Fitch Downgrades Ratings on Manatee County School Board, FL; Outlook Negative

Fitch Ratings has downgraded the following ratings on the Manatee County School Board, Florida (the district):

--Implied unlimited tax general obligation (ULTGO) to 'BBB' from 'BBB+';

--$185 million certificates of participation (COPs), series 2005A, 2007, 2008A, 2009, and 2011A to 'BBB-' from 'BBB';

--$14.3 million sales tax revenue bonds, series 2005 to 'BBB' from 'BBB+'.

The Rating Outlook is Negative.

SECURITY

The COPs are payable from lease rental payments made by the district, subject to annual appropriation, pursuant to a master lease purchase agreement. Bondholders are further secured by a leasehold security interest in certain educational facilities.

The sales tax revenue bonds are secured by the proceeds of the local government half-cent sales tax collected within the county and distributed between the county and its incorporated municipalities based on a population-driven formula. Limited additional security is also provided by a debt service reserve account satisfied by a surety bond.

KEY RATING DRIVERS

CONTINUED DEFICITS DRIVE DOWNGRADE: Recurring operating deficits driven by a combination of overspending and mismanagement have resulted in negative general fund balances the last two fiscal years. Fiscal 2013 unaudited results are in sharp contrast to prior expectations of a positive ending fund balance.

FINANCIAL MANAGEMENT QUESTIONS REMAIN: Recent actions have been taken to reduce and more accurately monitor district spending but the district's history of failed budget forecasts remain a concern. Furthermore, the district faces sizable penalties stemming from prior years misuse of funds that could deter progress in improving its reserve position. These factors largely account for the maintenance of a Negative Outlook.

LOW DEBT: Key debt metrics are low, capital needs are affordable, and no additional borrowing is expected.

SALES TAX CAPPED AT GO: The rating on the sales tax revenue bonds is capped by the implied GO rating. Sales tax revenues continue to increase modestly, coverage is satisfactory at 1.5x, and there is essentially no risk to additional leveraging given the short remaining term of the sales tax authorization.

COPS NOTCHED OFF GO: A single-notch distinction between the implied GO and the COPs recognizes risk to annual appropriation, master lease provisions including 'all or none' appropriation requirement, and a leasehold interest on a significant number of essential school facilities.

RATING SENSITIVITIES

FINANCIAL STABILITY AND IMPROVEMENT KEY: Maintenance of the current rating requires progress towards fund balance restoration to positive albeit modest levels and improved budgetary stability.

CREDIT PROFILE

The Manatee County School Board shares the same geographic boundaries as Manatee County (the county), encompassing an area of 740 square miles on Florida's Gulf Coast, approximately 45 miles south of Tampa. The district operates 53 schools and has a current enrollment of 45,660 students. The county has an estimated 2013 population of 333,951. The county seat and the largest municipality in the county is the city of Bradenton (implied Fitch ULTGO rating of 'AA').

TEPID FINANCIAL POSITION WEAKENS ON FISCAL 2013 PERFORMANCE

Unaudited general fund operating results for fiscal 2013 were notably weaker than previous expectations. An operating deficit (after transfers) of $4.04 million resulted in an accumulated unrestricted fund balance deficit of $8.97 million or negative 2.7% of general fund spending.

The district had forecast a positive ending balance of $6.6 million or 2.1% for fiscal 2013 in a financial recovery plan submitted to and approved by the Florida Department of Education (DOE). Florida school districts are required to submit this plan if their unassigned and assigned fund balance is less than 2% of revenue.

The district has now failed to meet the state fund balance requirement for three straight years. DOE remains engaged with the district and there are no indications from either party that a fiscal emergency board with consultation and review powers is presently considered.

LOW BALANCE SHEET LIQUIDITY

General fund liquidity levels are low (Fitch estimates less than 30 days' cash on hand at the end of fiscal 2011 and 2012) and essentially dependent on interfund loans from several internal service funds (ISF). The ISFs maintain a surplus net position on a combined basis and premium revenue has sufficiently covered operating expenses the last several years.

The district also routinely issues tax anticipation notes in July or August which are paid back the following in May - the principal amount for the current year is $50 million or a somewhat high 15% of general fund revenue. Revenue from the state accounts for approximately 50% of total sources and is distributed somewhat evenly over the course of the year.

FINANCIAL MANAGEMENT CONCERNS

General fund operating deficits have now been recorded in seven of the prior eight fiscal years, resulting in an aggregate loss of $21.9 million in reserves. The operating deficits reflect significant overspending of the budget, largely under the guidance of the former superintendent and assistant superintendent of business services.

A related and equally troubling concern are the significant internal control deficiencies and questioned costs pertaining to the use of capital outlay and sales tax funds identified by the district's independent auditor and the state auditor general. The district reports it could be liable for up to $10 million in fines and/or reimbursement. If required to pay DOE, the district hopes it would be allowed to spread the costs over a three-to-four-year period.

CAUTIOUSLY OPTIMISTIC AS TO FISCAL 2014 RESULTS

The recovery plan submitted to and approved by DOE for the current fiscal year projects a fiscal 2014 ending balance equal to $10.3 million or 3.3% of spending. The year-end fund balance projection has since been lowered to $8 million, largely due to an estimated $1.7 million reduction in state funding based on an overestimation of enrollment (about 300 students or 0.7% of full-time equivalents).

The revised year-end forecast would still translate to an impressive operating surplus of about $15.5 million, although any payments made by the district in relation to the audit findings would lower this figure. The fiscal 2014 budget reflects the elimination of 182 teacher positions (about 7% of the instructional staff) for $11.3 million in savings and closure of a high school for $1.7 million. The district faces very modest penalties with respect to class size requirements despite the teacher cuts.

The district believes that a series of enhancements with respect to financial software, policies, and reporting not yet in place during development of the fiscal 2013 budget will yield much improved expenditure accuracy going forward.

LOW DEBT BURDEN

Fitch estimates the district's overall debt burden at a low 1.4% of market value or $1,364 per capita inclusive of the outstanding obligations of underlying local government units. Carrying charges related to district debt, payments to the Florida Retirement System for pension, and payments to a district plan for other post-employment benefits (OPEB) approximate a fairly manageable 10% of total governmental fund spending.

The district's five-year capital plan appears manageable totaling $322.9 million or 1.2% of market value. The district does not plan to issue additional bonds but will instead fund the capital program from property taxes (63%) and sales tax (36%). The sales tax was approved by voters for capital spending only for a 15-year period ending on Dec. 31, 2017. As the voter-approved sales tax comes to expire there is some concern that the district's recent fiscal problems could thwart any effort to gain voter approval for another sales tax or possibly an additional property tax for capital.

SATISFACTORY SALES TAX COVERAGE; BONDS MATURE IN 2017

Sales tax performance has improved with ongoing stabilization of the local economy and employment base. Sales tax revenues totaled $23.3 million in fiscal 2013 or 1.52x maximum annual debt service (MADS) of $15.5 million. Fitch believes there is a safe cushion against stress events - revenue can fall 34% before coverage falls below 1.0x MADS, whereas the aggregate revenue loss from fiscal years 2007-2010 was less than 15%. The district has budgeted 6.4% sales tax growth for the current fiscal year. The sales tax bonds mature Oct. 1, 2017, three months prior to expiration of the tax.

AMPLE CAPACITY TO MAKE LEASE RENTALS FROM CAPITAL OUTLAY LEVY

Lease rental payments securing the COPs are primarily paid from proceeds of the capital outlay levy (three-fourths of the 1.5 mill tax is available for such purpose under state law). The estimated amount of capital outlay tax revenue available for lease rental payments in fiscal 2014 is approximately $28 million compared to COP debt service of $18.9 million.

MASTER LEASE ENHANCES INCENTIVE TO APPROPRIATE

In Fitch's view the master lease structure mitigates risk to non-appropriation. Essentially the district must choose to make rental payments on all or none of the lease schedules under the master lease purchase agreement. 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. District properties associated with the master lease include a total of 20 elementary, middle, and high schools, a technical institute, and a transportation and maintenance facility.

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 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=817373

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