Fitch Rates Jacksonville, FL's Special Rev Bonds 'AA'; Various Sales Tax Downgraded; Outlook Neg

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Jacksonville, Florida special revenue bonds:

--$80,190,000 series 2010B-1;

--$35,640,000 taxable series 2010B-2 (direct payment Build America Bonds).

The Rating Outlook is Stable.

The bonds are scheduled to sell via negotiation on Aug. 25, 2010.

In addition, Fitch affirms the following ratings with a Stable Outlook:

--Implied GO bonds at 'AA+';

--$191 million special revenue bonds at 'AA';

--$153 million capital improvement revenue bonds at 'AA';

--$449 million excise tax revenue bonds at 'AA+';

--$133 million local government sales tax revenue bonds at 'AA+';

--$102 million guaranteed entitlement revenue and improvement bonds at 'AA'.

Fitch also downgrades the following ratings with a Negative Outlook:

--$534 million transportation sales tax revenue bonds to 'AA' from 'AA+';

--$679 million Better Jacksonville sales tax revenue bonds to 'AA-' from 'AA'.

Fitch has corrected the rating on Jacksonville's capital projects revenue bonds, series 2008A and series 2008B to 'A+' from 'AA-'. The rating is being revised in conjunction with the recalibration of the local government credit ratings effective April 30, 2010.

Fitch initially announced plans for recalibration in the 'Recalibration of U.S. Public Finance Ratings' special report, which was published on March 25, 2010. That report, along with special reports outlining summary and detailed information on other U.S. local tax-supported recalibrated ratings are available at 'www.fitchratings.com'.

RATING RATIONALE:

--The rating on the special revenue bonds is based on Jacksonville's general credit characteristics and its covenant to budget and appropriate (CB&A) non-ad valorem revenues to pay debt service.

--The downgrade of the transportation sales tax revenue bonds to 'AA' from 'AA+' and the Better Jacksonville sales tax revenue bonds to 'AA-' from 'AA' reflects weaker debt service coverage at each respective rating level given a steady decline in pledged revenues since the onset of the recession. The ratings also consider the general credit characteristics of the city and lack of additional leveraging plans for each security.

--The city's management team has navigated through a difficult operating environment relying on a mix of recurring revenue enhancements, expenditure savings, and modest use of reserves maintaining a satisfactory level of financial flexibility.

--The city's debt burden is expected to remain manageable based on current issuance plans and capital needs, however, the city has significant unfunded long-term obligations related to its pension program, particularly for public safety employees.

--Jacksonville's economy retains sound long-term prospects anchored by trade and transportation activity at the Port of Jacksonville, however, unemployment remains high and the economy continues to lose jobs in large part due to the high concentration of employment in the business services and financial activities sectors.

--Fitch affirms the city's capital improvement revenue bonds, excise tax revenue bonds, local government sales tax and improvement revenue bonds, and guaranteed entitlement revenue and improvement bonds based on the maintenance of satisfactory debt service coverage at each respective rating level and the absence of additional leveraging plans for each security. The rating also considers the general credit characteristics of the city.

KEY RATING DRIVERS:

--A prolonged period of suppressed economic activity or additional leveraging not presently anticipated may result in coverage levels inconsistent the respective ratings on the city's various revenue-backed securities.

--Fitch expects stable financial performance over the short term based on the city's history of prudent financial management and planning and conservative budgeting.

--The city's ability to reform its pension programs will alleviate a considerable amount of long-term expenditure pressures.

WHAT COULD TRIGGER A DOWNGRADE on the transportation sales tax revenue bonds and the Better Jacksonville sales tax revenue bonds?

--The inability to maintain coverage at newly reduced levels.

SECURITY:

The special revenue bonds are limited obligations of the city payable from the city's CB&A non-ad valorem revenues to pay debt service. In addition, the city has covenant to deposit proceeds from the collection of a one-half cent infrastructure sales tax on a subordinate basis to the funding requirements with respect to outstanding Better Jacksonville sales tax revenue bonds and certain State Infrastructure Bank loans. Holders of the special revenue bonds do not have a lien on the sales tax revenues unless and until such amounts are deposited to the special revenue bonds revenue account. The special revenue bonds are additionally secured by cash funded reserve account.

The city has covenant not to issue additional non-self sufficient debt backed by its CB&A non-ad valorem revenue if proposed debt service exceeds 35% of maximum annual debt service (MADS) unless the occurrence of MADS is more than six years from the date of calculation, in which case proposed debt service is limited to 45% of non-ad valorem revenues.

CREDIT SUMMARY:

Non-ad valorem revenues for fiscal 2010 are expected to grow by 1.2% from the year prior to $507 million, resulting in 3.6 times (x) coverage of MADS on all non-self sufficient debt including the proposed issuance. Coverage is expected to remain high due to the government's reliance on these revenues for operations. Jacksonville has migrated toward a CB&A-based debt program using an anti-dilution test and debt affordability models in lieu of the traditional pledged revenue approach that relies on an additional bonds test (ABT) to establish borrowing limitations. Officials believe the CB&A program is a more reliable and diverse security. The city plans to issue approximately $60 million to $80 million annually to fund general government projects within the capital improvement program. Additional issuance plans are not expected to impact the city's moderate debt burden. The proposed fiscal 2011 budget includes approximately $78 million in debt service expenditures or a reasonable 7.8% of total spending.

The city recorded positive year-end results in the general fund from fiscal 2006 to fiscal 2009, adding $47.2 million to reserves during this period. Entering fiscal 2010 the general fund reported unassigned reserves totaling $38 million or 4% of spending in addition to nearly $66 million or 6.9% of spending in fund balance which are constrained or intended to be used for specific purposes internally imposed. The latter fund balance designation includes an emergency reserve totaling $44.1 million. Management is forecasting a net deficit during fiscal 2010 totaling $8.5 million in the worst case, which would equal less than 1% of spending. The proposed fiscal 2011 budget does not appropriate existing reserves and prudent revenue and expenditure measures to date should continue to support stable financial operations.

The Jacksonville economy has generally been spared the worst of the housing downturn and recession when compared to other large metro areas in Florida. However, the city has an above-average concentration of jobs in the business services and financial activities sector which, when combined with losses in construction and manufacturing, led to unemployment rates above 12% during the first several months of 2010. Job growth has since lowered the unemployment rate to 11.6% in June. The Jacksonville Naval Air Station and Mayport Naval Station are the metro's largest employers, each base with approximately 16,000 employees. The Port of Jacksonville continues with major expansion projects that should serve to boost the trade and transportation sectors. The port, which ranks as the nation's 13th largest port in terms of container trade volume and as the third largest in the state of Florida, benefits from good inter-modal connectivity and nearby infrastructure with links to high growth markets. The healthcare sector, which includes major employers Baptist Health and a local branch of the Mayo Clinic, continues to experience growth. Hospital Corporation of America (HCA) recently is in the process of constructing a $130 million new community hospital and medical office building that will employ 250 people during the two-year building phase and 800 workers thereafter. Wealth and income levels are average.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, PPR, LoanPerformance, Inc. and University Financial Associates.

Related Research:

--'Tax-Supported Rating Criteria', dated 16 Aug. 2010.

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

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

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