[November 14, 2012]

Fitch Affirms Monroe County School Board, FL's Sales Tax Revs at 'A+'; Outlook Stable

Fitch Ratings affirms its 'A+' rating on the following Monroe County School Board, FL (the district) sales tax revenue bonds:

--$39.6 million outstanding infrastructures sales tax revenue bonds, series 2005.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the district's portion of the one-half-cent discretionary local infrastructure sales surtax. The tax is currently authorized by district voters to be levied through December 2015, three months after the final maturity of the series 2005 bonds. The bonds are senior to the district's series 2007 bonds (not rated by Fitch). The debt service reserve fund is satisfied by an Ambac Assurance surety bond.

KEY RATING DRIVERS

SOUND SALES TAX COVERAGE: Pledged revenues have grown steadily in recent years, providing sound coverage of 1.53 times (x) on fiscal 2012 senior lien debt service and all-in coverage of 1.18x.

BUDGETARY BALANCE RESTORED: Positive operating results for fiscal 2011, near break-even results for fiscal 2012, and the adoption of a balanced budget for fiscal 2013 are expected to maintain an adequate level of operating reserves. Management retains flexibility to cut spending or raise recurring revenues to maintain budgetary balance.

LIMITED LOCAL ECONOMY: The area economy is limited, with concentrations in government and tourism. Economic indicators are nonetheless positive in comparison to state and national averages.

MANAGEABLE DEBT LEVELS: Overall debt levels are manageable, capital needs are modest, and amortization of outstanding principal is rapid. Carrying costs of debt service and employee benefits do not pressure financial operations.

WHAT COULD TRIGGER A RATING ACTION

DECLINE IN FINANCIAL CUSHION: The inability to achieve budget stabilization in current and forthcoming fiscal years could result in overall financial margins that are no longer consistent with the implied GO rating.

FAILURE TO IMPROVE FINANCIAL CONTROLS: Fitch views the district's weak internal controls as a credit concern. Should future audits continue to note material deficiencies that impede the district's path to financial stability, there could be downward pressure on the district's implied GO rating.

CREDIT PROFILE

SALES TAX REVENUES SHOW SIGNS OF IMPROVEMENT

Fiscal years 2011 and 2012 sales tax receipts exhibited annual growth of 5% and 10%, respectively. As a result, maximum annual debt service (MADs) coverage for the 2005 bonds has increased from 1.32 times (x) in fiscal 2010 to a sound 1.53x (unaudited) for fiscal 2012. Debt service on the series 2005 bonds is level, with MADs of $8.8 million occurring in fiscal 2014. MADS coverage including the subordinate series 2007 bonds, sold privately, also improved from 1.02 in 2010 to 1.18 in fiscal 2012. The district projects continued growth in pledged revenues in fiscal 2013 of about 5.2% based on fiscal year to date monthly receipts.

The district maintains excess sales tax revenues in its debt service fund, totaling $4.5 million as of July 1, 2012, according to management. Although not pledged to bondholders, these excess funds provide a buffer against any unexpected decline in revenues. Bond covenants include an additional bonds test of 1.25x MADS although no additional debt is currently anticipated as the sales tax expires in December 2015.

ADEQUATE FINANCIAL CUSHION ANTICIPATED OVER NEAR TERM

The district has experienced some financial pressure beginning in fiscal 2009 as a result of state aid reductions and marginal declines in its tax base and its decision to utilize fund balance to support operations. As a result of these financial pressures, the district's unreserved general fund balance declined from 8% of spending in fiscal 2008 to a more modest 3.9% in fiscal 2010.

In fiscal 2011, the district receivd $2.5 million in Federal ARRA monies, which helped it cover unbudgeted increases in employee salaries, additional decreases in state aid, and increasing benefit costs. The district was able to achieve an operating surplus (after transfers) of $1.4 million (1.7% of spending) and ended the year with an unrestricted fund balance (the sum of assigned, unassigned and committed as per GASB 54) equal to 4.8 million, or 5.2% of spending.

The fiscal 2012 budget decreased expenses modestly (0.1% relative to the prior year's) and tax rates were decreased 10%. State aid increased by $2.5 million (20%). Unaudited financial information for fiscal 2012 shows a marginal draw on reserves of $200,000 or 0.2% of spending, bringing the unassigned fund balance to $4.2 million or 5.1% of spending. These results represent a significant improvement over the district's mid-year projection of a year-end fund balance below 3% of spending. After alerting the Department of Education in December 2011 to this possibility, the district amended its budget to implement mid-year staffing cuts and reductions in its healthcare plan that in aggregate cut $4 million in spending.

FISCAL 2013 BUDGET

The adopted fiscal 2013 budget is essentially flat compared to fiscal 2012, with a modest $600,000 (0.8% of spending) appropriated addition to fund balance. Though the millage rate increased modestly to 3.16 mills, the district's tax burden remains low relative to its peers and well below the state's 10-mill statutory cap. Differing from fiscal 2011, the district did not choose to levy the critical needs millage in fiscal years 2012 or 2013. Fitch notes that the district retains flexibility to implement deeper spending reductions given the moderate nature of cuts to date.

Fitch views positively the district's plan in fiscal 2013 to adopt an informal fund balance policy of 12% of spending, as well as its intention to begin budgeting on a three year horizon. The district hopes to grow its reserves gradually to achieve this goal; however, the district has not yet formalized a plan or a timeline by which it will achieve this fund balance target.

LIMITED ECONOMY, POSITIVE ECONOMIC INDICATORS

Monroe County, which is coterminous with the school district, is the southernmost county in the nation, consisting primarily of the Florida Keys. The area's economy is limited with heavy concentrations in government and tourism. The sub-tropical climate and beaches help make the Florida Keys and Key West, the county seat, a main tourist attraction.

Economic indicators for the county compare favorably to state and national averages. Due to substantial annual employment gains of 7.2%, the county's unemployment rate dropped to 5.0% as of September 2012 from 6.5% the year prior. The county's rate remains well below that of the state (8.6%) and nation (7.6%), for the same period. Wealth levels are high relative to state averages.

The county's tax base suffered a cumulative loss of 32% since fiscal 2008 due primarily to housing price declines, which is moderate relative to other areas in the state. Though the county's total assessed value (TAV) declined by 12.4% and 3.6% in fiscal 2011 and 2012, respectively, modest growth was achieved in fiscal 2013 of 1.3%.

MANAGEABLE CARRYING COSTS

Overall debt levels are low to moderate as a percentage of market value (0.5% of MV) and on a per capita ($2,058) basis. Seasonal fluctuations in population due to tourism help to explain the relatively higher per capita metric. Fiscal 2011 debt service for the district's certificate of participation and sales tax bonds totaled $13.5 million or a moderate 14% of general and debt service funds spending. Amortization of outstanding principal is a rapid 65% in ten years.

Capital needs are modest, as delineated in the fiscal 2011-2015 capital improvement plan. The district has no future debt plans. The district is an annual issuer of tax anticipation notes (TAN), with values ranging from $8 - $18 million, for cash flow purposes. The district has no exposure to variable rate debt or derivative instruments.

Employee benefits are manageable as a percentage of spending. The district participates in the state-administered Florida Retirement System, to which it contributed $5 million (or 6.3% of spending) toward its annual required contribution (ARC) in fiscal 2011. Due to the state's required 3% contribution from employees and a reduction in the district's required contribution rate, the district's ARC fell to $1.9 million in fiscal 2012. The district funds its other post-employment benefits (OPEB) on a pay-go basis, contributing $1.6 million in fiscal 2011.

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 (News - Alert) Global Insight, 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

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