Fitch Downgrades Nassau County, Florida's Non-Ad Val Revs to 'A-'; Maintains Rating Watch Negative.

TAMPA, Fla. -- Fitch Ratings downgrades the underlying rating on Nassau County, Florida's approximately $33.9 million outstanding public improvement revenue bonds, series 2001 to 'A-' from 'A'. The bonds, which are secured by the county's covenant to budget and appropriate non-ad valorem revenues, remain on Rating Watch Negative, where the rating was placed on Sept. 2, 2004.

The downgrade reflects the absence of audited financial statements for fiscal 2004 that corroborate the county's representations about its financial position and continuing concerns related to internal controls as underscored by a recent investigation into malfeasance in the county Clerk of Court's office. This downgrade follows a one-notch downgrade in September 2004 in response to the rapid deterioration of the county's financial position between fiscal years 2000 and 2003 and expected negative financial results in fiscal 2004.

Nassau County has released unaudited fiscal 2004 results that indicate a sound year-end cash position and a $2.1 million operating surplus. However, these figures are in contrast to representations made to Fitch in August 2004 that a sizable deficit was projected for the fiscal year, and external borrowing would be needed to meet cash flow in the first quarter of fiscal 2005. These representations contributed to Fitch's Sept. 2, 2004 decision to downgrade the non-ad valorem bonds to 'A' from 'A+' and the placement of the credit on Negative Rating Watch. The county drew approximately $2.4 million on a locally established line of credit, evidencing cash flow difficulties that the unaudited figures do not show. The county now expects its audit to be complete by the state deadline of Sept. 30, 2005, one year after the close of the fiscal year.

The downgrade also reflects serious internal control and budgetary weaknesses that led to the erosion of the county's reserve position and, most recently, to a failure to prevent or uncover an employee theft of about $875,000 from the Clerk of Court offices. Additionally concerning is the county's continued use of the auditor that failed to identify the missing funds for the county's fiscal 2004 financial statements. While the county has implemented measures to improve controls, with further plans to employ a controller, Fitch believes that it will take time to assess the effectiveness of the measures.

The Rating Watch Negative reflects Fitch's ongoing concerns about the county's cash position and uncertainty about its overall financial position, given the delay in fiscal 2004 and a lack of a detailed budget document for fiscal 2005. While the county appears to have addressed its cashflow emergency, at least in the near-term, with the use of a line of credit and measures in its 2005 fiscal year, repayment of the cash flow loan will apparently be stretched over several fiscal years and a long-term cash flow solution remains unclear.

Maintenance of the 'A-' rating will depend on the realization of audited fiscal 2004 results consistent with those contained in the unaudited release; evidence of improving cash flows and balanced operations for fiscal 2005; indications that improved internal controls have been institutionalized; and the adoption of a structurally balanced fiscal 2006 budget that incorporates reasonable financial assumptions, management's actions to date and further plans to restore ongoing structural budget balance, and the preservation of sufficient cash flow to fund operations without external borrowing. Fitch expects to review its Rating Watch designation once the fiscal 2004 financials are audited, operations in 2005 are completed, and the fiscal 2006 budget is passed.

Nassau County is located in the northeastern most corner of Florida, bordered by Jacksonville to the south and the State of Georgia to the north. Key credit characteristics that remain relevant are strong tax base growth, moderate debt levels, and a limited, residential economy with unemployment rates consistently below state and national averages.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.