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Fitch Affirms Pasco County School Board, FL's IDR at 'AA-'; Outlook StableFitch Ratings has affirmed the following ratings for Pasco County School Board: -- $168.2 million outstanding certificates of participation (COPs) issued on behalf of the school board at 'A+'; -- Issuer Default Rating (IDR) at 'AA-'. In addition, Fitch has affirmed the following Pasco County School District outstanding debt: -- $96.7 outstanding infrastructure sales surtax revenue bonds at 'A+'. The Rating Outlook is Stable. SECURITY The COPs are payable from lease 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. The sales tax bonds are payable by the district's share of a voter authorized 1% sales surtax levied within Pasco County (the Penny for Pasco) and distributed pursuant to an interlocal agreement. KEY RATING DRIVERS The 'AA-' IDR reflects the district's solid growth prospects for enrollment-driven revenue growth, very limited ability to independently raise revenues, a low long-term liability burden and adequate reserves that may be sensitive to cyclical economic declines. 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. The 'A+' rating on the sales tax bonds reflects the solid coverage and growth prospects for pledged revenues, while incorporating limited resiliency to economic downturns. The rating is capped by the district's IDR. Economic Resource Base The district, which is coterminous with Pasco County (rated 'AA'/ Stable Outlook), spans 745 square miles on the west coast of the state. Its major population centers of New Port Richey and Zephyrhills lie roughly 35 miles northwest of Tampa, the second largest employment center in the state. The county's population has experienced steady growth and currently approximates 500,000 residents, a roughly 7% increase from the 2010 census. 2015 traditional school enrollment was just over 65,000 with an additional 3,000 students enrolled in charter schools. The Bureau of Economic and Business Research forecasts a 20% increase in the county's population to roughly 595,000 residents by 2020 and district management projects yearly traditional school enrollment growth in excess of 2% per year through the same time period. Revenue Framework: 'a' factor assessment District general fund operations are funded through a state formula based on enrollment which includes a combination of state aid and local property taxes. Fitch expects strong historical revenue growth to be replicated through continued traditional school enrollment and a somewhat improved environment for state funding. The district has very limited legal ability to raise revenues. Expenditure Framework: 'aa' factor assessment Instructional costs are the main driver of expenditures and are expected to rise in line with to marginally above revenues absent policy action. The district has ample legal control over workforce decisions. Long-Term Liability Burden: 'aaa' factor assessment The district's long-term liability burden is low and it participates in the adequately funded Florida Retirement System (FRS). Operating Performance: 'aa' factor assessment Unrestricted general fund balance has historically been above the district's policy of a balance equal to 5% of spending. The district's inability to independently raise revenues limits budget flexibility and thus gap-closing ability in times of economic stress. RATING SENSITIVITIES Maintenance of financial flexibility: The rating is sensitive to a draw on general fund reserves below district policy while the district adds staff and capacity to accommodate a growing student population. Sales tax coverage: A material contraction of pledged revenues or further leveraging of the revenue stream that considerably decreases coverage, and thus resiliency to revenue declines, could pressure the rating. CREDIT PROFILE The district is the largest employer in the county with greater than 9,700 employees. Pasco County is principally rural and suburban in nature and its economy has proven to be more susceptible to job loss and high unemployment in economic downshifts than the MSA and the state. Economic activity is driven by the retail, healthcare, and construction sectors and a high preponderance of retirees. After the school district, eight of the remaining top 10 employers are either health care or government-related. 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 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 up to the statutory maximum rates of 0.748 mills and 1.5 mills, respectively. State aid made up about 71% of the district's fiscal 2015 revenues (prior to transfers in), with about 25% generated by property taxes. 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 strong traditional school enrollment growth for the district to yield strong growth prospects for revenues above the level of inflation. Due to the state funding mechanism, Florida school districts 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 make up the bulk (approximately 86%) of general fund expenditures. Fitch expects the natural pace of spending growth to match or marginally exceed revenue growth, 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 expenitures through their ability to ultimately implement a contract after non-binding arbitration. The district is currently meeting state class size requirements in all schools. Carrying costs related to debt service, pensions and OPEB are low at roughly 10% of fiscal 2015 total government spending. Carrying costs are not expected to rise in the near future, as the district has limited borrowing plans and both pensions in which they participate are adequately to fully funded. The district currently administers an early retirement plan but a plan change in January 2015 eliminated the benefit for employees retiring after June 30, 2018, which will assist in reducing carrying costs. Long-Term Liability Burden The district's fiscal 2015 combined long-term liability burden, comprised of debt and the district's share of the net pension liability of the Florida Retirement System (FRS), is low at approximately 4% of personal income. Moderately amortizing direct debt (57% of principal retired in 10 years) makes up approximately 70% of the district's combined long-term liability burden. 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. The early retirement plan's assets cover an estimated 128% of liabilities. The sharp uptick from previous years reflects the decreased liabilities associated with the plan change in 2015 that eliminates the benefit for employees retiring after fiscal 2018. Operating Performance The Fitch Analytical Sensitivity Tool (FAST (News - Alert)) indicates a potential revenue decline for the district of 2.3% in a moderate economic decline in which GDP drops by 1% Fitch expects the district to respond to such a decline similarly to historical patterns, in which they maintained reserves in excess of 5% of spending, in line with district policy. Flexibility is somewhat augmented by available balances in capital project funds, which have been maintained between $17 million and $24 million over the last five fiscal years, but the districts reports that most of the balance is committed to debt service payments. The district has achieved surpluses in the past two fiscal years after a small deficit (0.1% of spending) in fiscal 2013. Fiscal 2015 available fund balance was $47.5 million, or an adequate 9.6% of expenditures and transfers out. Unaudited fiscal 2016 results show roughly break even operating results. The fiscal 2017 budget is 2.8% higher than the year prior and appropriates $3.6 million in fund balance, equal to roughly 0.7% of spending. The district has historically budgeted conservatively, turning a fiscal 2016 budget fund balance appropriation of nearly $9.5 million into a modest addition to fund balance and Fitch expects fiscal 2017 results to trend positively to budget. Solid Sales Tax Growth Prospects As a general sales and use tax Fitch believes the performance of the infrastructure sales surtax should generally align with changes in the population, employment and income of Pasco County and the broader Tampa-St. Petersburg MSA. Fiscal 2015 revenues were nearly 8% lower than the previous year, attributable to a change in the interlocal agreement upon voter renewal of the authorization effective Jan. 1, 2015. Over time Fitch believes the pace of revenue growth will remain slightly above the rate of inflation, consistent with an 'aa' assessment. Sales Tax Coverage Fiscal 2015 surtax revenues of $26.7 million cover MADS by 2.1x. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP stress scenario) and the largest consecutive decline in actual collected revenue since fiscal 2001. The county government's sales tax revenues are used as a proxy for the district's sales tax revenues since the district did not receive a share until partially through fiscal 2005. The FAST generates an estimate of a 3% decline in sales tax revenue in a 1% GDP decline scenario. The largest actual cumulative decline in historical sales tax revenues is a 14% in fiscal 2007 through fiscal 2010, due to the recession. Fitch considers the scenario results consistent with an 'a' assessment. The current authorization expires Dec. 31, 2024 and Fitch rates to a level of expected coverage consistent with the lenient 1.25x ABT. Sales tax revenues could tolerate a 20% decline before MADS coverage fell to 1x. This level of tolerance is equivalent to 6.7x the FAST results and 1.4x the largest historical decline in the review period. Given the outsized impact of the housing market collapse on the Florida economy, the rating incorporates Fitch's expectation that such a drastic decline in pledged revenues would not reoccur in future economic downturns. 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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