Fitch Rates Jacksonville, FL's Special Rev Bonds 'AA'; Outlook Stable

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

--Approximately $90 million series 2011B.

The bonds are scheduled to sell competitively on June 9, 2011. Proceeds will finance the costs of various capital improvements comprising the Better Jacksonville Projects and fund a deposit to the debt service reserve fund (DSRF).

In addition, Fitch affirms the following ratings:

--Implied general obligation (GO) at 'AA+';

--Approximately $600 million special revenue bonds at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The special revenue bond rating of 'AA' 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 implied GO rating of 'AA+' is based on the city's history of sound financial management, which has navigated through a difficult operating environment maintaining a satisfactory level of financial flexibility largely relying on a mix of recurring revenue enhancements and expenditure savings.

--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 programs, particularly for public safety employees, with escalating pension costs representing a notable spending pressure.

--Jacksonville's economy retains sound long-term prospects anchored by presence of the U.S. Navy and trade and transportation activity at the Port of Jacksonville.

--Employment levels have exhibited signs of stabilization, but unemployment remains high in large part due to continued losses in construction and high concentration of employment in the business services and financial activities sectors.

KEY RATING DRIVERS:

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

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

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. The bonds are additionally secured by a cash-funded DSRF, and are structured with an anti-dilution test that provides adequate protection against overleveraging.

CREDIT SUMMARY:

Jacksonville, situated on Florida's northern Atlantic coast, is a consolidated city/county political entity and the anchor of the five-county Jacksonville metropolitan statistical area (MSA). The city has a sizable military presence anchored by the Jacksonville Naval Air Station and Mayport Naval Station, which collectively employ nearly 40,000. The city's sizable military presence is estimated to contribute approximately $8 billion to the local economy annually. Generally a source of stability, the city's military presence faces the risk of downsizing of the Department of Defense budget. However, recent announcements suggest continued growth for Jacksonville's military economy. The Naval Air Station Brunswick (2,300 new military personnel) is expected to relocate to Jacksonville in 2011, and in 2010 the Navy committed to homeport a nuclear-powered aircraft carrier in Mayport, which the city estimates will total 3,200 personnel and $460 million in infrastructure improvements for the base. The timing for the arrival of the nuclear carrier is uncertain.

The Port of Jacksonville continues with major expansion projects that should serve to boost the metro's sizable trade and transportation sectors. Growth in the healthcare sector has helped diversify the economy, with major employers including Baptist Health, the Mayo Clinic, and St. Vincent's Health. Hospital Corporation of America (HCA) 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. The Jacksonville economy has generally been spared the worst of the housing downturn and recession when compared to other large metro areas in Florida. Unemployment has improved, but remains high at 10.3% in March 2011, largely owing to the city's above-average concentration of jobs in the business services and financial activities sector, combined with losses in construction and manufacturing. Favorably, the city is regarded for its business friendliness and low tax burden, and both Global Insight and Property and Portfolio Research forecast employment growth for the Jacksonville metro area outperforming the nation from 2011-2015. Wealth and income levels are average.

The city forecasts non-ad valorem revenues increasing by 2.9% in fiscal 2011 to $514.2 million, which is 3.2 times (x) maximum annual debt service (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 limitations. Fitch generally considers CB&A debt a strong structure despite the absence of a revenue pledge or leasehold interest in an essential asset, given the lack of abatement risk and non-cancellable nature of the covenant, and the diversity of revenue streams available to appropriate for debt service.

Fitch expects the city's debt burden will remain moderate. The city plans to sell approximately $60 million annually over the near term in CB&A debt, but has no other issuance plans. For fiscal 2011 the city has budgeted $78 million in general fund supported debt service, or a reasonable 7.8% of total spending. Total tax-supported debt service, including sales tax debt service paid from various special revenue funds, totals more than $150 million or a still manageable 12% of combined fund spending. Overall debt (including overlapping debt of the county school board) is equal to 3.5% of market value or $3,721 per capita. Approximately 17% of the city's outstanding debt is in variable-rate mode, a portion of which has been synthetically fixed via swap contracts with Wells Fargo (Issuer Default Rating of 'AA-' with a Stable Outlook by Fitch). Fitch considers the credit risk to collateral posting and termination payments minimal. Liquidity agreements are in place with various investment grade financial institutions with staggered terms from 2012 to 2016.

The city posted a net surplus in the general fund in fiscal 2010 for the fifth consecutive fiscal year. At the close of fiscal 2010 a total of $103.5 million or 10.4% of spending is reported as unrestricted fund balance in the general fund (the city implemented the requirements of GASB 54 ahead of the required date - the unrestricted fund balance noted above includes the unassigned, assigned, and committed fund balance). The unrestricted fund balance includes an emergency reserve equal to $44.9 million or 4.5% of spending, and an operating reserve of $41.8 million or 4.2% of spending. The city recently codified a reserve policy requiring an emergency reserve and operating reserve, each equal to 5% to 7% of spending, which Fitch considers sound fiscal policy. Overall, Fitch views the city's financial policies and disclosure favorably. The fiscal 2011 budget does not appropriate existing reserves; however, management has indicated the possible use of up to $2 million in reserves in the worst-case scenario, in part due to labor savings assumed in the budget that have yet to be realized. The preliminary budget gap for fiscal 2012 is $50 million to $60 million, or the equivalent to 5% to 6% of the general fund budget. The magnitude of the preliminary budget gap is similar to recent years past. Departments are preparing 10%-15% cuts in response, and management has indicated that some use of fund balance may be necessary to plug the gap, as revenue increases are not contemplated.

Management has responded favorably to a challenging operating environment, introducing several revenue initiatives since 2008 including a franchise fee, stormwater fee, and solid waste fee contributing approximately $110 million in revenue to the current year budget. The city also increased the tax rate more than 18% from fiscal 2009-2011, after having not previously raised taxes in 17 years. Jacksonville's fiscal 2011 millage rate of 10.04 mills remains extremely competitive when compared with the combined city/county tax rate of other major Florida metro areas. The city has also implemented a number of cost saving or avoidance measures resulting in $40 million in savings (approximately 4% of spending) in the current fiscal year.

Overall spending has continued to rise since the recession, however, with cost pressures centering on the city's rapidly rising contribution to its general employee and public safety pension plans. Pension contributions totaled $119 million or 11.9% of spending in fiscal 2010, up from $65.3 million or 7.7% of spending in fiscal 2006. Fitch's approximation of the city's pension funding ratio is very weak at 53%, and the unfunded pension liability significant at $2.3 billion or 2.6% of market value - both ratios are calculated utilizing a more conservative 7% discount rate assumption (see Fitch's report dated Feb. 17, 2011, 'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' available on Fitch's website at 'www.fitchratings.com'). The city plans to present to city council in June a pension reform package that will impact benefits and eligibility requirements for new hires and have no effect on current employees or retirees. The proposed changes are not expected to generate marked savings in the short term but are expected to save the city $750 million to $1 billion over the next 35 years.

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, LoanPerformance, Inc., IHS Global Insight, and Property and Portfolio Research.

Applicable Criteria and Related Research:

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

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 08, 2010.

--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' Feb. 17, 2011.

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

Applicable Criteria and 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=564566

Enhancing the Analysis of U.S. State and Local Government Pension Obligations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604785

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