Fitch Affirms Marion County School Board's (FL) COPs at 'A'; Outlook Remains Negative

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

--$91.5 million certificates of participation (COPs) at 'A'.

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

The Rating Outlook remains Negative.

SECURITY

The COPs are payable from lease payments made by the district, subject to annual appropriation of the school board under a master lease purchase agreement. The district is required to appropriate funds for all outstanding leases on an all or none basis. In the event of non-appropriation, the district must surrender possession of all leased facilities under the master lease to the trustee for disposition by sale or re-letting of its interest in the facilities.

KEY RATING DRIVERS

NEGATIVE OUTLOOK REFLECTS WEAKENED FINANCIAL FLEXIBILITY: The Negative Outlook continues to reflect the district's limited financial flexibility and structural imbalance. The district's ability to generate additional revenues through the referendum and return to fiscal balance are key to maintaining the current rating.

LOW DEBT LEVELS: District debt levels are modest and are expected to remain so given the absence of any plans to issue new debt and rapid amortization of existing bonds. Carrying costs are affordable.

LIMITED BUT IMPROVING ECONOMY: The district's economic base remains somewhat limited and exhibits below-average levels of income. Unemployment, while above-average, has improved significantly year-over-year.

COPS APPROPRIATION RISK: The one notch rating difference between the implied unlimited tax GO and the COPs recognizes the non-appropriation risk inherent in the COPs structure. Master lease provisions including 'all or none' appropriation requirement, a leasehold interest on a significant number of essential schools and reliance upon COPs financing serve to mitigate the potential for non-appropriation.

RATING SENSITIVITIES

FAILURE TO ACHIEVE STRUCTURAL BALANCE: The district's ability to generate additional revenues through the 1-millage tax increase referendum to return to structural balance and maintenance of minimum reserves are key to rating stability.

CREDIT PROFILE

The district's boundaries are coterminous with Marion County, located in central Florida about 65 miles north of Orlando. The current estimated population is 336,000 and Ocala is the largest city within the county, with a 2012 population of 56,945. The district currently enrolls approximately 41,589 students across 49 schools. Enrollment has demonstrated flat to moderate growth since 2011 and official expect this trend to continue over the next several years.

CONTINUED EROSION OF FUND BALANCE IN FISCAL 2013

After a $8.3 million general fund deficit in fiscal 2012 (3% of spending), fiscal 2013 ended the year with a $2.1 million general fund deficit (less than 1% of spending) dropping the unrestricted general fund balance to just 3.9% of spending. This was better than the original budgeted deficit as a result of various spending reductions including not filling vacant positions and an overall reduction in operating expenditures.

DEFICIT BUDGETED FOR FISCAL 2014; WOULD DROP FUND BALANCE TO MINIMUM LEVEL; PROPOSED MILLAGE INCREASE

The fiscal 2014 budget reflects a $3.1 million general fund operating deficit, resulting in a budgeted unrestricted general fund balance equal to the district's minimum level of 3% of spending. The district continues to cut expenditures where it can, including eliminating over 100 positions, downsizing school programs, replacing full-time teachers with substitutes, and exceeding state mandated class size limits. District management project year-end results will be at or slightly better than budgeted, which Fitch views as reasonable given the history of outperforming budget.

The school board recently voted for an additional four-year 1-millage increase in the property tax rate to be placed on the November 2014 ballot, subject to approval by the county commission. Management indicates the 1-millage increase would generate an additional $14 million to $15 million in annual revenue over the four years, and would alleviate some financial pressure by helping the district meet class size standards, restore cut programs, and retain certified staff.

LIMITED ECONOMY WITH SIGNS OF MODERATE IMPROVEMENT

The county's economy is somewhat limited with about 60% of total acreage designated for agricultural purposes. The area has historically been a major center for thoroughbred horse breeding. Leading employers include the school board, Monroe Regional Medical Center, the state, and Wal-Mart.

The economy continues to experience modest recovery. October 2013 employment grew 2% year-over-year, well above state and national averages. Consequently, county October 2013 unemployment rates fell 20% year-over-year to 7.3%, which is a significant improvement, but still remains above state and national averages.

Wealth indices are below average with the 2011 median household income 84% and 76% of the state and national benchmarks, respectively.

RECENT STABILITY IN TAXABLE VALUES

After falling by 7.9% and 6.4% in fiscals 2012 and 2013, respectively, taxable values showed some stabilization, evidenced by a decline of less than 0.5% in fiscal 2014. Management is projecting taxable values to remain flat or show some moderate growth over the next several years.

LOW DEBT BURDEN; AFFORDABLE CARRYING COSTS

The district's overall debt burden is modest at less than 1% of market value and $713 per capita. Direct debt consists primarily of COPs issued under the master lease. Principal amortization is very rapid with 74% of principal retired within the next 10 years. Capital needs are manageable and the district has no new debt issuance plans.

All district employees participate in the Florida Retirement System, a statewide plan which administers two cost-sharing multiple employer retirement plans: a defined benefit plan and a defined contribution plan. The district's combined contribution to both plans for fiscal 2013 totaled $10.5 million, which represented a modest 2.3% of total governmental funds spending.

Fiscal 2013 pay as you go district contributions to its retiree health plan, which are less than the annual required contribution (ARC), represented only 0.4% of governmental fund spending. If the fiscal 2013 ARC had been fully funded, the contribution would represent a still modest 1.1% of spending. Carrying costs (including debt service, pension and OPEB costs) are very manageable at less than 5% of total governmental fund spending.

MASTER LEASE STRUCTURE MITIGATES APPROPRIATION RISK

The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease structure. The district is required to appropriate on an all-or-none basis or risk losing possession of all or parts of 11 schools subject to the master lease. The 11 schools include 40% of the district's middle schools, four of the eight high schools and many of the district's newer facilities. The district's 1.5 capital outlay millage is the primary revenue source for COPs payments, and provides adequate 1.4x coverage of maximum annual debt service based on fiscal 2014 assessed value.

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:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815163

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