Fitch Rates Lake County School Board, FL's Series 2015B COPS 'A+'; Outlook Stable

Fitch Ratings assigns an 'A+' rating to the following Lake County School Board, Florida (the district) certificates of participation (COPs):

--$57.8 million series 2015B.

The COPs are expected to price on a negotiated basis during the week of Jan. 5. Proceeds will be used to refund a portion of the outstanding series 2006A COPs for interest cost savings.

In addition, Fitch affirms the following ratings:

--$245.4 million outstanding COPs at 'A+';

--Implied unlimited tax general obligation (ULTGO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by an undivided proportionate interest in lease payments made by the district to the financing corporation for the district under the master lease purchase agreement, subject to annual appropriation. 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 such facilities.

KEY RATING DRIVERS

PRUDENT FISCAL MANAGEMENT: The district's financial operations have been historically sound despite declines in property tax revenues and state funding. Reserve levels remain adequate and are expected to increase as revenues trend upwards.

LIMITED LOCAL ECONOMY: Lake County's economic profile is marked by fairly limited employment opportunities but benefits from its proximity to rapidly expanding Orlando. Unemployment rates have improved but wealth levels remain slightly below state and national levels.

FAVORABLE DEBT PROFILE: Debt levels should remain affordable as the district reports no borrowing plans. Principal is amortized at an above-average rate.

COPS APPROPRIATION RISK: The one-notch distinction between the implied ULTGO and COPs ratings incorporates the slightly elevated risk of annual appropriation. 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

DECLINE IN REVENUES: A significant decrease in revenues utilized to pay COPs debt service, including capital outlay millage revenues and/or infrastructure sales tax collections, could result in negative rating action.

CHANGES IN RESERVE LEVELS: Deterioration of unrestricted general fund balances below the district's minimum balance threshold would be viewed unfavorably by Fitch. Conversely, a material increase in reserves could lead an upward change in the ratings.

CREDIT PROFILE

The district is coterminous with Lake County and is located in central Florida between Orlando and Ocala. Its estimated 2013 population was 308,034, up 3.4% since 2010.

LIMITED ECONOMY

Lake County (implied ULTGO rating of 'AA-' by Fitch) has historically been concentrated in citrus farming with some recent diversification into light manufacturing. The county's large number of residents over 65 has also driven an expanding health care sector. The largest employers are the school district, followed by Leesburg Regional Medical Center and the Villages of Lake-Sumter, Inc. (a large retirement community).

The local economy is benefiting from rapid growth in nearby Orlando, which serves as the economic anchor for the region. Many residents commute to Orlando for employment, and areas of the county closest to the city are experiencing an influx of residents due to spillover from Orlando.

IMPROVED ECONOMY BOLSTERS JOBS AND TAXABLE VALUES

Employment continues to escalate through 2014 with a yearly gain of 4.2%, the largest increase since job growth resumed in 2011. The September 2014 unemployment rate at 6.2% remains higher than both the state (6.1%) and national (5.7%) averages. Assessed values (AV) rebounded in fiscal 2014 after four years of declines totaling 28%. The fiscal 2014 tax base increase was less than 1%, but fiscal 2015 AV is up a much more substantial 4.4%. The housing market is recovering, as evidenced by November 2014 housing values surging by over 15% year over year according to Zillow. Given these trends, the district's expectations of future AV growth appear reasonable.

Rapid population growth has historically driven corresponding enrollment growth in the district. Fiscal 2014 student counts were up a healthy 5.8% from the prior year after several years of stable enrollment. Growth slowed again in fiscal 2015, but still exceeded district projections. Wealth levels remain slightly below average, with median household income equal to 97% and 86% of state and national averages, respectively. The county's poverty rate, however, is lower than both the state and national benchmarks.

SOUND FINANCIAL OPERATIONS

Financial operations have historically been sound, and unrestricted fund balances have consistently exceeded the district's minimum policy of 4% of spending. The district prudently built up reserves during fiscals 2010 and 2011 when it was able to set aside a portion of stimulus funds. These reserves were utilized in fiscals 2012 and 2013 to offset declines in state funding and falling property tax revenues. For fiscal 2013 the district reported a general fund drawdown of $1 million, decreasing unrestricted fund balance to $11.7 million or a slim but still adequate 4.2% of spending.

District finances rely heavily upon state aid, which accounts for over 60% of general fund revenues. For fiscal 2014, the state sharply raised its base student allocations and dedicated about half the increase to personnel salary increases. Coupled with a modest decline in property tax revenues, the district budgeted a modest $3.1 million drawdown (1% of budget). Draft audit results show general fund operations with a modest net operating surplus of $1.35 million, raising unrestricted general fund balance to $13 million, or 4.6% of spending. The projected positive variance is attributable to larger than budgeted transfers from capital projects funds into the general fund.

For fiscal 2015, management budgeted a $1.4 million general fund operating surplus. Operations should benefit from increased state aid and expansion of the tax base. Included in the budget are salary increases averaging about 2% for all employees. Management reports interim results are tracking better than budget due to higher than expected enrollment. Fitch considers management's ability to maintain satisfactory reserve levels to be critical to rating stability.

STRONG COP SECURITY, LEVERAGED CAPITAL MILLAGE

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 its pledged school facilities which, according to management, currently serve a sizable 40% of its total students.

The district utilizes collections from a 1.5 mill capital outlay levy to support COP debt service but also has available excess infrastructure sales tax revenues (after payment of an outstanding sales tax note). Due to past declines in AV, capital outlay revenues are insufficient to cover the district's aggregate COPs debt service. Fiscal 2015 coverage of COPs debt service is 0.99x, assuming a 97% collection rate (a shortfall of $365,000) while coverage of MADS in fiscal 2018 is only 0.92x (a $2.25 million shortfall). After fiscal 2018, annual COPs debt service decreases by one third and is adequately accommodated by current capital outlay revenues.

Excess infrastructure sales tax revenues totaling over $6 million in fiscal 2015 are sufficient to fill in any gaps in coverage through expiration of the sales tax at the end of 2017, as well as provide funds for capital maintenance needs. The district also has approximately $7 million of reserves in its sales tax sinking fund available for COPs debt service if needed.

FAVORABLE DEBT PROFILE

Overall debt is low at 1.7% of fiscal 2014 market value and $1,262 per capita, and is expected to remain low given no additional borrowing plans. Capital needs through fiscal 2019 are manageable at $100 million. The district has entered into a forward delivery agreement to privately place COPs in 2015 to refund for savings a portion of the outstanding series 2005B COPs.

Principal amortization of all district debt is above average at 60% in 10 years. COP debt service accounted for an affordable 9.1% of fiscal 2013 general government expenditures. An additional 3% of the district's budget is consumed by contributions to the well-funded state pension plan and an implicit rate subsidy for retiree health care costs. In total, the district's carrying costs including debt service, pension and other post-employment benefits (OPEB) was a below average 12.1% of governmental spending in fiscal 2013.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and 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=959875

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