Citing erosion of reserves and ongoing fiscal imbalances, Fitch Ratings on Monday downgraded the implied general obligation of the Marion County School Board in north-central Florida to A-plus from AA-minus.

Fitch also downgraded the school board's $99.5 million of outstanding certificates of participation to A from A-plus. The outlook was also revised to negative from stable.

"The downgrade of the implied GO to A-plus reflects the substantial erosion of the district's reserves and concomitant loss of financial flexibility as a result of ongoing fiscal imbalances which have yet to be adequately addressed," said Fitch analyst Larry Levitz.

The depletion of federal stimulus funds and a failed referendum for voter approval to levy an additional operating tax "magnify the pressures upon operations," Levitz said. "The outlook revision to negative is based on Fitch's expectation that finances will weaken further over the near term as management grapples with a persistent budgetary deficit relying almost exclusively on additional cuts in spending."

Marion County is about 40 miles south of Gainesville, and encompasses Ocala which is known for horse breeding and its large number of retirees. The county's population is about 336,000, while the single school district currently enrolls 41,400 students.

Since fiscal 2008, the district's tax base has fallen by 31%, including a 6% drop in the current fiscal year reflecting the severe slide in housing values, according to Levitz.

"The district's financial position has been deteriorating since fiscal 2009, pressured by declines in the district's two largest sources of revenue — property taxes and state aid," he said. "General fund revenues have fallen by 12% since fiscal 2008."

The phase-out of stimulus funding in fiscal 2012 prompted officials to implement severe spending cuts, including the elimination of more than 200 full-time positions.

Despite the reductions, the district reported a fiscal 2012 general fund net operating deficit of $8.3 million. "Fitch believes the school board will be challenged to balance fiscal 2014 operations given the current spending gap, an inflexible revenue base, and the magnitude of spending cuts already made," Levitz said.

The district's direct debt consists primarily of COPs issued under a master lease. The school board's capital needs are manageable given the recent fall-off in enrollment, with no plans to issue additional new money debt, said Levitz.

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