[February 12, 2013]

Fitch Rates St. Lucie County School Board COPS 'A+'; Outlook Stable

Fitch Ratings has assigned an 'A+' rating to the following St. Lucie County School Board, Florida's (the board or district) obligations:

--$75 million refunding certificates of participation (COPS) series 2013A.

The bonds are expected to sell via negotiation during the week of February 18th.

In addition, Fitch affirms the following ratings:

--$105.4 million COPS series 2005, 2011A and 2011B at 'A+';

--$108.8 million sales tax revenue bonds, series 2006 at 'A';

--Implied unlimited tax general obligation bonds at 'AA-'.

The Rating Outlook is Stable.

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 master lease requires the district to appropriate funds for all outstanding sub-leases 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.

The sales tax bonds are secured by the proceeds of half cent school capital outlay sales tax.

KEY RATING DRIVERS

FINANCIAL FLEXIBILITY: The district benefits from a strong experienced management team which practices conservative budgeting and prudent fiscal planning. Adequate reserves and options for spending cuts provide the district with satisfactory financial flexibility.

STRONG MASTER LEASE PROVISIONS: The 'A+' rating on the COPS is based on the district's general creditworthiness and the COPs' sound legal structure and available capital millage. The master lease structure requires all or none appropriation and the 1.5 mill capital millage outlay typically used for lease payments provides more than sufficient revenues to meet debt service requirements.

ADEQUATE SALES TAX COVERAGE: Sales tax revenues have improved over the past two years and the 'A' rating reflects the narrow but adequate coverage levels on the outstanding bonds.

LOW CARRYING COSTS: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are very manageable and no material changes are expected.

LIMITED LOCAL ECONOMY: The district's economic base remains somewhat limited despite recent diversification and exhibits below average levels of income and high unemployment.

RATING SENSITIVITIES

STRUCTURAL IMBALANCE: If the district is unable to eliminate the fiscal 2014 structural deficit and maintain reserves at close to forecast levels, there could be negative rating action.

CREDIT PROFILE

St. Lucie county, whose boundaries are coterminous with those of the school district, is located along the east coast of Florida and has a year round population of approximately 280,000. Encompassing 76.7 square miles, the largest city in the county is Port St. Lucie (Fitch rated 'AA' with Stable Outlook) with a population of 164,000.

PROACTIVE FINANCIAL PLANNING

The district benefits from a strong and knowledgeable management team which prudently focused on building reserves in the anticipation of upcoming budgetary shortfalls. Over the two year period of fiscal 2010 and 2011 the district added $18 million to reserves by implementing a nearly $30 million expenditure reduction, increasing transfers from the capital improvement fund, and the levying a temporary 0.25 mill critical needs millage (expires in fiscal 2013).

As a result of these measures as well as the receipt of Federal stimulus funds, general fund balance grew to approximately $28 million (11.7% of expenditures) in fiscal 2011. Unaudited fiscal 2012 results indicate an operating deficit of just under $4 million (1.4% of expenditures) and a still ample unrestricted general fund balance to spending of 9.8%.

FINANCIAL CHALLENGES AHEAD

Consistent with its budget, the district plans on using $13 to $15 million of general fund balance in fiscal 2013 as Federal stimulus funds dry up and the district reduced transfers in to the general fund from the capital improvement fund to their former levels. The use of available reserves will reduce total general fund balance to approximately $17 million (6.1% of expenditures) at the end of fiscal 2013, which remains above the informal target of 5% of expenditures which Ftch believes provides an adequate amount of financial flexibility for the rating level.

The district faces a $15 million revenue shortfall in fiscal 2014. Management has identified over $20 million in possible expenditure reductions including privatization of custodial services, a 10% reduction in board contribution to employee health insurance and the closure of two schools. The identified reductions do not need voter approval and the board's past willingness to implement the necessary reductions makes it reasonable to believe that the board will act prudently to restore fiscal balance to the general fund.

The budget gap reflects increased costs as well as the redirection of approximately $5 million from the capital improvement fund that had supported operations (general maintenance and other projects) in recent years and the loss of revenue from the 0.25 mill critical needs levy in 2014 ($3.75 million).

The district plans to implement budget cuts in order to maintain total general fund balance at or slightly below the informal policy level of 5% of expenditures. The Stable Outlook is based on Fitch's expectation that management will implement sufficient expenditure reductions to fund operations going forward, preserving the districts stable financial position.

CARRYING COSTS ARE MANAGEABLE

Overall debt levels are moderate at 3.5% of market value and $2,566 per capita; amortization of direct debt is average with 54% of principal retired within 10 years. Debt levels are expected to remain stable, as no additional long-term debt is presently contemplated.

Pensions are provided through the state run Florida Retirement System (FRS) and total annual pension contributions were a manageable at 5% of expenditures in 2011. FRS is well funded at 80% and as such costs are not expected to increase materially.

OPEB is currently funded on a paygo basis and the unfunded liability represents a very low 0.04% of market value. Carrying costs including debt service, pension and OPEB were a very manageable 12% of total fiscal 2011 expenditures.

IMPROVEMENT IN SALES TAX REVENUES

Fiscal 2012 sales tax receipts increased 2.2% over the prior year to $12.7 million or 1.25 times (x) maximum annual debt service (MADS). Collections peaked at $15.1 million or 1.5x MADS in fiscal 2006 then declined through fiscal 2010 due to the poor economic conditions. With the uptick in economic activity, Fitch expects sales tax to continue to expand over the next two or three years.

The debt service reserve account which had been satisfied by a surety from National Public Finance Guarantee, formerly MBIA has been replaced with a Letter of Credit from JP Morgan (News - Alert) which will expire in 2014. The district has a balance of $411 thousand in surplus sales tax collections that, if retained, can be used to meet debt service or other capital needs.

LIMITED LOCAL ECONOMY

The county's economy, historically driven by its sizable residential base, is also led by service sector activities with concentrations in tourism and construction. The county was hard hit by the housing downturn beginning in 2007. Home values dropped by over 60% from 2006, the largest decline of any county in Florida according to Case Schiller. More recent data indicates tentative stabilization in the housing market, but home values remain well below their former highs.

The opening of the Torrey Pines Institute of Molecular Studies in Port St. Lucie in 2008 has fostered a small but growing biotech hub in the area, providing both jobs and diversification to the underlying economy. Recent developments include the opening of Martin Memorial Health Systems and the Vaccine and Gene Therapy Institute with additional biomedical projects scheduled to open in 2014.

Income levels are below average, with per capita money income equal to 87% of the state average and 83% of the national. Unemployment rates remained high at 10.5% in November 2012 above both the state (8%) and nation (7.4%) in the same month. Improvements in year over year unemployment were mainly attributable to a decline in the labor force.

ASSESSED VALUE DECLINES ARE SLOWING

The district experienced large assessed value (AV) declines reflecting the housing meltdown; however the pace of tax base devaluation has slowed more recently to 4.2% and 1% in fiscals 2012 and 2013, respectively. Fitch believes that tax base stabilization is imminent as housing begins to rebound. While Fitch notes that Florida school districts are less dependent on the tax base than other local entities, tax base losses do lessen revenues available for capital needs as well as critical discretionary millage revenues. Property tax collection rates remain slightly above the 96% budgeted rate, despite significant economic pressures.

STRONG MASTER LEASE PROVISIONS

Lease payments are payable from any legally available source; however, on a budget basis, payments are made from the district's capital millage outlay which can be levied up to 1.5 mills for lease payments for COPs issued before 2009. For bonds issued post 2009, state law limits the amount to be used for COPs repayment to 75% of the 1.5 mill levy or 1.125 mills. In fiscal 2012, the 1.5 mill levy provided ample revenues to meet MADS. While the lease payments are subject to appropriation, the 'all or none' payment requirement under the master lease would result in the loss of all or parts of nearly 30% of the district's schools which are covered under the lease should the district fail to appropriate. The 'all or none' appropriation feature provides significant enhancement to the credit.

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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