Fitch Affirms Lee County School Board's (FL) COPs at 'AA-'; Outlook Stable

Fitch Ratings affirms the following ratings of the Lee County School Board, Florida (the school board or district):

--$334.3 million certificates of participation (COPs) at 'AA-'.

In addition, Fitch affirms the school board's implied general obligation (GO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY
The COPs are secured by lease payments made by the school board to the trustee pursuant to a master lease purchase agreement. Lease payments are payable from legally available funds of the district, subject to annual appropriation by the school board. The district is required to appropriate funds for outstanding leases on an all or none basis.

KEY RATING DRIVERS

IMPLIED GO RATING: The 'AA' implied GO rating reflects the district's solid financial position and maintenance of ample reserves despite planned general fund drawdowns in fiscals 2012 and 2013.

FAVORABLE DEBT BURDEN: District debt levels are expected to remain modest given the absence of any plans to issue new debt and above average amortization of existing COPs. Carrying costs for long-term liabilities are low.

IMPROVING ECONOMIC PROFILE: The taxable assessed value (TAV) declines in fiscals 2013 and 2014 have moderated from those of the prior two fiscal years. Unemployment improved significantly year-over-year and is now below the national average.

COPS APPROPRIATION RISK: The one-notch rating difference between the implied GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. The all or none appropriation feature of the master lease and the essential nature of leased assets, which are subject to surrender in the event of non-appropriation, temper this risk.

RATING SENSITIVITIES

FISCAL IMBALANCE: Continued structural imbalance could result in negative rating action.

CREDIT PROFILE
The school district, which is coterminous with Lee County (implied ULTGO rating of 'AA' with a Stable Outlook by Fitch), is located on the Gulf Coast of Florida. Incorporated municipalities within the district include Fort Myers and Cape Coral. The district enrolled approximately 85,587 students in fiscal 2013, an increase of 2.3% from the prior year. Enrollment has demonstrated steady growth since 2010 and officials expect this trend to continue.

AMPLE RESERVES DESPITE DRAWDOWNS IN FISCALS 2012 and 2013
After a $22 million general fund operating deficit in fiscal 2012 (3.6% of spending), fiscal 2013 ended the year with a planned $18.6 million deficit (2.9% of spending), resulting in an unrestricted general fund balance of $111 million equal to a still ample 17% of spending.

The 12.6% ($43.1 million) growth in state sources (41% of general fund revenue) in fiscal 2013 was offset by a 4.5% increase in general fund expenditures, mainly a result of a 5.8% ($23.3 million) increase in instruction-related expenses, and the 8% decline in property taxes ($14.5 million), which comprise over 50% of total general fund revenue.

BALANCED OPERATIONS PROJECTED FOR FISCAL 2014
Management anticipates fiscal 2014 general fund reserves will remain consistent with prior year levels based on increased state funding and strategic budget cutting. Fiscal 2014 state funding is budgeted to increase by $30.5 million (13%) over fiscal 2013 actual results. Property tax revenue is also budgeted to increase (approximately 4% or $13.3 million) compared to the prior year, due to improving taxable assessed value (TAV). Continued enrollment growth, the basis for the state funding formula, will favorably impact the district in fiscal 2014.

The school board typically budgets the use of a significant amount of reserves, but actual results usually outperform the budget due to conservative budgeting. Fitch believes the district retains a fair amount of expenditure flexibility allowing it to reduce spending further if needed. However the return to structural balance and maintenance of high reserves are keys to credit stability.

CONTINUED IMPROVEMENT IN REGIONAL ECONOMY
After losing approximately 42% of its value since 2008, TAV contraction has moderated with values down 3.1% and 0.7% in fiscals 2013 and 2014, respectively, compared to declines of 6.5% and 12.9% in fiscals 2012 and 2011, respectively.

The November 2013 unemployment rate improved significantly year-over-year, falling over 23% to 6.2%, in line with the state and below the national rate. Wealth indices remain slightly above state and national averages.

LOW DEBT BURDEN, AFFORDABLE CARRYING COSTS
Overall debt levels are modest at $1,257 per capita and 1.2% of TAV. Principal amortization is above average with 60% of principal retired within the next 10 years. Management indicates there are no plans to issue additional debt.

The district's fiscal 2014-2018 capital plan totals $243 million excluding debt service and transfers. Maintenance, renovations, and technology account for the majority of needs. The CIP is fully funded through prior year carry-over balances and local revenues. The school board will be focused on capacity issues as student enrollment continues to grow and may need to seek alternative sources of revenue for capital funding in lieu of issuing additional debt and the loss of revenue available for capital needs due to the divergence of TAV and student growth.

Pension obligations are limited to the district's participation in the well-funded statewide multiple-employer pension plan (FRS). The district's contribution in fiscal 2013 totaled $30 million, which represented a modest 3.5% of governmental funds spending.

The district offers an implicit subsidy for other post- employment benefits (OPEB). Fiscal 2013 pay-as-you-go contributions, which are less than the annual required contribution (ARC), represented only 0.2% of governmental funds spending. If the fiscal 2013 ARC had been fully funded, the contribution would represent a still modest 0.6% of spending. Carrying costs (including debt service, pension and OPEB costs) are low at less than 6% of spending.

MASTER LEASE STRUCTURE MITIGATES APPROPRIATION RISK
The district continues to pay COPs debt service with revenue from its 1.5 capital outlay millage, although all legally available revenues can be used for this purpose. The capital outlay millage provides ample 2.2x coverage of maximum annual debt service based on fiscal 2013 TAV.

The master lease structure on the COPs is strong, requiring an all or none appropriation. In the case of non-appropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease, which would amount to approximately 33% of the district's total facilities. Fitch considers this a strong incentive to appropriate.

Additional information is available at www.fitchratings.com.

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, and the National Association of Realtors.

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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818133
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