Fitch Rates Martin County School Board, FL's COPs 'A'; Outlook Negative

Fitch Ratings has assigned an 'A' rating to the following certificates of participation (COPs) issued on behalf of the Martin County School Board, Florida (the district):

--$28,530,000 refunding COPs, series 2014.

The COPs are scheduled to sell via negotiation the week of Aug. 25. Proceeds will be used to refund certain of the district's outstanding COPs for savings and no extension of maturity.

In addition, Fitch affirms its ratings on the following district obligations:

--$33.1 million certificates of participation (COPs) at 'A';

--Implied general obligation rating at 'A+'.

The Rating Outlook is Negative.

SECURITY

The COPs are payable from lease rental 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.

KEY RATING DRIVERS

OUTLOOK REMAINS NEGATIVE: The Negative Outlook reflects Fitch's concern over the district's inability to regain structural balance, despite the implementation of cost savings. Measures taken in fiscal 2014 to restore unassigned fund balance to a minimally satisfactory level are viewed positively by Fitch. However, it remains uncertain whether or not these measures will materially improve the district's financial position.

FAVORABLE ARBITRATION DECISION: A favorable arbitration outcome enabled the district to institute furlough days which generated a large share of expenditure savings. Further labor concessions will be necessary to realize additional savings in fiscal 2015.

LOW DEBT, AFFORDABLE CARRYING COSTS: Debt levels are low and likely to remain so given the district's rapid amortization schedule and manageable capital needs. Retiree benefit costs do not pressure district finances, and overall carrying costs constitute a relatively small share of governmental fund spending.

LIMITED ECONOMY: The local economy is primarily residential and somewhat limited. Wealth levels are above average, and unemployment approximates state and national averages.

COPS APPROPRIATION RISK: The one-notch rating distinction on the district's COPs is based on the risk of non-appropriation inherent in the lease structure. The appropriation risk is not tempered by the master lease structure as only one school, a middle school, is subject to the lease.

RATING SENSITIVITIES

ADEQUATE FUND BALANCE: Failure to maintain unassigned reserves at the minimum state required level through balanced operations will lead to a downgrade.

CREDIT PROFILE

The district is coterminous with Martin County (implied ULTGO rating of 'AA' by Fitch) is a 556 square mile area located on the eastern coast of Florida approximately 45 miles north of Palm Beach. The county is home to approximately 148,000 residents in 2011 and is primarily residential with a somewhat limited economy concentrated in agriculture, healthcare and tourism.

REPORTING INACCURACIES REVEAL WEAK POSITION

The district's credit profile was challenged by financial reporting inaccuracies in fiscal 2012 which significantly overstated reserve levels and underpinned Fitch's June 2013 downgrade of the COPs rating to 'A' from 'AA-'. The errors and reserve declines led to the departure of the district's finance director and much lower than projected reserve levels for fiscal 2013. New district management has implemented a corrective action plan, which is projected to yield favorable year-end results for fiscal 2014.

Reserves were overstated in fiscal 2012 by $2.6 million, or 1.9% of general fund spending. The error reflected improper transfer of local capital projects fund monies to the general fund and the failure to accrue termination pay for retirees during the fiscal year.

BUDGETARY SURPLUS; WEAKENED LIQUIDITY

Restatement of the district's fiscal 2012 results occurred late in fiscal 2013 hampering the district's ability to adjust spending to offset the lower reserve levels before year-end.

The fiscal 2013 budget included a planned operating deficit of approximately $4 million, yielding an ending fund balance of an acceptable 5.6% of spending. Instead, despite a $1.8 million budgetary surplus, the fiscal 2013 year-end unassigned fund balance declined to $3.2 million, or a low 2.3% of spending, as a result of the error. Fiscal 2013 reserves were below the state's unassigned fund balance minimum of 3% of budgeted spending, requiring state notification.

Liquidity has tightened but remains adequate. The district issued and repaid $9.9 million in tax anticipation notes (TANs) in fiscal 2014, representing a moderate 6.7% of fiscal 2014 general fund spending. Management plans to issue TANs of $8 million in fiscal 2015.

EXPENSE CONTROL MUST DRIVE FISCAL RECOVERY

The district's new management team implemented a plan for restoration of unassigned general fund balance to 3% of spending as part of the fiscal 2014 budget process. The solution must largely be driven by expenditure control given the school districts' lack of revenue control.

The plan includes measures to trim spending, such as furlough days, program cuts, and department reorganization. These efforts are projected to yield $2.5 million in savings (1.7% of spending) in fiscal 2014, due largely to the implementation of furlough days, which ultimately required state arbitration of a grievance filed by the district's teachers' union.

Unaudited results indicate the district achieved an operating surplus (after transfers) of $3.3 million, or 2.3% of spending for fiscal 2014. This is an improvement over the modest deficit originally budgeted. Lower than budgeted state aid was more than offset by below-budget spending, particularly for salary and benefit costs. The district continues to rely on transfers from the local capital improvement tax fund of approximately $6.3 million, or a moderate 4.4% of spending, to reimburse the general fund for capital expenditures in fiscal 2014.

The positive results lift the fiscal 2014 unassigned fund balance to 3.75% of general fund spending, above the state minimum required 3%. Future rating stability will reflect the district's demonstrated ability to maintain this cushion through balanced operations.

LOW DEBT BURDEN; AFFORDABLE CARRYING COSTS

The district's overall debt levels are very low at $735 per capita and 0.47% of full market value. Amortization is average with 55% of outstanding principle repaid within 10 years. Debt levels are expected to remain stable as the district currently has no long-term borrowing plans.

The district participates in the state-run Florida Retirement System (FRS), which Fitch estimates to be adequately funded at 78.9% based on the 7% investment rate of return used by Fitch. The district's actuarial required contribution (ARC) was $6.3 million, or an affordable 3.3% of governmental fund spending in fiscal 2013.

Other post-employment benefits (OPEB) are limited and currently funded on a pay-as-you-go basis. The unfunded liability represents a manageable 0.8% of market value. Carrying costs including debt service, pension ARC, and OPEB contribution were a low 7.4% of governmental fund spending in fiscal 2013.

LIMITED ECONOMY; RECOVERING TAX BASE

The district is home to a large retiree population which contributes to a healthy per capita income 30% to 35% higher than state and national averages. The local economy is based mainly in health care, agriculture, and tourism, stabilized by a large government presence, which constitutes 50% of jobs among top employers.

The largest private sector employer in the county is Martin Memorial Health Systems, with 2,783 employees. The 6.2% unemployment rate in March 2014 was down from 8.1% a year prior, approximating the state (6.2%) and nation (6.3%).

The housing market shows signs of recovery following recessionary tax base declines. Property value losses through fiscal 2013 have been consistent but moderate, declining 13% since fiscal 2009. Signs of stabilization are evident, as the district's taxable assessed value (TAV) grew by a modest 1.5% in fiscal 2014 following four years of recessionary contraction. Management projects stronger growth of approximately 6% in fiscal 2015, as per the state.

SOUND LEASE PROVISIONS

Lease payments are payable from any legally available source, although on a budget basis payments are made from the district's capital outlay millage. The capital millage can be levied up to 1.5 mills for lease payments for COPs issued before 2009 and 1.125 mills for COPs issued post 2009. The district uses a very low 0.152 mills of the levy to meet MADS leaving considerable flexibility.

The lease payments are subject to appropriation and a failure to appropriate would require the district to surrender use of the one middle school (out of 27 district facilities) covered under the master lease.

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.

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=854154

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