Fitch Rates Brevard County School Board, FL's Refunding COPs 'AA-'; Outlook
NEW YORK -- March 28, 2013
Fitch Ratings assigns the following ratings to the certificates of
participation (COPs) issued on behalf of the Brevard County School Board,
Florida (the district):
--$42,955,000 refunding COPs, series 2013A, 'AA-';
--$39,280,000 taxable refunding COPs, series 2013B, 'AA-'
The COPs are scheduled to sell via negotiation the week of April 1. The COPs
will be used to refund certain of the district's outstanding COPs for savings
and no extension of maturity.
In addition, Fitch affirms its ratings on the district's following
--Approximately $512 million outstanding COPs, at 'AA-';
--Implied unlimited tax general obligation (ULTGO), at 'AA'.
The Rating Outlook is Stable.
COPs are secured by an undivided proportionate interest in lease payments
made, subject to appropriation, by the Brevard County School Board under a
master lease purchase agreement.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The district's conservative budgeting practices
and policies have contributed to historically sound operations and adequate
reserves even as revenues have declined due to significant decreases in
property values and volatile levels of state funding. The 'AA' implied ULTGO
rating reflects the district's satisfactory financial performance and expected
maintenance of adequate reserves.
LEVERAGED CAPITAL OUTLAY MILLAGE: The district's capital outlay millage, used
for debt service payments and capital funding, is highly leveraged and is
expected to remain so over the next few years. Capital needs are planned to be
partially funded from the operating budget.
DEPENDENCE ON STATE REVENUES: The board remains dependent upon state funding
which has fluctuated in recent years, as do most Florida school districts.
MODERATE DEBT LEVELS: Overall debt ratios are moderate and are not expected to
AVERAGE ECONOMIC INDICATORS: Unemployment rates, although decreasing, remain
high, and wealth levels are in line with state averages. The economy remains
anchored by tourism and a more diverse aerospace industry following the
completion of the space shuttle program and appears to be making a recovery
from major job losses in 2011.
COPS SUBJECT TO APPROPRIATION: The 'AA-' COPs rating reflects the district's
general credit quality, the district's obligation to make annually
appropriated lease payments under a master lease structure, and the
essentiality of leased assets.
DECLINES IN ASSESSED VALUE: If assessed values show additional declines this
could result in financial pressure on the operating fund.
DECLINES IN RESERVE LEVELS: The maintenance of reserves above policy levels
has been considered a credit positive. A decline to levels inconsistent with
the rating category could cause rating pressure.
Brevard County (implied ULTGOs rated 'AA' by Fitch), home to Cape Canaveral,
is located along Florida's eastern seaboard. The boundaries of the school
district are coterminous with the county.
DIVERSE ECONOMY WITH IMPROVING EMPLOYMENT
The area economy was historically anchored by the federal government's space
program, with ancillary defense and aerospace contractors including Harris
Corporation, Northrop Grumman and Boeing playing a significant role in the
economy. The county experienced significant job losses during calendar 2011 as
a result of the retirement of the space shuttle program. Despite the setback,
the area economy has been able to absorb the job losses and is currently
experiencing a notable recovery. Businesses have opened or expanded and taken
advantage of the skilled work force that still exists in the county.
Year-over-year employment is up 2.8%, and the unemployment rate, at 8.3% in
December 2012, is down from 10.7% last year, but still above that of the state
(7.9%) and nation (7.6%). Major employers include the district (9,100), Health
First (6,400), and Harris Corporation (6,100).
Tourism also represents a sizeable portion of the area economy, driven by the
area's numerous beaches, the Kennedy Space Center, and Port Canaveral. The
Port serves as base operations for Disney Cruise Lines and supports other
major cruise companies.
Student enrollment declines were high in fiscal 2009 at 1,235 (1.7%), but much
more moderate through fiscal 2013, and in total were not as significant as
expected. Current membership enrollment of 72,526 is projected to experience
only moderate declines, in fiscal 2014 with a slight growth pattern in future
Population growth was strong during the early part of the last decade but has
slowed after 2006 standing at 543,566 in 2011. Per-capita income levels are
slightly above state averages but median household income is below national
norms. This may be in part due to the large number of retirees that live in
ABOVE-AVERAGE LOSS IN PROPERTY VALUES
The county has experienced a significant decline in property values resulting
in a corresponding reduction in revenue from the district's discretionary
operating and capital outlay millage. Taxable assessed value (AV) has declined
32% since 2008 but the most recent June 2012 assessment shows only a 1.4%
decline. Management expects AV to have bottomed, and recent home pricing
indicators support this notion as the home value index improved 8.9% year over
year through February according to Zillow, Inc.
PRUDENT MANAGEMENT PRACTICES
Financial management is strong as evidenced by historically prudent management
of reserves despite volatility in state funding and, more recently, by the
district's immediate corrective action plan to solve a projected $30.7 million
budget gap for fiscal 2014.
The imbalance is due in part to a failed sales tax referendum submitted in
November 2012 in which the district sought approval for a half-cent sales tax
to help subsidize capital needs. Projected revenues were estimated at $32
million and were expected to provide partial budget relief for the district,
as the operating fund is funding a portion of capital needs and the current
0.25 mill critical needs millage, which provided roughly $8.9 million in
revenues, is set to expire this fiscal year.
Management quickly reacted to the failed sales tax proposal and announced the
closing of three elementary schools. It has also proposed a number of program
cuts, staffing changes and other cost saving measures which are expected to be
implemented to correct the projected imbalance. The conservative estimate of
savings does not take into account a possible increase in state funding next
fiscal year nor any increases in AV.
Management has included in its proposed fiscal 2014 operating budget a
recurring $6 million contribution to its capital fund to support future
capital needs. Management has prudently identified an additional number of
cuts totaling close to $10 million which could be imposed if unforeseen cuts
in state aid or declines in AV should occur. No change in fund balance is
anticipated. As per Florida law, the adoption of a tentative budget for fiscal
2014 is expected in July.
FISCAL YEAR 2012 AND 2013 BUDGETS RELY ON BUILT-UP RESERVES
In addition to the flexibility to make expenditure cuts, reserves still remain
adequate after a decline in fiscal 2012 and projected declines in fiscal 2013
due to the use of built-up stimulus funds. Fiscal 2012 ended with an
unrestricted general fund balance (assigned and unassigned) of $53.4 million,
or an adequate 11% of spending. The budget included approximately $23 million
in use of reserves, accounting for a bulk of federal stimulus monies received
by the district in fiscal 2011. The fiscal 2012 general fund operating deficit
of $19.6 million after transfers was better than expected.
The tentative budget for fiscal 2013 included the use of $8 million in
built-up reserves to balance operations. The budget also included a notable
$18 million increase in revenue from the Florida Education Finance Program
The district's board continued to levy the final 0.25 mill critical needs
millage for operations providing $8.9 million in revenues. Management
subsequently appropriated use of $10.4 million in reserves for non-recurring
salary enhancements and health insurance benefits negotiated between the
school board and its unions mid-fiscal year. These appropriations along with a
projected general fund deficit, after transfers, of $6.6 million will reduce
the district's total fund balance to approximately $43 million, or 8%-10% of
spending, which remains adequate and consistent with historical reserve
The district's policy is to maintain a contingency reserve of at least 3% of
spending. Reserve levels have historically exceeded this threshold by a good
margin, which has long been noted by Fitch as a credit strength.
COP SECURITY IS STRONG BUT CAPITAL OUTLAY MILLAGE IS LEVERAGED
Legal provisions under the master lease are strong, requiring an all-or-none
appropriation. The district would relinquish rights to approximately 75% of
its facilities in the event of non-appropriation.
The district may use any legally available revenue for COP debt service, but
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). Due to recent declines
in assessed value, the district now requires a high 1.45 mills to fund COPs
(assuming a 96% tax collection rate).
The district had further leveraged its capital outlay millage through use of
its revenue anticipation note (RAN) program (not rated by Fitch). The program,
which was originated to supplement the use of COPs, is being unwound by the
district with the last expected payment of $8 million due in April 2013. The
district plans to use primarily capital projects reserves to pay off this
debt. The capital projects reserve fund is projected to have a $23 million
balance at fiscal end 2013.
DEBT LEVELS ARE LOW AND RETIREE COSTS ARE MANAGEABLE
The district's overall debt levels are low at 2.3% of the district's $27.8
billion AV and $1,176 per capita. Amortization is below average, with roughly
35% of debt being retired in 10 years. Pension and other post-employment
benefit (OPEB) obligations remain well-managed. Carrying costs for debt,
pension and OPEB pay-go are manageable at 10% of governmental funds spending
(net of capital projects).
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
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, S&P/Case-Shiller Home Price
Index, IHS Global Insight, National Association of Realtors, and Zillow, Inc.
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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