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Fitch Affirms Osceola County School Board, FL's IDR at 'AA-'; Outlook Stable.

New York: Fitch Ratings has affirmed the following ratings on the Osceola County School District, Florida (the district):

--$84.1 million certificates of participation (COPs), series 2009A, 2010A and 2013A at 'A+';

--Issuer Default Rating (IDR) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The district's 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 on an all or none basis, subject to annual appropriation by the district.

ANALYTICAL CONCLUSION

The 'AA-' IDR reflects the district's solid revenue growth prospects and expenditure flexibility, strong financial resilience and a moderate long-term liability burden, offset by a very limited legal ability to raise revenues.

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 school district, which is coterminous with Osceola County, is located in east central Florida within the Orlando MSA, in close proximity to Walt Disney World and Universal Studios. The district has experienced significant population growth, with an estimated 2017 population of 336,015 that has grown about 25% since 2010. While the county is growing rapidly, much of the school enrollment growth has been captured by charter schools. Traditional enrollment growth has been modest. Estimated traditional enrollment for the 2018-2019 school year is approximately 53,513, which is essentially flat from the prior year, although enrollment figures are somewhat skewed by a decline in displaced students that the district enrolled in the prior school year following Hurricane Maria. The district operates 60 school facilities.

KEY RATING DRIVERS

Revenue Framework: 'a'

District operations are funded through a combination of state aid and local property taxes. Fitch views the district's revenue growth prospects as solid based on expectations for continued enrollment growth and modest increases in the per pupil funding levels under the Florida Education Finance Program or FEFP. The district has limited independent ability to raise revenues.

Expenditure Framework: 'aa'

The district's natural pace of spending growth is expected to be close to or marginally above that of revenue. Enrollment growth and staffing costs are the main expenditure drivers. The district has good control over employee-related expenditures, with some constraints related to class size requirements and maintenance of adequate staff compensation levels. Carrying costs associated with debt service and retiree costs are affordable.

Long-Term Liability Burden: 'aa'

Long-term liabilities are moderate, estimated at roughly 12% of resident personal income. The district does not currently have any plans for additional long-term debt issuance and plans to fund near-term capital needs on a pay-as-you-go basis. The district participates in the well-funded Florida Retirement System.

Operating Performance: 'aaa'

The district's financial resilience remains strong. General fund reserve levels have stabilized following several recent years of planned drawdowns. Fitch believes that the district would maintain a high level of fundamental financial flexibility in a moderate economic decline scenario.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is sensitive to material changes in the district's solid expenditure flexibility, moderate long-term liability burden, and expectations for maintenance of adequate reserve levels through a typical economic cycle.

CREDIT PROFILE

Proximity to Disney World, Universal Studios and other local attractions underpins the county's tourist and service-based economy. Within the county are numerous hotels and resorts providing more affordable lodging than in neighboring Orange County for theme park guests. The leisure and tourism sector accounts for approximately 21% of nonfarm employment in the MSA. Both Disney and Universal are making substantial investments in their parks, which Fitch expects should further boost area economic trends.

Osceola County experienced steep declines in jobs, housing values and building permit activity during the last recession. Resident per capita personal income is very low, equivalent to 66% of the state average and 62% of the national average, reflective of a large number of jobs in the lower wage service sector. Efforts to diversify the economy and attract higher wage jobs are evident, including the county's collaboration with nearby higher education institutions and Florida's High Tech Corridor Council to build the Florida Advanced Manufacturing Research Center, intended to promote the research and development of smart sensors. The expansion of SunRail from Orange County through major population centers in Osceola County (including Kissimmee and Poinciana) has begun to stimulate private-sector investment. Unemployment levels have improved markedly since the last recession and have moved in line with the state and below the national average.

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 FEFP is primarily funded from a combination of state aid appropriated from the state general revenue funds, and a mandatory millage rate, or the required local effort, established by the state legislature for each school district. 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 70% of the district's fiscal 2017 revenues (prior to transfers in), with about 26% 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 revenues 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%-2% increase for the past three fiscal years.

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.

Charter school expansion has captured a significant portion of the growth within the district over the past several years, with total charter school enrollment representing a somewhat high 21% of total district enrollment for the 2018-2019 school year, up from 13% in the 2014-2015 school year. The district has historically encouraged charter schools to open in growth areas of the county, which has tempered the need to construct new schools. As a result, there has been an absence of new traditional school openings during this period of strong charter school growth. Nonetheless, traditional enrollment has continued to grow modestly each year.

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

Instructional related expenditures, including salaries and benefits, comprise the bulk of the district's general fund spending.

Fitch expects the district's pace of spending growth to match or marginally exceed revenue growth, reflecting enrollment-driven spending needs largely funded by related increases in state-controlled per-student funding.

Carrying costs related to debt service, pensions and other post-employment benefits (OPEB) are low at about 7% of governmental spending in fiscal 2017. Factors limiting spending flexibility include class size requirements that can dictate staffing levels and the need to maintain adequate salary and benefit levels. The district is currently meeting its minimum class size mandates. Additionally, the district is designated as a CHOICE district and can meet class size at the school-wide average rather than class by class. This is allowing the district to generate savings as a result of teacher allocations and related salary expenditures.

Wages and benefits are collectively bargained between the district and unions representing teachers and support staff. Under Florida law, the district's elected officials can implement contract terms after the conclusion of a non-binding arbitration process. The district went to impasse with the teachers and support staff bargaining units in the most recent round of negotiations and imposed a 2% raise for employees as well as changes to health insurance plans designed to reduce costs to the district.

Long-Term Liability Burden

The district's combined burden of direct and overlapping debt and Fitch adjusted net pension liability, equates to about 12% of resident personal income. Roughly half of the estimated liability is from overlapping debt of the county and underlying cities, followed by the district's Fitch adjusted net pension liability and direct debt, which each make up about a quarter of the liability. Direct debt amortizes at an above average rate (roughly 80% of principal retired in 10 years).

County voters approved a half-cent sales tax increase that took effect in 2017 to be used for school facility reconstruction and improvement projects, including safety and security, technology upgrades, and other capital facilities projects. The district's fiscal 2019 to fiscal 2023 capital improvement plan (CIP) totals approximately $627 million, the bulk of which pertains to the construction of new schools and school maintenance needs. The district plans to fund the CIP primarily through a combination of carryover fund balance, capital outlay revenue, sales taxes, and impact fees. The district does not have plans to issue additional debt and expects to fund near-term capital projects on a pay-as-you-go basis.

The district participates in the Florida Retirement System. The district's estimated proportionate share of the plan's net pension liability was approximately $320 million, when adjusted by Fitch to reflect a 6% discount rate assumption. The Fitch adjusted ratio of assets to liabilities was 73% as of the June 30, 2017 measurement date.

Operating Performance

Healthy fund balances, low revenue volatility, and midrange inherent budget flexibility create a very high level of gap closing capacity throughout the economic cycle. Flexibility is additionally supported by available balances outside the general fund, specifically in the capital funds.

The district built up reserves in anticipation of the end of the federal stimulus program and the expiration of a $7 million annual critical needs tax after fiscal 2011. In order to absorb the subsequent revenue losses and maintain service levels, management instituted a controlled spend-down of the district's substantial fund balance between fiscals 2012 and 2015. Unrestricted reserves dropped to $44.7 million or 10.5% of spending in fiscal 2015 from $74.4 million or 21% of spending in fiscal 2011. Since the end of the planned drawdown, the district has maintained steady reserve levels with unrestricted fund balance covering roughly 10% of spending annually, remaining in compliance with its formal reserve policy.

Preliminary unaudited estimates for fiscal 2018 indicate a modest general fund surplus (after transfers) of approximately $1 million. State revenues came in approximately $8 million higher than the budgeted amount due largely to an influx of displaced students following Hurricane Maria. Due to continued shortfalls in the health insurance trust fund, the district decided to transfer $8.5 million from the general fund to remain in compliance with the state minimum reserve requirement. Recent changes in the insurance plan design for teachers and support staff, including increased deductibles and premiums, are expected to lead to improved health insurance trust fund performance, although the fund is expected to continue to require some general fund support.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U5FL
Date:Jan 23, 2019
Words:1891
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