Fitch Rates Orange County School Board Corp, FL's $60MM COPs 'AA'; Outlook Stable Fitch Ratings-New York-08 December 2017: Fitch Ratings has assigned a 'AA' rating to the following obligations issued by the Orange County School Board Corporation, Florida: --Approximately $60 million certificates of participation (COPs), series 2017C. The Orange County School District's Issuer Default Rating (IDR) is 'AA+'. The Rating Outlook is Stable. The COPs will be sold on a negotiated basis on or about Dec. 14. The proceeds will be used to advance refund the outstanding series 2014A COPs. SECURITY The COPs are payable by lease payments equal to debt service on the COPs to be made by the Orange County School Board, subject to annual appropriation, to the Orange County School Board Leasing Corporation under a master lease purchase agreement. In the event of non-appropriation the trustee may force the school board to surrender possession of all leased facilities under the master lease for disposition by sale or re-letting of its interest in such facilities. ANALYTICAL CONCLUSION The 'AA+' IDR reflects the district's superior financial strength combined with a relatively modest long-term liability load. Fiscal operations are supported by solid spending flexibility and high reserves. These features plus the district's strong growth prospects offset a very restrictive revenue-raising framework. The COPs rating is one notch below the IDR reflecting the slightly higher
degree of optionality associated with lease payments subject to appropriation. Economic Resource Base The district is coterminous with central Florida's Orange County (AAA/Stable). The county's population has experienced over 14% growth since 2010 to an estimated 1.3 million for 2016. The growing health and education sector of the county, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based in tourism. Fitch expects the above-average growth rate of area employment to lift county income indicators, which are currently below national levels. Charter school enrollment is growing at a steady pace, although it is currently only 7% of the total student population. KEY RATING DRIVERS Revenue Framework: 'a' The school board has limited discretion over revenues, as per capita funding levels are set by the state. However, district revenues show steady, strong growth, due to solid enrollment increases and some growth in state per-pupil funding, both of which are expected to continue. Expenditure Framework: 'aa' The school board demonstrates strong flexibility to adjust spending to match revenue trends, most notably during the past recession. This flexibility is enhanced by the district's low carrying costs. Fitch expects spending to be generally in line with revenue growth over time. Long-Term Liability Burden: 'aaa' The long-term liability burden is relatively low, with most of the district's debt consisting of COPs. This burden is expected to remain stable given the district's ability to fund a sizable capital program largely on a pay-as-you-go basis, limited debt plans and an adequately funded pension system. Operating Performance: 'aaa' The district's spending flexibility and ability to secure additional revenues through voter referendum have enabled it to maintain high reserve levels even with the challenges experienced during the Great Recession. Fitch
expects district management to continue such policies during future downturns. RATING SENSITIVITIES FINANCIAL RESILIENCE: The district's financial resilience, supported by solid reserve funding, is a principal consideration in the 'AA+' IDR. Reserves provide a sound level of financial flexibility in the event of state school funding changes. CREDIT PROFILE The district operates 195 schools with pre-k through 12 enrollment totaling over 200,000 in the 2017-18 school year. Robust population growth has resulted in corresponding rise in enrollment in the district. The leisure and hospitality sector is a major component of the local economy, making up about 20% of total area employment. Disney is the leading employer with about 74,000 or more than 10% of the total county workforce while Universal Orlando reports 19,000 employees. Both corporations continue to make substantial investments in their parks. The county has experienced positive job growth for six straight years and unemployment rates are below the state and national benchmarks. Fitch believes that the underlying economic characteristics point to favorable prospects for continued tax base, employment and enrollment growth. Revenue Framework Common to Florida school districts, revenues are derived almost entirely from a combination of property taxes and state aid. The state establishes statewide per-student revenues under the Florida Educational Finance Program (FEFP) equalized per-student funding formula. Overall funding for each district in any year is determined by enrollment. The state then determines the level of property taxes to be levied within the district and provides the remainder of funding. Typically, the larger a district's tax base, the higher proportion of revenues sourced from property taxes. In fiscal 2017, state revenues accounted for 52% of total district general fund revenues while property taxes accounted for 47%.
Historical growth has exceeded the pace of both inflation and national GDP due in large part to solid enrollment growth as revenues are distributed on a per pupil basis. Prospects for future revenue expansion are favorable due to projected increases in student enrollment driven by robust population growth. Florida FEFP funding levels have lagged the rate of growth in state general fund revenues in recent years, with the district's fiscal 2017 FEFP per student allocation rising 1% over fiscal 2016 allocations. The district has no independent legal ability to raise revenues outside of some minor fees. The risk associated with the district's limited revenueraising ability is offset by the recognition of K-12 education as a fundamental state responsibility and the strong foundation of state support for education funding. The district gained an additional 3,000 new students (1% of total enrollment) from Puerto Rico after Hurricane Maria. District officials indicate a majority of new students have enrolled in its traditional schools which may result in an adjustment to the FEFP funding. Fitch believes the recent influx of students will be temporary and may partially reverse as storm damage is repaired. Expenditure Framework About two-thirds of the district's spending is instruction-related with the most important components being teacher salaries and benefits. The pace of spending growth generally matched revenue trends. Spending trends going forward are expected to be in line with revenue growth as increased spending demands fueled by enrollment growth are funded by corresponding revenue expansion. The district's fixed carrying costs for debt, pensions and OPEB benefits are modest at 7% for fiscal 2017 affording it significant spending flexibility. Management reduced instructional staff by over 1,100 or 10% between fiscals 2008 and 2010 in order to curtail expenditures. Since then, the district has steadily added back teaching personnel, which now exceed prerecession levels. State class size requirements can affect personnel decisions although the penalties for non-compliance are modest. The district is currently meeting its minimum class size mandates.
Long-Term Liability Burden Fitch estimates the district's total long-term liabilities, including overall debt and the unfunded pension liability, at 9% of personal income. Direct debt consists primarily of COPs issued under the master lease structure. About two-thirds of the total burden is attributable to debt of overlapping of underlying jurisdictions, particularly the county and the city of Orlando (AAA/Stable). Almost half of the overlapping debt consists of bonds payable from the tourist development taxes (hotel taxes) which are mostly paid by visitors. Neither the county nor the city has plans for substantial new debt. The district's variable-rate debt makes up about 10% of its debt portfolio. Fitch considers this position manageable due to the district's strong liquidity and history of market access and the low level of carrying costs. All of the positions are hedged and despite a negative valuation of $33 million as of November 2017, the district is not exposed to collateral posting. Given the limited debt plans of the district and overlapping jurisdictions, debt levels are expected to remain relatively stable. Capital improvements are funded from a combination of existing reserves in the capital projects fund, proceeds from the voter-approved capital outlay sales tax (renewed through 2025), property taxes and impact fees. Florida passed legislation in July 2017 (HB7069) that requires districts to allocate a portion of the capital outlay millage on a per student basis to support eligible charter school capital projects. According to district officials, the amount estimated to be shared with the charter schools is less than $4 million, which Fitch believes will have a nominal impact on the district. The district, along with 13 other school boards, filed a lawsuit in October 2017 to challenge the constitutionality of HB 7069. The district participates in the adequately funded Florida Retirement System (FRS). FRS reported an asset to liability ratio of 85%, or an estimated 70% when adjusted by Fitch to assume a 6% rate of return (as of the June 30, 2016 measurement date). Operating Performance
The district proved exceptionally resilient during the severe downturn in Florida beginning in 2007, reporting positive general fund results throughout the recession despite a fall-off in state per student funding levels. The strong results were primarily attributable to the district's spending flexibility - general fund spending fell by 16% between fiscals 2008 and 2011 - and rapid revenue escalation since fiscal 2010. Voter-approved discretionary revenues have enhanced revenues. Management secured an additional discretionary 1 mill for operations which was renewed by voters in fiscal 2014 for four years. The 1 mill provides over $100 million in supplemental operating funds annually and is set to expire in fiscal 2019. District officials plan to seek voter approval to extend it for another four years. In a moderate economic downturn, Fitch expects the district to respond to a decline in revenues similarly as in the past by taking actions to reduce spending in order to rebalance operations while maintaining a high level of financial flexibility. The district incurred general fund deficits in fiscals 2014 and 2015 that were driven primarily by non-recurring employee bonuses and the upfront payment of the two-year salary increase negotiated for fiscal 2015-2016. Despite the deficits, fiscal 2015 unrestricted general fund reserves represented a robust 22% of spending. Fiscal 2016 results reflect a $51 million surplus after transfers, as several scheduled projects were postponed, boosting the reserve position to 25%. Unaudited results for fiscal 2017 report an approximate $12 million use of reserves, reflecting the timing of projects and non-recurring spending. Unrestricted general fund reserves are estimated at 23% of total spending for fiscal 2017, which was in line with prior fiscal year results. The district's fiscal 2018 adopted general fund budget is 2% higher than the fiscal 2017 budget, reflecting a continued rise in instructional and support costs, including increased staffing for its six new schools, and an expanded digital curriculum. The budget also incorporates a modest increase in FEFP funding and a reduced millage rate (7.470) and is balanced with the use of reserves. The district typically budgets conservatively and expects better than budget revenue and expenditure performance to result in a lower draw. Fitch
believes the district will continue to maintain solid reserve levels, consistent with past performance. The district did not experience significant damage related to Hurricane Irma. District officials estimate the costs of debris clean-up and repairs at $12 million, to be funded with general fund reserves, and expect to recover the costs through FEMA reimbursements. Contact: Primary Analyst Grace Wong Director +1-212-908-0652 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Rinaldi Senior Director +1-212-908-0833 Committee Chairperson Laura Porter Managing Director +1-212-908-0575 Date of Relevant Rating Committee: July 21, 2017 In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
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