Fitch Downgrades Miami FL ULTGOs to 'A-', Rates Special Ob NAV Bonds 'BBB+'; Rating Watch Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following city of Miami, Florida (the city) bonds:

--$80 million special obligation non-ad valorem (NAV) revenue refunding bonds.

The bonds are expected to sell via negotiation on July 13. The current issue refunds five separate loans with the Sunshine State Governmental Financing Commission (the commission), which are backed by the city's CB&A pledge. The Sunshine loans are variable rate demand obligations (VRDOs), with liquidity support provided by Dexia, which informed the commission that it will terminate its liquidity support to the commission's VRDO program by Aug. 1, 2011. Debt service savings attributable to the series 2011A are $8 million in fiscal 2012 and around $11.8 million annually in fiscal 2013 and fiscal 2014.

In addition, Fitch downgrades the following ratings:

--$77.3 million unlimited tax general obligation (ULTGOs) bonds to 'A-' from 'A';

--$179 million limited ad valorem bonds to 'BBB+' from 'A-';

--$139.8 million special obligation streets and sidewalk bonds to 'A-' from 'A';

--$101.3 million special obligation parking revenue bonds to 'BBB+' from 'A-'.

In addition, Fitch places the rating on Rating Watch Negative.

RATING RATIONALE:

--The downgrade of the city's GO rating reflects Fitch's expectation of the persistence of structural budgetary pressures, and further erosion of previously narrow reserves during fiscal 2010. In Fitch's view, the city faces significant challenges to improve its substantially constricted financial flexibility and adhere to established financial policies.

--The Negative Watch reflects the upcoming rulings in litigation challenging the city's ability to impose recent wage and pension reductions could result in severe pressure on the city's financial profile.

--The downgrade of the limited ad valorem bonds reflects the relatively modest coverage from pledged taxes and potential for additional erosion given continuing pressures on the city's tax base.

--City financial results have been volatile and characterized by operating deficits in recent years. Miami is continually challenged to manage expenditure growth in a flat or declining revenue environment. Dramatic increases in pension costs have contributed to the financial pressures.

--There has been frequent turnover in key city management over the past year and a half.

--Although the economic base has weakened, particularly as it relates to joblessness and the housing market, Fitch believes Miami retains favorable long-term prospects, which center on the city's role as a premier international trade center and tourist destination.

--The city's debt profile is manageable and capital plans have been reduced in recent years to address a slowdown in development and reduced resource availability, although the current issue and proposed future restructurings will narrow the city's future debt capacity.

--The downgrade for the streets and sidewalks revenue bonds reflects the ceiling of the city's ULTGO rating. Coverage of debt service by pledged revenues remains sound.

--The rating on the special obligation parking revenue bonds is based on the city's covenant to budget and appropriate available NAV revenue in the event of a shortfall in pledged revenues.

WHAT COULD TRIGGER A DOWNGRADE

--A court or administrative ruling requiring the city to reinstate the previously implemented wage and pension reductions in fiscal 2011.

--In the longer term, a significant decline in reserves from the low level expected at the end of fiscal 2011.

--In the longer term, a meaningful erosion of financial flexibility, changing the overall credit profile to result in future rating differentiation between the ULTGO and limited ad valorem ratings.

SECURITY:

--General obligation bonds are secured by the city's full faith and credit.

--Limited ad valorem bonds are secured by a pledge of the city's limited ad valorem tax (subject to a 1.218 mill cap), as well as the city's covenant to budget and appropriate its NAV revenue in an amount not to exceed 10% of maximum annual debt service (MADS).

--The special obligation NAV revenue refunding bonds are secured by the city's covenant to budget and appropriate, by amendment if necessary, NAV revenues in amounts sufficient to satisfy the annual debt service requirement. --The city's covenant to budget and appropriate NAV revenues shall be cumulative and shall continue until such revenues are sufficient to fully defease the bonds.

--Special obligation streets and sidewalks bonds are secured by a pledge of two county-levied local option fuel taxes, a portion of a county-levied transportation surtax, and a portion of a city-levied parking surcharge. The first levy fuel tax is a 6-cent tax and the second levy is a 3-cent tax on all motor vehicle fuel sold in the county.

Special obligation parking revenue bonds are secured by a lien upon and pledge of the city's portion of the county-levied convention development tax (CDT), which consists of a 3% occupancy tax, as well as parking revenues as detailed in the parking agreement between the city and the Marlins Stadium Operator and 80% of the city's 15% parking surcharge in the stadium parking facilities. If CDT and parking revenues are insufficient to pay debt service, the city has covenanted to budget and appropriate, by amendment if necessary, and deposit into the revenue fund in sufficient amounts NAV revenues lawfully available for such purpose.

CREDIT SUMMARY:

The downgrade of the city's GO rating reflects the narrowing financial margins in a financial profile that has been volatile historically and remains severely pressured. The Negative Rating Watch incorporates the financial fragility that could arise from rulings in current wage and pension litigation.

At the close of fiscal 2006 the general fund reported an unreserved fund balance of $125.4 million or a strong 25.4% of spending (total operating expenditures and transfers out). By fiscal 2010 the unreserved fund balance had been whittled down to $4 million or a very low 0.8% of the approximately $518 million budget. Net deficits during this period were largely driven by actual revenues that failed to meet original budget expectations, and consistent over-spending, particularly with respect to public safety. Further straining operations was an increase in pension spending from $70.7 million or 12% of spending in fiscal 2007 to $90 million or 17% of spending in fiscal 2010. The decrease in financial flexibility has been swift and severe, and has resulted in significant erosion of liquidity.

Deficit operations of the past four years have depleted reserves well below financial policies of maintaining 10% in unreserved fund balance to fund long-term liabilities and an additional 10% to compensate for mid-year revenue shortfalls or emergency expenditures. Fitch views management's inability to maintain reserves at policy levels as well as recurring turnover in key financial personnel negatively. There is a new city manager for the third time in 16 months and a search is underway to replace the Chief Financial Officer who recently resigned. The city is proposing to restore its general fund reserve largely through one-time measures, initially through a series of debt restructurings that will produce near-term savings but increase the overall cost of debt to final maturity. In addition, the city will continue to explore the monetization of the marina - a plan Fitch does not consider a credit factor given risk to execution, evidenced by prior attempts to monetize city assets which have not come to fruition. Upon publication of the city's five-year financial forecast which the city slates for this summer, Fitch can analyze the conservatism of the assumptions behind the proposed reserve restoration.

The city expects to conclude fiscal 2011 flat or with minimal use of fund balance, as an unspent $5 million contingency reserve can offset a projected $5.5 million deficit. In addition, the city intends to produce a fiscal 2012 budget that is balanced without the use of reserves. Fitch is concerned that results for fiscal 2011 and fiscal 2012 may not materialize as the city anticipates, as in recent fiscal years audited financial results have been more negative than projections indicated.

On April 30, 2010, city management declared fiscal urgency pursuant to Florida State Statute 447.4095, thereby reopening union negotiations in order to impose far-reaching reductions for wage, health benefits, and pension contributions necessary to balance the fiscal 2011 budget. Affected unions have mounted legal challenges as to the city's ability to institute fiscal urgency. Adverse legal rulings could expose the city to the possibility of reinstating up to the $76.9 million in costs eliminated from the fiscal 2011 budget and assuming those costs in future years. Fitch believes that given the slim financial margin, the city would struggle to absorb the reinstated costs and its financial profile would markedly deteriorate if adversely ruled. City officials have proposed a back-up plan in the event that negotiations are stalled or results are insufficient to cut costs which includes massive layoffs in all city departments, including police and fire.

The city's taxable assessed value (TAV) more than doubled between fiscals 2004 and 2008, increasing at an annual average rate of 19%. The construction boom that drove earlier tax base growth slowed substantially in fiscal 2009 and taxable values retracted 0.5% and 14.8% in fiscals 2010 and 2011, respectively. A modest 4% decline is expected in fiscal 2012, although it is possible that the city may be poised to experience larger declines in future years when the absence of new construction catches up with the valuation schedule. The price deterioration of single-family homes shows no signs of abatement, although there are hints of stabilization elsewhere in the residential real estate market. Management does not anticipate that the tax rate, which has remained unchanged since fiscal 2009, will be increased to the revenue neutral rate in the upcoming budget. Management's unwillingness to increase the tax rate to preserve revenue neutrality given recent declines in TAV has contributed to the city's precarious financial position. In addition, the city has been slow to respond to a weakening trend in tax collections, contributing to the revenue shortfalls noted earlier. In fiscal 2010 current tax collections were 87%, which Fitch considers poor.

The area economy is diverse with a large international component. The presence of healthcare, higher education, and professional and business services balance the tourism component of the city's economy. Sector employment statistics are well balanced between the education and healthcare, professional and business services, leisure, trade/transportation and government. Employment and labor trends were positive, annually, through 2008, when employment retracted slightly though labor force growth continued. Recent monthly statistics indicate expansion in each at 2.3% and 3.2%, respectively, the latter contributing to the increased unemployment rate from March 2010 to March 2011. The high 13.2% city unemployment rate continues to trend higher than that of the state and nation. Wealth levels are below average, and the poverty index is double that of the nation.

The city's debt profile has weakened somewhat over the last couple of years. The debt burden is moderately high on an overall basis at $4,503 per capita and 5.7% of TAV; the slight elevation from levels of the last issue is attributable to population declines from census estimates to actuals and tax base declines. Assuming the issuance of all debt included in the $573 million portion of the CIP for which funding has been identified, the debt burden will rise, as projected issuance exceeds debt maturity within the next five years. Near-term plans for new tax-supported debt are limited to bonds payable by tax increment revenues. In September, the city expects to issue $55.3 million in long-term debt to refinance a $50 million short-term note.

The city will lose debt capacity in the outyears as a result of a series of planned debt restructurings, and amortization, already at a below-average rate of 36.9% within ten years, will further decline. Although Fitch generally views debt restructuring negatively, it is somewhat offset in this case due to its inclusion in other recurring budget reduction measures. The current issue refinances variable-rate loans by issuing fixed-rate debt with a 15-year extension of maturity. Current cash-flow projections indicate debt service savings of $62.9 million through fiscal 2016, although debt service costs will increase by a total of $41.5 million through the life of the bonds. A future planned restructuring will achieve debt service savings of $16.6 million through fiscal 2014, and the life of the bonds will not be extended.

The special obligation streets and sidewalks bonds are secured by a pledge of two county-levied local option fuel taxes, a portion of a county-levied transportation sales surtax, and a portion of a city-levied parking surcharge. A portion of the pledged revenues expires in 2023, prior to bond maturity, but coverage should remain adequate even with no growth in pledged revenues. The additional bonds test requires that revenues received during a 12-consecutive-month period in the 18 months preceding a new issue must equal at least 1.35 times (x) MADS on existing and proposed bonds. The test, which is based on historical revenues, provides limited protection to bondholders, since the portion of the pledged revenue that expires in 2023 could be included in the test prior to its expiration. With the conservative assumption of no growth in pledged revenues, MADS coverage is projected at a sound 2.0x through fiscal 2023 and 1.4x thereafter. Fiscal 2010 MADS coverage equaled 2.0x, with the possibility of future improvement resulting from the slight uptick in the gas and transit taxes in fiscal 2011. No parity debt is currently planned.

For repayment of the special obligation parking revenue bonds, Miami-Dade County agreed to provide the city with a portion of its convention development tax revenues through fiscal 2039, subordinate to prior county commitments, for the purpose of funding the parking facility. Debt service on these bonds is ascending and relies on growth in the CDT which Fitch believes is likely over the long term. Nevertheless, annual debt service coverage is projected at a slim 1.2x throughout the life of the bonds, and the rating reflects the CB&A pledge. The special obligation parking revenue bonds are paid in the first instance from a pledge of certain revenues Fitch considers inherently volatile in nature, due to the influence of competitive forces and macroeconomic conditions. A measurable shortfall from these sources would further strain the city's budget situation, as NAV revenues fund approximate almost 50% of an already strained general fund budget.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and Zillow.com.

Applicable Criteria and Related Research:

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

'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

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

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