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TMCNet:  Fitch Affirms Hillsborough County, FL Schools' Ratings; Assigns Sales Tax Revs Positive Outlook

[February 18, 2014]

Fitch Affirms Hillsborough County, FL Schools' Ratings; Assigns Sales Tax Revs Positive Outlook

NEW YORK --(Business Wire)--

Fitch Ratings affirms the following ratings for the Hillsborough County School District, FL (the district):

--Implied unlimited tax general obligation (ULTGO) at 'AA+';

--$827 million outstanding Hillsborough School Board Leasing Corp. certificates of participation (COPs) at 'AA';

--$197 million outstanding community investment tax (CIT) sales tax revenue bonds at 'BBB+'.

The Rating Outlook is revised to Positive from Stable for the sales tax bonds. The Rating Outlook is Stable for the implied ULTGO and COPs.

SECURITY

The COPs are secured by lease payments made by the district to the trustee pursuant to a master lease purchase agreement. Lease payments are made from legally available funds of the district, subject to annual appropriation. In the event of less than full appropriation, the trustee may force the district to 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.

The sales tax revenue bonds are secured by the district's share of a one-half cent local infrastructure sales tax or CIT, levied and collected by Hillsborough County (the county). The CIT was approved by voters for a 30-year period ending Dec. 1, 2026, two months after the final maturity of the bonds. According to an interlocal agreement between the county and the district, the district receives 25% of total revenue collected within the county.

KEY RATING DRIVERS

IMPROVING SALES TAX COVERAGE: The Outlook revision on the CIT sales tax revenue bonds reflects strengthening debt service coverage, with fiscal 2013 CIT revenues generating 1.20x MADS coverage. Revenues have experienced a three-year upward trend and are reportedly trending higher in fiscal 2014 as well.

STRONG FINANCIAL MANAGEMENT: The district's adherence to its fiscal policies, combined with conservative budgeting and expenditure controls, have contributed to sound reserves despite fluctuations in property tax revenues and state funding.

DIVERSE ECONOMY: The county serves as the economic anchor of western Florida, with significant employment in the professional and business services and education and health services. Signs of economic stabilization are evident as employment levels have improved and sales tax revenues continue an upward trend.

LOW DEBT BURDEN: The district's debt burden is low, and debt service requirements do not pressure the financial profile. The district has no immediate near-term borrowing plans.

DEPENDENCE ON (News - Alert) STATE REVENUES: Like most Florida school districts, the district remains dependent upon state funding which has fluctuated in recent years.

RESIDUAL SALES TAX REVENUES MAINTAINED BY DISTRICT: The district continues to hold in reserve a significant amount of residual sales tax revenues, which it has indicated it would utilize if necessary to compensate for any deficiency in pledged revenues.

COPS SUBJECT TO APPROPRIATION: The 'AA' COPs rating reflects the district's general credit quality, the district's obligation to make annually appropriated lease payments under a master lease structure, and the essentiality of leased assets.

RATING SENSITIVITIES

INCREASING PLEDGED CIT REVENUES: The sales tax bonds' rating is sensitive to debt service coverage from pledged revenues. A continued positive trend in CIT revenues and coverage likely would result in an upward revision to the rating.

CONTINUED STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics, including the district's strong financial management practices and maintenance of adequate reserves. The Stable Outlook on the COPs and implied ULTGO reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district is coterminous with Hillsborough County and is located on central Florida's western coast and includes the city of Tampa.

NARROW BUT IMPROVING SALES TAX COVERAGE

CIT sales tax revenues have continued the upward trend that began in fiscal 2011, with annual increases of 3.7%, 4.2% and 4.5% through fiscal 2013. Fiscal 2013 revenues covered MADS by 1.20 times (x) versus 1.15x for the previous fiscal year; annual coverage for fiscal 2013 was comparable at 1.22x.

Fiscal 2014 monthly sales tax collections through December are reportedly 4.3% higher than the same period for fiscal 2013. The revision in the Rating Outlook to Positive reflects this upward trend in revenues and coverage, and continuation of this trend likely would result in an upgrade.

District residual CIT revenues total $38.8 million, up from $33 million one year ago. These residual revenues are available if necessary to compensate for any deficiency in the current year's pledged revenues, although they are not pledged to bondholders.


Bond documents restrict additional debt through a 1.20x pro forma MADS additional bonds test. The debt service reserve is funded by a surety policy from Ambac (not rated by Fitch).

BROAD EMPLOYMENT BASE RECOVERING

Hillsborough County (GO bonds rated 'AAA' with a Stable Outlook by Fitch) serves as the economic center for Florida's Gulf Coast. Major economic sectors include business services, health care and education. Signs of recovery from the recent recession for this historically strong and diverse economy are evident. An uptick in employment has driven down the December 2013 unemployment rate to 5.7%, a healthy improvement from 7.6% last year. Wealth levels are slightly above the state average and just below national levels.

Rapid population growth has historically driven corresponding enrollment increases in the district. Recent enrollment growth has become more moderate with a 1.8% increase in fiscal 2013. The district expects moderate enrollment gains to continue for the next few years.

RESERVE LEVELS LOWER BUT SOUND

The district has managed a decline in state funding and the recently imposed unfunded state operating mandates through the use of built up reserves and expenditure cuts. Financial performance for fiscal 2012 and 2013 resulted in deficit operations and a drawdown on general fund reserves, most of which were planned. This followed two fiscal years of surplus operations and a buildup in reserves.

During fiscal 2012, the state cut school aid to districts statewide as it grappled with its own financial pressures. Many districts, including Hillsborough County, relied on federal stimulus and American Recovery and Reinvestment Act (ARRA) monies they received during fiscal 2011 to manage the cuts in state aid. The district ended fiscal 2012 with an unrestricted general fund balance of $268.2 million (18.6% of spending) down from $331.2 million (24% of spending) in fiscal 2011.

During fiscal 2013 the district experienced a $29.4 million net operating deficit due to a combination of one-time expenses associated with equipment, technology and security, as well as various state-mandated expenditures. The district ended fiscal 2013 with an unrestricted fund balance of $233.7 million, or a still sound 16% of general fund spending. This total handily exceeded the district's fund balance policy of maintaining an unassigned reserve equal to or greater than 5% of total anticipated revenue for the following year plus carry-forwards.

FISCAL 2014 BUDGET

The district benefited from the increases in the state's education funding for fiscal 2014 over the prior year, which will pay for teacher salary increases. The fiscal 2014 budget also includes new spending for state mandated reading programs and security, which management will absorb through teacher assignment and scheduling changes, as well as certain temporary hiring freezes and the outsourcing of certain services.

Management has indicated its intention to maintain fund balance levels in excess of its policy. The recent state-mandated spending is generating some pressure on operations, but Fitch believes the district retains the ability to adjust outlays to offset these directives. Management's history of prudent fiscal controls suggests that the district's sound financial profile will be maintained.

FAVORABLE DEBT PROFILE

Overall debt levels are low at $1,613 per capita and 2.5% of market value. Variable rate debt equals a low 10% of total district debt, a level that Fitch believes is manageable.

The district's facilities are reportedly in good shape, with capital needs greatly reduced after a building push earlier in the decade driven by escalating enrollment and state mandated class size requirements. The district uses excess revenue from the 1.5 mill capital outlay levy, after COPs debt service, for the majority of its capital and maintenance needs. No additional borrowing is planned presently.

COPS DEBT SERVICE

While any legally available revenue can be used for COPs debt service, the district has historically made payments from the 1.5 mill capital outlay tax. With the district's taxable assessed value (TAV) for fiscal 2014 of $69.7 billion, a 1.024 mill rate generates sufficient revenues, assuming a 96% tax collection rate, to cover fiscal 2014 COPs debt service of $68.6 million.

The master lease structure on the district's COPs is strong, requiring an all-or-none appropriation. In the case of non-appropriation, the trustee is authorized to require the district to surrender use of all facilities under the master lease, which would amount to approximately 20% of the district's facilities. Fitch considers this requirement a strong incentive to appropriate.

RETIREMENT COSTS ARE MANAGEABLE

All district employees participate in the state operated retirement system. Pension and OPEB costs are affordable. Total carrying costs for pension, OPEB pay-go and debt service equaled an affordable 7.3% of total fiscal 2013 governmental spending.

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 (News - Alert) Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 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=820933

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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