BRADENTON, Fla. - With sales tax revenues declining rapidly in Florida, Fitch Ratings last week downgraded the Hillsborough County School District's $237 million of sales tax revenue bonds to A-minus from A-plus and revised the outlook to negative.

At the same time, Fitch affirmed the A-plus rating on the district's $937 million of certificate of participation and revised the outlook to positive.

The divergent actions came even though Fitch said the state's third-largest school district has a financial position that is "strong" with a trend of sizeable operating surpluses and "robust" reserve levels.

Despite suffering $45.6 million in state funding cuts, the Hillsborough school district ended fiscal 2008 with a $47.5 million operating surplus and an unreserved fund balance of 23.3%, "which is especially high for a Florida school district," said a report by Fitch.

"The district has continued its proactive approach to offset these revenue declines by reducing district division budgets and expects to end the year with no drawdown of reserves," Fitch noted.

However, the downgrade in rating for the sales tax revenue bonds reflected a decline in maximum annual debt service coverage to 1.19 times in fiscal 2008 from 1.29 times in fiscal 2006, Fitch said. So far this fiscal year, revenues have declined 5.9% from the same period a year ago, lowering coverage to 1.12 times.

"The district has no control over the sales tax revenue stream but is able to control spending which has enabled it to effectively manage in a pressured operating environment and preserve financial flexibility, which is a positive credit factor for the rating on the COPs," said Fitch analyst Rachel Barkley in an interview Friday.

Hillsborough is the state's third-largest school district, and the eighth-largest in the nation, with approximately 190,000 students. The district, on the state's mid-western coast, is coterminous with Hillsborough County, whose seat is Tampa.

The downgrade of a financially strong school district points to a larger problem that could affect other districts in Florida, said Hillsborough superintendent MaryEllen Elia.

While Hillsborough's bonds are secured by a locally collected sales tax, the 67 public school districts in Florida, including Hillsborough, receive a good portion of state funding from state-collected sales taxes. Some analysts consider sales taxes among the most volatile of revenue sources particularly in economic downturns.

Florida's credit rating already has a negative outlook from all three major rating agencies, mostly because of declining revenues supporting the state budget. The major source of funding for Florida's budget comes from sales taxes because there is no state income tax.

"Obviously, we worked hard to establish a strong financial position," Elia said, noting that the school district trimmed its budget without firing or laying off employees. "While we're doing that, we can't control everything."

Barkley said declines in sales tax revenues have been accelerating and it is uncertain what the state will do to fund schools over the next couple of years. "We expect the next several years for all Florida districts to be challenging," she said.

Lawmakers are in session dealing with the state budget, for which they expect to have $3 billion less in revenue in fiscal 2010. A number of measures to raise revenues are being considered including the removal of some sales tax exemptions, and increasing cigarette taxes.

But Hillsborough's rating downgrade - and negative outlook - underscore the problem facing relatively healthy school districts in an otherwise sour economy, Elia said.

"In the short term, maybe the solution is to address the issues relative to the sales tax," Elia said. "In the long term, I think we have to find in Florida a less volatile source of general revenue."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.