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Fitch Rates Pasco County School Board, FL COPs 'A+'; Outlook Stable

Fitch Ratings assigns an 'A+' rating to the following certificates of participation (COPs) issued on behalf of the Pasco County School Board, Florida:

--$27,275,000 COPs series 2016A.

The COPs are scheduled to sell via negotiation on Jan. 13. Proceeds from the sale of the COPs will finance the acquisition and construction of a new high school facility.

Fitch also affirms the following ratings:

--$140.9 million in outstanding COPs, series 2005B, 2007A, 2009, 2013A, and 2015A at 'A+';

--$96.72 million sales tax bonds, series 2013 (issued by the Pasco County School District) at 'A+';

--Implied unlimited tax general obligation at 'AA-'.

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

COPs RATING NOTCHING: The rating on the COPs is based on the district's general creditworthiness. The single-notch distinction from the implied ULTGO rating reflects the appropriation risk given the strong incentives to appropriate under the master lease structure.

SOUND FINANCIAL MANAGEMENT: The 'AA-' implied ULTGO rating principally reflects the strength of the district's financial management team, a conservative budgeting approach, and maintenance of an adequate reserve position.

MANAGEABLE LIABILITY POSITION: Debt ratios are expected to remain low despite new issuances for school facility construction, remodeling, and improvements. Pension benefits are offered through the Florida Retirement System (FRS) which is adequately funded. The district's debt service, pension and other post-employment benefits (OPEB) expenses are a manageable percentage of total spending.

TAMPA PROXIMITY FUELS GROWTH: The southern portion of Pasco County benefits from its proximity about 20 miles from downtown Tampa fueling population and tax base growth. Construction, retail, tourism, and retirement-based activity are the primary drivers of the local economy, supporting a median household income moderately below regional norms and susceptibility to high unemployment and tax base volatility in periods of economic decline.

SATISFACTORY SALES TAX COVERAGE: Coverage of maximum annual debt service (MADS) is expected to decline to 1.59x from 2.08x with the issuance of a $30 million bank loan this month secured on parity with the series 2013A sales tax bonds. Despite the additional leverage, Fitch expects the sales tax to continue to provide satisfactory coverage in various stress scenarios, given the lack of parity borrowing plans, a relatively stable sales tax collection history, and ongoing improvement in the local economy.

RATING SENSITIVITIES

FINANCIAL STABILITY: Weakening of the district's financial profile could pressure the rating absent evidence of a reasonable plan of corrective action.

SALES TAX COVERAGE: Recent additional leverage has increased the sales tax revenue bond rating's sensitivity to changes in debt service coverage related to changes in economic conditions and sales tax collections and/or the issuance of additional parity indebtedness.

CREDIT PROFILE

Pasco County (coterminous with the district) is a 745 square mile area located on the west coast of the state approximately 20-30 miles northwest of Tampa. The county has a 2014 population of 485,331 representing an increase of 14% since 2006. New Port Richey and Zephyrhills are the largest cities in the county by population. The district operates 75 traditional schools and three alternative/technical schools with a combined student enrollment of 66,406 (an additional 3,585 students attend one of eight charter schools located in the district) and is the largest employer in the county with 9,362 employees.

STRONG FINANCIAL MANAGEMENT

District finances remain well managed and stable. The district concluded fiscal 2014 with an operating surplus (after transfers) in the general fund totaling $7.1 million or 1.5% of spending. The unrestricted general fund balance registered $44.4 million or a favorable 9.5% of spending. Fiscal 2015 results are unaudited but point to another operating surplus equal to $1.2 million or 0.3% of spending. Management expects to generate a similar modest surplus in fiscal 2016 based on year-to-date results. The district targets an unrestricted fund balance equal to 5% of recurring revenue for emergencies (above the 3% statutory requirement), which it has met dating back to at least fiscal 2002.

Revenue performance is largely predicated on the level of per pupil funding established by the state legislature and allocations through the Florida Educational Finance Program (FEFP) as independent revenue raising capacity at the district level is essentially nonexistent. FEFP funding has improved over the last several years with the state economy and revenue outlook. District spending has increased in turn, with the general fund budget up 4.9% on the year in fiscal 2015 and 5.0% in fiscal 2016 driven by increased instructional spending and negotiated wage increases after many years without raises. Salaries and benefits represent nearly 80% of the general fund budget; wages are subject to annual reopeners offering management the ability to assess affordability based on expectations of FEFP funding. During prior periods of flat or declining state aid management has proved it can effectively control costs to preserve its financial position, which is an important factor in Fitch's consideration of risk associated with a high dependence on state support.

MANAGABLE DEBT LOAD

Fitch estimated debt levels remain low at 2.0% of market value or $1,212 per capita following the current offering and sales tax bank loan. The 2015-2020 five-year capital plan is manageable totaling $237 million or 0.8% of market value. New debt is not being contemplated outside of a possible $25 million borrowing to purchase compressed natural gas buses. The lease payments/debt service on the district's COPs is level at approximately $27-28 million (4% of current governmental spending) before declining significantly in fiscal 2034. COPs lease payments are payable from any legally available source, but in practice they are paid from revenue generated by the 1.5 mill capital outlay levy which is estimated at $34 million in fiscal 2016 based on a 96% collection rate. While the lease payments are subject to appropriation, the 'all or none' payment requirement under the master lease would allow the bond trustee to cause the district to surrender possession of 31% of the district's schools that are covered under the master lease should the district fail to appropriate.

The district's variable-rate debt outstanding totals $103.2 million ($30.5 million series 2005B auction rate COPs and $72.7 million series 2008C privately held COPs) or 20% of projected direct debt. The variable rate debt exposure is balanced somewhat by the low level of debt service to budget and good liquidity with $391.2 million in cash and investments government wide in fiscal 2014. The district's variable rate series 2008C certificates are hedged with a derivative contract with Bank of America, N.A. The swap has a current negative net mark-to-market value of $19.5 million; however, the district faces limited risk of collateral posting and termination.

GOOD SALES TAX COVERAGE

Projected fiscal 2016 sales tax collections of $25.8 million equals 1.59x projected MADS on the series 2013A sales tax bonds and the series 2016 bank loan. Debt service will be level through final scheduled maturity of both obligations, which is prior to the Dec. 31, 2024 expiration of the sales tax. The additional bonds test (ABT) is based on a fairly permissive 1.25x coverage requirement. Management has indicated it has no plans to leverage the sales tax after issuance of the bank note; additional leverage could pressure the 'A+' rating absent commensurate revenue growth.

Coverage from current pledged revenues holds up well to various Fitch revenue scenarios. Sales tax collections declined only 7.0% in aggregate from fiscal 2008-2012; a similar decline against budgeted fiscal 2016 revenue would lower coverage to a still adequate 1.4x MADS. Furthermore, revenue would need to decline by close to 34% before MADS coverage falls below 1.0x. Actual sales tax collections have performed well over the last several years. Fitch anticipates continued moderate sales tax revenue growth over the near term based on ongoing improvement in the local economy and population growth.

RETIREE LIABILITIES NOT A PRESSURE

Pensions are provided through the state run Florida Retirement System (FRS) and costs are manageable. FRS is well funded at a reported 86.6% on a reported basis as of July 1, 2014 or an estimated 80.8% when adjusted by Fitch to assume a 7% rate of return, and as such costs are not expected to increase materially. The district administers an early retirement plan that it contributes to on an actuarial basis. The plan is only 62% funded but its unfunded liability is not a significant dollar amount, and the plan will be closed to new participants effective June 30, 2018. OPEB is currently funded on a pay-go basis, and the unfunded liability of $104 million Jan. 1, 2014 is a very low 0.4% of market value. Combining the cost of retiree liabilities and debt, the district's fixed cost burden is estimated at a manageable 10% of governmental spending.

MODERATE GROWTH ON THE HORIZON

The series 2016A COPs and series 2016 sales tax bank loan are primarily being offered to meet school facility construction and renovation needs, and to alleviate overcrowding issues along the district's southern border. New construction activity and enrollment growth have been concentrated here given its very close proximity to downtown Tampa. District officials anticipate an uptick in enrollment after mostly flat growth from fiscal 2008-2015. The Florida Office of Economic & Demographic Research forecasts enrollment growth of about 1% per year through 2020, and an almost 10% increase in population over the same period. For the current year all but a single district school was fully compliant with class size legislation requirements.

Home prices in New Port Richey and Zephyrhills are up 4.9% and 6.7%, respectively, for the year according to Zillow Group, but mortgage delinquency rates and the number of homes with negative equity remain above average. Taxable values grew 0.9%, 5.0%, and 4.7% in fiscal years 2014-2016, after a peak to trough decline of almost 30% during the recession. Tax base performance is particularly important with respect to the generation of capital outlay revenue, which is outside the FEFP funding formula and the primary source from which the district makes COPs lease payments.

Median household income is about 10% below the MSA norm but on par with the state. Tax collection rates remain fair averaging 96.8% over the last decade, whereas the district assumes a 96% collection rate in accordance with state requirements. 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 prior economic downshifts when compared to the MSA and the state. Economic activity is driven by the retail, healthcare, and construction sectors and a high preponderance of retiree-aged residents. Job and labor force growth have been solid since 2011 and the county's preliminary October unemployment rate registered 5.4%, slightly higher than the Tampa-St. Petersburg-Clearwater MSA (4.8%) and the state (5.1%).

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from IHS Global Insight and Lumesis.

Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997243
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997243
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Case
Director
+1-212-908-0376
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (December 22, 2015 - 3:07 PM EST)

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