will result in restoration of unrestricted reserves closer to the district's 5% policy level over the next two fiscal years.

Economic Resource Base

Hernando County School District is coterminous with Hernando County and is a mainly residential area. The county has an estimated 2014 population of 174,441 and is located on the central-west coast of Florida, north of Tampa Bay.

Revenue Framework: 'a' factor assessment

Revenue growth is predicated solely on the level of state education funding provided by the state legislature and district enrollment trends. Fitch expects a moderate level of revenue growth based on expectations for state funding and the level of projected enrollment growth. The district lacks independent revenue raising authority.

Expenditure Framework: 'aa' factor assessment

Expenditures have outpaced revenues in recent years, evidence of the structural imbalance that was in place, although Fitch expects the natural pace of spending growth to be more in line with expected revenue growth going forward. The district has a solid ability to reduce its spending as necessary. Labor agreements provide for some flexibility and carrying costs are moderate.

Long-Term Liability Burden: 'aaa' factor assessment

Debt and pension liabilities are low and compare very favorably to personal income.

Operating Performance: 'a' factor assessment

The district has experienced net operating deficits in each of the past four fiscal years, resulting in a notable decline in reserves that is particularly troubling during a period of economic recovery. Management has made changes in operations to effectively reduce costs and combined with an increase in state educational aid this should help in its efforts to restore structural balance to policy levels.

RATING SENSITIVITIES

BOLSTERING RESERVES: The district's declining reserve position through fiscal 2015 has resulted in only a minimal financial cushion. Failure to add to financial cushion in fiscal 2016 and restore unrestricted reserves to the district's 5% policy level over the next two fiscal years would trigger negative rating action.

CREDIT PROFILE

Located north of Tampa on the central-west coast of Florida, the county is mainly residential. The district, which is coterminous with the county, experienced rapid enrollment growth in the first half of the decade as the county's population increased over 5% annually before tapering off in the past few years.

The county serves as a bedroom community due to its proximity and direct access via the Suncoast Parkway to the City of Tampa. The area economy remains fairly narrow with concentrations in agriculture, citrus products, cattle production, limestone mining and cement production. The county's unemployment rate has improved but is consistently above the state and national rates. Median household income (MHI) for 2014 was 87% of the state's level.

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 split between state funds, largely derived from statewide sales tax revenue, and local funds via the required local millage rate established pursuant to statutory procedure. In fiscal 2015, the state provided directly about 68% of the district's general fund revenues and the property tax about 30%. Discretionary taxes for operations and capital/maintenance are levied by the district up to the statutory maximum rates of 0.748 mills and 1.5 mills, respectively.

District revenues were much stronger prior to the recession, reflective of the rapid population growth, but funding did taper off as the state cut funding leels during the downturn and population and enrollment trends slowed. Recent state funding levels have improved although district revenues are still below fiscal 2009 levels.



Actual revenue growth for the 2004 to 2014 period exceeded the rate of U.S. economic performance. Fitch anticipates stable to moderate growth in enrollment going forward based on expectations for economic and population growth in the Tampa-St. Petersburg-Clearwater, FL metro area. Furthermore, state revenue performance has returned to steady growth which should benefit FEFP funding levels absent education funding policy changes. The budget approved by the governor for fiscal 2017 includes a roughly 1% increase in per student funding. Fitch would expect state funding levels to trend in accordance with economic cycles and that the district's revenues will trend at least in line with inflation going forward.

Florida school districts have very limited to no ability to independently increase general fund revenues. Fitch believes that the risk presented by this limitation is offset to some degree by recognition of K-12 education as fundamentally a state responsibility and the strong foundation of state support for education funding.


Expenditure Framework

Employee-related salaries and benefits make up the largest component of school spending. These costs have escalated in recent years due to certain state mandates regarding classroom size and other unfunded program requirements contributing to a growth in expenses above revenues.

Fitch expects the natural pace of growth in expenditures to become more moderate in the near term. In addition, management control through cost reduction efforts is expected to continue.

The district does retain the ability to reduce operational costs even though the state has certain program mandates which in some cases are not funded. The district is moving its classification of schools as schools of choice resulting in projected cost savings and has instituted other budget reduction strategies in fiscal 2016. These changes combined with continued conservative budgeting practices are projected by management to result in a reduction in expenses helping lead to an expected increase in its reserves.

Management retains strong control over labor, including the ability to institute workforce reductions or modify wages if financial circumstances dictate such actions. These capabilities combined with a low level of carrying costs provide the district with spending flexibility. The district's carrying costs for debt service, pension and other post-employment benefit (OPEB) contributions is moderate at 12% of fiscal 2015 spending.

Long-Term Liability Burden

The district's overall debt and pension liability burden is very low at about 3.5% of personal income and no new debt is anticipated in the near term. The district received voter-approval in September 2015 to renew its half-cent sales tax dedicated to capital improvements. The county-wide sales tax is estimated to generate $8.5 million in annual proceeds over the 10-year term. District officials do not plan to issue debt supported by the sales tax.

While the district may use any legally available revenue for COPs debt service, the district has historically allocated revenue for this purpose from its capital outlay millage. 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 of the district's lease agreements were entered into prior to this date).

Based on pro forma debt service schedules following the proposed refunding, the district requires a slightly high 1.07 mills to fund maximum annual COP debt service (in fiscal 2019) assuming a 96% tax collection rate. The required millage has lessened in each of the past two years as the district's tax base has experienced moderate growth.

Operating Performance

Fitch's scenario for an unaddressed moderate economic downturn shows reserves quickly declining to negative levels in the absence of management action. The district's conservative budgeting practices had historically helped it maintain solid reserves in the 5% to 10% range but recent performance has included a decline in certain state funding, overly optimistic enrollment assumptions, and increased expenses, resulting in a reduction in reserves to just 2% at the close of fiscal 2015. Fitch expects the district's recent cost control efforts combined with continued conservative budgeting practices to help it improve reserves to more adequate levels as it has historically done.

Management's lack of controls over revenues requires it to carefully manage expenses and maintain sufficient reserves to ensure some level of financial flexibility.

The district has historically retained sound fund balance levels. Fund balance levels declined during fiscal years 2012-2014 with fiscal 2014 ending with unrestricted fund balance at $12.9 million or a satisfactory 8% of spending. Results for fiscal 2015 included a sizable use of reserves of $7.9 million reducing unrestricted reserves to a low 2% of spending. A portion of the decline in reserves was due to a reclassification of $1.6 million for employee workforce development as restricted and no longer assigned as required by state law. The negative operating results are due mostly to lower than anticipated state aid as enrollment projections were down and the district did not receive sparsity aid. Other miscellaneous revenues were also down.

The total district fiscal 2016 budget was $223 million, a $28 million reduction compared to 2015. A significant portion of the decline is attributable to a drop in debt service as the district's sales tax bonds have matured. Management also implemented a number of cost savings measures which total approximately $8 million, helping offset the prior year's structural imbalance. State aid increased along with an increase in student enrollment. Management is projecting an increase in reserves to 3% of revenues, the minimum recommended by the state.

For fiscal 2017, management will continue its efforts to reduce spending and increase fund balance closer to its 5% policy level. Fitch expects restoration of unrestricted reserves over the next two years helping to increase the district's financial resilience, better cushioning it for a future financial downturn.

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.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005275

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005275

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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