Fitch Affirms North Port, FL's Sales Tax Rev Bonds at 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating actions on North Port, Florida's (the city) ratings as part of its continuous surveillance effort:

--Approximately $12.4 million in outstanding sales tax revenue bonds, series 2003 affirmed at 'A+';

--Implied GO rating affirmed at 'AA-'.

The Rating Outlook for the sales tax revenue bonds is Stable.

The Rating Outlook on the implied GO rating is revised to Negative from Stable.

The Negative Outlook reflects the ongoing structural imbalance between the city's revenues and expenditures. While exceptionally strong fund balances going into the recession has allowed the city to use reserves to balance operations since 2007, much of this initial flexibility will be depleted by fiscal 2011, at which time, additional revenue or expenditure actions will be needed to preserve credit quality.

RATING RATIONALE:

--The Negative Outlook on the implied GO rating reflects diminished financial flexibility driven by recent declines in financial operations, including an ongoing structural imbalance and significant drawdown of reserves.

--Despite recent declines, reserves remain strong at the end of the last audited year and are expected to remain healthy at the end of fiscal 2010.

--While flexibility has lessened due to depleted reserves, ample financial options are still available. However, Fitch expects structural budgetary pressures will persist in the near term.

--Debt levels are currently low.

--Economic indicators continue to be below average with high foreclosure and unemployment rates.

--The sales tax rating is based on strong coverage provided by pledged revenues that have remained consistent through the recession.

--The sales tax revenue bonds continue to benefit from the county-wide collection base, allowing it to profit from the Sarasota County's broad economy and high wealth levels.

WHAT COULD TRIGGER A DOWNGRADE OF THE IMPLIED GO RATING:

--Declines in reserve levels greater than currently anticipated would put downward pressure on the rating.

--The city will need to address the structural imbalance between its revenues and expenditures in order to maintain the current rating.

KEY RATING DRIVER FOR THE SALES TAX BONDS:

Preservation of strong debt service coverage levels provided by the city's share of county-wide sales tax receipts.

SECURITY:

The sales tax bonds are secured by the city's portion of the countywide one-half-cent sales tax.

CREDIT SUMMARY:

The one-half-cent sales tax is levied by the state and collected on a countywide basis. Revenue collected within each county is divided between the county and its incorporated municipalities based on a population-driven formula. Due to the city's population growth rate outpacing the rest of the county, the city's portion of total revenue has increased from 3.7% in fiscal year 1993 to over 10% currently. Pledged revenues softened in fiscal 2009, declining 4.9% from fiscal 2008 although coverage remained strong at 2.8 times (x) maximum annual debt service (MADS). Year to date revenues in fiscal 2010 through the first eight months are up 2.5% with monthly year-over-year increases in four of the last five months. Legal provisions are sound requiring 1.4x MADS coverage to issue additional bonds. No additional debt is anticipated.

North Port, located in the southern portion of Sarasota County (GOs rated 'AAA' by Fitch), serves as a bedroom community for Sarasota and Charlotte counties due to its relatively affordable housing and access to I-75. City population has increased significantly in the past 10 years with over 133% population expansion. Despite the recent growth, the city remains relatively undeveloped with significant amounts yet to be developed. The combination of the housing bubble and the rapid population growth led to a large amount of speculative building in the city leading to over 65% annual assessed value (AV) increases in fiscal 2005 and fiscal 2006. When the housing bubble burst, tax-base values began to drop precipitously, losing over 40% of its value in two years with an additional assessed value (AV) decrease of roughly 12% for fiscal 2011. Unemployment and foreclosure rates are well above the national average.

Pressured by the decline in the area economy, the city's financial operations have deteriorated in the past few years. Property tax revenue, which makes up the city's largest revenue source, has fallen severely due to AV losses coupled with the city's decision to maintain a constant tax rate while consumer-based revenues have also weakened. Although the city has taken some measures to offset a portion of revenue declines, it has relied on reserves to fund a part of operating expenditures, creating a structural imbalance. Despite these draws on reserves, the unreserved fund balance remains robust at 49.3% of spending at the end of fiscal 2009. The city projects using at least $4 million in reserves in fiscal 2010, equal to over 10% of total spending. Plans for the fiscal 2011 budget include drawing down unreserved fund balance to below the current policy level of 20% of spending and recommending revising the fund balance policy to call for 15% reserves. Fitch has concerns regarding the city's recurrent use of fund balance to finance ongoing expenditures. The city's ability to stabilize financial operations while maintaining reserves in line with the revised 15% policy will be a major rating driver over the next few years.

Debt levels are currently low due to the city's history of using pay-go funding capital needs as well as its stringent debt policy requiring voter approval for any bonds to be issued. The city has approved two ordinances to be put on the November ballot for voter referenda allowing the city to issue an aggregate $62 million in debt for roads and a water park, which would significantly alter the city's debt profile.

Applicable criteria available on Fitch's website at www.fitchratings.com:

--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.