Fitch Rates Hillsborough County FL School District's $166MM Ser 2017 Rfdg COPs 'AA'; Outlook Stable

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1 Fitch Rates Hillsborough County FL School District's $166MM Ser 2017 Rfdg COPs 'AA'; Outlook Stable Fitch Ratings-New York-23 October 2017: Fitch Ratings has assigned a 'AA' rating to the following Hillsborough County FL School Board's certificates of participation (COPs): --$51,985,000 refunding COPs series 2017B; --$98,535,000 refunding COPs series 2017C; --$15,530,000 taxable refunding COPs series 2017D. The series 2017B COPs are being issued to refund certain outstanding maturities of the series 2012A COPs of the issuer. The series 2017C and 2017D refunding certificates will provide for the refunding of the current variable rate series 2008A COPs and the elimination of the associated interest rate swap outstanding, subject to market conditions. The COPs will be sold via negotiated sale during the week of Oct. 30. In addition, Fitch has affirmed the following ratings: --Approximately $430 million outstanding Hillsborough County FL School Board and School Board Leasing Corp. COPs at 'AA'; --Hillsborough County FL School District's Issuer Default Rating (IDR) at 'AA+'. The Rating Outlook is Stable. SECURITY The COPs are payable from 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 by the Hillsborough County FL School Board. In the event of less than full appropriation, the trustee may force the district to surrender

2 possession of all leased facilities under the master lease to the trustee for disposition of its interest in such facilities by sale or re-letting. ANALYTICAL CONCLUSION The 'AA' rating on the COPs is one notch below the district's IDR, reflecting the slightly higher degree of optionality associated with lease payments subject to appropriation. The district's 'AA+' IDR reflects the solid prospects for enrollment-driven revenue growth, historically low fixed carrying costs, a low long-term liability burden and sound reserves relative to revenue volatility and budgetary flexibility. Economic Resource Base The district is coterminous with Hillsborough County ('AAA' IDR/Outlook Stable), is located on central Florida's western coast and includes the city of Tampa ('AA+' IDR/Outlook Stable). The county's census population was an estimated 1,376,238 for 2016, up 12% since KEY RATING DRIVERS Revenue Framework: 'a' District revenues are comprised of a combination of state allocations and local property taxes. The district's 10-year general fund revenue growth rate (through fiscal 2016) exceeded inflation and was equal to U.S. economic performance and Fitch expects future growth to be solid. The improved environment for state school funding following the recession bodes well for the district as its enrollment is expected to continue trending positively supported by the strong economic growth occurring in the county. The district has no independent legal ability to raise revenues. Expenditure Framework: 'aa' Fitch expects the natural pace of spending to remain in line with or rise marginally above the natural pace of revenues. The district's carrying costs are low and management retains satisfactory ability to control labor costs and staffing levels after engaging in a structured bargaining framework.

3 Long-Term Liability Burden: 'aaa' The district's long-term liability burden, including overlapping debt, is low at roughly 5% of personal income. Fitch expects the liability burden to remain low based on expectations for limited future debt offerings and a relatively well funded state pension system for which the district is paying full actuarially determined contributions. Operating Performance: 'aaa' The district has historically maintained sound financial flexibility, despite notable declines in reserves over the past few years for mainly operational needs. Management took significant measures to eradicate its recent structural imbalance and has expressed its commitment to maintaining at a minimum its current level of financial resilience. Fitch believes that the district, supported by its solid expenditure flexibility and relatively stable revenue base, will manage through periods of economic decline and maintain its sound gap-closing capacity. RATING SENSITIVITIES MAINTENANCE OF RESERVES: Fitch expects management to continue to manage its operations with a goal towards maintaining similar to stronger levels of reserves during this period of economic recovery. Results contrary to Fitch's expectations will likely lead to a downward change in the rating. CREDIT PROFILE The county is located along the western coast of Florida with a population of 1.8 million. Along with its largest city, Tampa, the county serves as the economic center for Florida's Gulf Coast with major sectors of business services, government, health care, education and tourism. MacDill Air Force Base and the Tampa Port are major economic engines. Following a severe recession, the county has been experiencing a sustained and vigorous recovery, characterized by strong and consistent job growth since 2010, a rebound in housing and the resumption of tax base growth since fiscal The housing market continues to thrive after a period of sharp declines during the recession. Taxable values reversed the downward trend in fiscal 2014,

4 growing by 5%. Growth has subsequently continued with annual increases of over 7% in fiscals 2015, 2016 and A large upgrade and expansion project at Tampa International Airport and a proposed $3 billion waterfront mixed use development project in Tampa are expected to support new job growth. Fitch believes that underlying economic characteristics of the county point to favorable prospects for continued tax base, employment and enrollment growth. Revenue Framework The Florida Education Finance Program (FEFP) is the primary mechanism for funding the operating costs of Florida school districts. The FEFP process determines a base per-student funding level. The funding is split between state funds, largely derived from statewide sales tax revenue, and local funds via the required local millage rate established pursuant to state statutory procedure. Discretionary taxes for operations and capital/maintenance are also levied by the district up to the statutory maximum rates of mills and 1.5 mills, respectively. Fitch's view of school district revenue prospects considers the revenue performance of the state as a starting point given its fundamental responsibility for public education funding. Fitch believes Florida's revenues will grow at a pace that is above the rate of inflation but below U.S. economic performance based on a resumption of population growth and stronger economic expansion. School district revenue expectations are somewhat tempered by the state's education funding commitments, which have been variable in recent history with annual changes in the base student allocation as low as a 1%-2% increase for the past two fiscal years. Enrollment trends and expectations are the second key determinant of a school district's revenue growth prospects and are based on Fitch's view of the local economy, demographic patterns, and competition from nontraditional public schools, among other factors. District general fund revenue growth over a 10 year period (through fiscal 2016) was greater than inflation and in line with GDP growth for the same period. Going forward, Fitch expects the natural pace of revenue growth to

5 continue on a positive trajectory given recent enrollment growth and projections for continued modest enrollment gains. Enrollment has grown in traditional schools as well as charter schools and management projects moderate growth to continue. The potential for an influx of students from Puerto Rico as a result of Hurricane Irma could result in an even higher percentage of new students than has been occurring the past few years. Due to the state funding mechanism, Florida school districts have very limited ability to independently increase general fund revenues. However, this limitation as a factor in the revenue framework assessment is somewhat offset by the recognition of K-12 education as fundamentally a state responsibility and the strong foundation of state support for education funding. Expenditure Framework Personnel costs for teachers and staff comprise the vast majority of district expenditures. Fitch expects expenditure growth to be in line with to modestly above expected revenue growth in the absence of policy action, reflecting enrollment-driven spending needs largely funded by increases in state and local funding. The district's mandate to provide educational services places some limitations on its ability to make expenditure reductions in the event of a revenue decline. Nonetheless, the district's relatively low carrying costs and ability to modify class sizes, reduce personnel, adjust curriculum, and make other cuts if needed, provide solid expenditure flexibility. Carrying costs for debt service (excluding principal retired due to refundings), pension contributions, other post-employment benefits (OPEB) and Florida Health Insurance Subsidy plan contributions represented an estimated 9% of total governmental spending in fiscal Long-Term Liability Burden The district's combined burden of debt and pension liabilities, relative to personal income, is low at about 5% with overall debt accounting for most of the liabilities. There are no plans to issue additional bonds in the medium term. Variable rate debt prior to the proposed refundings equals an approximate 20% of total direct district debt. After issuance of the series

6 2017C COPs, variable rate debt would comprise approximately 9% of total direct debt, which Fitch considers to be a moderate level of risk. The district participates in the Florida Retirement System and administers a single-employer defined benefit early retirement plan. The estimated Fitchadjusted ratio of assets to liabilities for these combined plans is 75% (using a 6% investment rate of return (IRR) for the FRS plan based on a measurement date of June 30, 2015). The early retirement plan assumes a 2.5% IRR. The district's liability related to OPEB is less than 1% of personal income. Operating Performance Fitch's rating reflects its belief that the district is committed to maintaining at a minimum its current level of financial resilience. Flexibility is augmented by available balances in the district's capital projects fund. The district has experienced relatively stable revenue performance throughout economic cycles, attributable to continued enrollment growth. Fitch's Analytical Sensitivity Tool (FAST) suggests a potential 1% revenue decline for the district in a moderate economic decline in which GDP drops by 1%. During fiscal 2017, management continued its efforts to control spending and saw a reduction in staff of 3.6% or 1,030, mostly through attrition. Full time enrollment, excluding charter school students, increased by close to 1,000 to 193,569. However, the district experienced a $5 million general fund operating deficit (0.3% of spending) for fiscal 2017 in part because of a midyear $9 million charge to the general fund to increase the district's workers' compensation reserve account pursuant to a new actuarial study. Overall spending declined for the second year in a row but exceeded revenues as planned savings did not fully materialize. The estimated general fund unrestricted fund balance is expected to remain roughly at 7% of spending. The fiscal 2018 budget was approved at $1.67 billion, up 1% from projected fiscal 2017 actual spending. The budget reflects a 5% increase in FEFP funding and moderate increases in instructional costs offset by reductions in transportation and plant operation spending. Fitch believes the district's efforts to control employee costs related to salaries and benefits remain key to its success in maintaining structural balance and a sound reserve position.

7 Fiscal 2016 operating results were flat following a large operating deficit in fiscal 2015 wherein reserves of $84 million (5% of spending) were utilized primarily to support unbudgeted negotiated salary raises and bonuses. Management was successful in eradicating its estimated $100 million structural imbalance through the implementation of significant cost efficiencies, reduction in employees due mostly to attrition, a realignment of positions and strong spending controls. Prior years' usage of fund balance was related to one-time uses for equipment, technology and security upgrades. Management continues to implement cost saving strategies and the reorganization and reduction of its workforce with a goal to slowly increase its reserve position. Fitch recognizes the efforts made by the current administration to maintain balanced operations and expects enrollment and state funding growth to continue, resulting in revenue growth. State mandated programs and a lesser degree of available options for spending cuts will continue to burden the budget. Spending pressures resulting in what Fitch views as weaker financial resilience could result in a downgrade in the district's ratings. Contact: Primary Analyst Kevin Dolan Director Fitch Ratings, Inc. 33 Whitehall Street New York, NY Secondary Analyst Michael Rinaldi Senior Director Committee Chairperson Amy Laskey

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