Thursday, August 16, 2012

No Sales Tax Could Affect Brevard Schools Credit Rating

BREVARD COUNTY, Florida -- Fitch Ratings, at the request of the Brevard County School Board, has has affirmed its rating on the following certificates of participation (COPs) issued on behalf of the Brevard County School Board, Florida.  


According to Fitch, "If the half-cent sales tax referendum is not approved in November, this could significantly impair the district's ability to fund capital needs. The potential reliance on reserves for such purpose could put pressure on the district's financial profile and ratings."


In a recent Brevard Times viewer poll conducted in July 2012, viewers opposed the half-cent sales tax 4-1 over support of the sales tax.

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The Brevard County School Board maintains a 'AA-' rating in $512 COPs and a 'AA' rating in the district's implied unlimited tax general obligation (ULTGO).   Fitch says the School Board's "conservative budgeting practices and policies have contributed to historically sound operations and adequate reserves even as revenues have declined due to significant decreases in property values and volatile levels of state funding. The 'AA' implied ULTGO rating reflects the district's satisfactory financial performance and expected maintenance of adequate reserves."


Fitch's outlook says that "The district's capital outlay millage, used for debt service payments and capital funding, is highly leveraged and is expected to remain so over the next few years. Passage of a proposed sales tax referendum in November would benefit the district and provide significant budget relief."


Additional excerpts from the Fitch ratting follow:


CONTINUED DECLINES IN ASSESSED VALUE: If assessed values show additional declines this could result in financial pressure on the operating fund.


CREDIT PROFILE 

Located along Florida's eastern seaboard, Brevard County is home to Cape Canaveral and is coterminous with the school district. The area economy was historically anchored by the federal government's space program with ancillary defense and aerospace contractors including Harris Corporation, Northrop Grumman and Boeing playing a significant role in the economy. Tourism also represents a sizeable portion of the area economy, driven by the area's numerous beaches. 


The county experienced significant job losses during calendar 2011 as a result of the retirement of the space shuttle program. However, year-over-year employment is up 2%, and the unemployment rate, at 9% in May, is down from 10.7% last year, but still above that of the state (8.5%) and nation (7.9%). 


Student enrollment declines were high in fiscal 2009 at 1,235 (1.7%), but much more moderate (down 522) through fiscal 2012, and in total were not as significant as expected. Contrary to prior expectations, enrollment has been projected to increase by 583 students (approximately 0.8%) for the upcoming school year, to 73,489. 


Population growth has been steady, increasing 12% since the 2000 census to 543,376 in 2010. Income levels are slightly above state averages.


ABOVE-AVERAGE LOSS IN PROPERTY VALUES
The county has experienced a significant decline in property values resulting in a corresponding reduction in revenue from the district's discretionary operating and capital outlay millage. Taxable assessed value has declined 33% since 2008 but the most recent June 2012 assessment shows a 1% decline.


PRUDENT MANAGEMENT PRACTICES
Financial management is strong as evidenced by reserve levels remaining sound despite recent volatility in state funding. Fiscal 2011 ended with a $22.3 million general fund operating surplus after transfers. The unrestricted fund balance (the sum of committed, assigned and unassigned fund balance as per GASB 54) increased to $72.4 million or 15.5% of spending, up from 10% of spending the previous year. The strong financial results were driven by an increase in federal stimulus monies, to be used in future years, and positive expenditure variances. 


The district's policy is to maintain a contingency reserve of at least 3% of spending. Reserve levels have historically exceeded this threshold by a good margin, which has long been noted by Fitch as a credit strength.


FISCAL YEAR 2012 AND 2013 BUDGETS RELY ON BUILT-UP RESERVES
The fiscal 2012 operating budget remained relatively flat to fiscal 2011. The budget includes a reduction in retirement costs, accounting for the newly implemented 3% contribution by employees, offset by higher salary and supply costs. The budget also included $3 million for capital improvements.


Fiscal 2012 revenues were projected to be down 4.8% due to the decline in assessed value and a 4% reduction in state aid. The budget included approximately $23 million in use of reserves, accounting for a bulk of federal stimulus monies received by the district in fiscal 2011. Management reports fiscal 2012 unaudited results are slightly better than budget, with an expected decrease in total general fund balance of $20 million, back to roughly where the district was at the end of fiscal 2010. 

This would result in a projected unrestricted fund balance of $57 million, or an adequate 11.8% of general fund spending.


The preliminary budget for fiscal 2013 anticipates a notable $18 million increase in revenue from the Florida Education Finance Program allocation. The district's board will continue to levy the 0.25 critical needs millage for operations providing $8 million in revenues. The current 0.25 mill critical needs levy, approved by voters in November 2010, remains in effect through fiscal 2013. Management has appropriated use of $8 million in unassigned reserves which if used would reduce the district's fund balance to approximately 8%-10% of spending, which remains adequate and consistent with historical reserve levels.


SALES TAX REFERENDUM TO PROVIDE CAPITAL SUPPORT
The district has approved a referendum for this November asking voters to approve a half-cent sales tax to be used solely for capital needs. The sales tax would be in place for no more than 10 years. Sales tax revenues (estimated at $32 million annually) could not be used for existing debt service, but the revenues would provide partial budget relief for the district, as the operating fund is funding a portion of capital needs.


If this referendum is not approved, the district financial profile could become challenged as its capital improvement plan totals $240 million, and current revenues from the capital outlay millage are almost entirely allocated to paying debt service on the outstanding COPs.


COP SECURITY IS STRONG BUT CAPITAL OUTLAY MILLAGE IS LEVERAGED
Legal provisions under the master lease are strong, requiring an all-or-none appropriation. In the event of non-appropriation, the district would relinquish rights to approximately 60% of its facilities. 


While the district may use any legally available revenue for COPS debt service, the district has historically allocated revenue for this purpose from its capital outlay millage. The capital outlay millage is authorized by state law up to 1.5 mills. Up to three-fourths of the proceeds of the capital levy is available for lease payments. Effective July 1, 2012, the three-fourths limitation is waived for lease purchase agreements entered into prior to June 30, 2009 (all of the district's lease agreements were entered into prior to this date). Due to recent declines in assessed value, the district now requires a high 1.45 mills to fund COPs.


The district had further leveraged its capital millage outlay through use of its revenue anticipation note (RAN) program (not rated by Fitch). The program, which was originated to supplement the use of COPs, is being unwound by the district with the last expected payment of $8 million due in April 2013. The district plans to use primarily capital projects reserves to pay off this debt. The capital projects reserve fund is projected to have a $51 million balance at fiscal end 2012. 


DEBT LEVELS ARE LOW AND RETIREE COSTS ARE MANAGEABLE


The district's overall debt levels are low at 2% of the district's $35 billion market value and $1,260 per capita. Amortization is below average, with roughly 33% of debt being retired in ten years. Pension and other post-employment benefits obligations remain well-managed.


Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 


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, Zillow.com, National Association of Realtors.


Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:


Tax-Supported Rating Criteria


U.S. Local Government Tax-Supported Rating Criteria
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SOURCE: Fitch Ratings via BusinessWire