NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its rating for outstanding Florida Municipal Loan Council (FMLC) revenue bonds as follows:
--$3.8 million series 2010D at 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations of the FMLC payable solely from payments equal to debt service made by the borrower, the city of West Melbourne, FL (the city), pursuant to the loan agreement. The bonds were issued pursuant to bond resolutions adopted by the FMLC on March 17, 2010, and a Trust Indenture, dated Aug. 1, 2010, between the issuer and the Trustee (Deutsche Bank). Pursuant to the indenture, the issuer has assigned and pledged all of its right, title and interest in and to the loan agreements, including the rights to receive loan repayments, to the trustee for the benefit of bondholders.
Pursuant to the loan agreement, the city covenants to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, an amount of non ad valorem revenue to satisfy its loan agreement.
KEY RATING DRIVERS
BORROWER'S CREDIT PROFILE UNDERLIES RATING: The rating is based on the general credit characteristics of the obligor, the city, as well as the security structure of the loan agreement. The loan security includes a covenant to budget and appropriate legally available non ad valorem revenues. The FMLC is a conduit issuer.
HEALTHY COVERAGE BY AVAILABLE REVENUES: Available non ad valorem revenues provide sound debt service coverage. Fitch expects coverage to remain high, given the city's reliance on these revenues to fund operational needs.
SUBSTANTIAL FINANCIAL FLEXIBILITY: Ample reserve levels, significant capacity to increase revenues, and conservative budgeting underscore the city's resilient financial profile.
NARROW ECONOMY: The primarily residential city has a thin commercial base. Wealth levels hover around regional and national averages.
LIGHT DEBT BURDEN: Limited capital needs and a lack of intermediate-term financing plans will help support a moderately low debt burden. The city has begun to address low pension funding.
CREDIT PROFILE
STRONG NON AD VALOREM REVENUE COVERAGE
City revenues available to meet the city's CB&A requirement for debt service payments are broad and diverse, accounting for nearly three-quarters of total governmental revenues. Revenues net of essential expenditures have historically provided strong coverage for maximum annual debt service (MADS) of debt, at 6.5 times (x) in fiscal 2011. Fiscal 2012 MADS coverage is expected to be significantly higher at about 13.2x, due to the recent maturity of a note secured by the city's CB&A. Fitch expects coverage to remain high over the life of the bonds, as excess revenues fund general governmental operations.
The anti-dilution test to be met prior to the issuance of parity debt is reasonably rigorous. The average of non ad valorem revenues for the prior two fiscal years must cover MADS by at least 1.5x and projected MADS for all debt secured or payable from non ad valorem revenues must not exceed 20% of governmental fund revenues. Roughly two-thirds of expenditures are categorized as 'essential,' requiring those needs to be funded before payment of CB&A debt service.
The cash-funded debt service reserve fund (DSRF) is the lesser of MADs, 125% of average annual debt service, or the maximum allowed by law. The DSRF is specific to the rated obligor and series; there is no cross-collateralization with other FMLC obligors' DSRFs.
LIMITED EMPLOYMENT BASE
The city is mainly residential, with a modest estimated population of 18,355 encompassing 10 square miles of central Florida's Brevard County (sales tax revenue bonds rated 'AA-' Stable Outlook by Fitch). The city reports that its three primary economic components are: trade, transportation, and utilities; professional and business services; and construction. Kennedy Space Center and the related aero-tech industries, which serve as a driving force in the county as a whole, have less of an impact here as the center is 45 miles to the north, although Lockheed Martin and some technology companies are within city limits.
Fitch expects the employment base will consist of smaller employers in the intermediate term, given constraints on the size of available sites in the city's business parks. In the longer term, significant amounts of developable land are still available, with roughly 45% of the city not yet developed. Wealth indicators are around or above regional and national averages. City unemployment data are unavailable. The county's unemployment rate, at 9.5% in March 2012, has historically exceeded that of the nation.
Fitch believes there are indications of real estate stabilization, although only select data are available. The city reports that building permits have flattened after declining in CY2011 by a sharp 35%, reflective of a slow-down in both commercial and residential activities. Reportedly, both housing prices and foreclosures show signs of recovery. The city maintains substantial revenue raising capacity in its 2.3 millage, well-below that of the 10 mill cap and very competitive in terms of neighboring areas.
SOLID RESERVE LEVELS
The city has maintained sound reserve levels and ample liquidity, despite general fund drawdowns in fiscal years 2007 - 2009 primarily to fund one-time capital expenditures. Fiscal 2010 ended with a healthy unreserved fund balance equal to 26.4% of general fund spending. The city realized a $1.2 million surplus in fiscal 2011, equal to 14.5% of spending. The fiscal 2011 unrestricted fund balance, equal to the sum of committed, assigned, and unassigned per GASB54, soared disproportionately to 95.2% of spending, largely due to a reclassification of what had formerly been reserved fund balance. Had those items not been reclassified, the unassigned FB would have equaled a very strong 50% of spending.
The city has historically budgeted expenditures conservatively. It anticipates that fiscal 2012 spending will be $500,000 below budget, contributing to an anticipated $800,000 surplus. The city expects to appropriate a minimal amount of fund balance in fiscal 2013. The city's new management team has achieved its goal of publishing audits in a timely fashion. Fitch believes that the city's sound management will continue to exhibit a willingness to maintain healthy reserves and liquidity.
WELL-MANAGED DEBT POSITION
Overall debt is low on a per capita basis at $1,839 and moderately low at 3.8% of market value, with a significant portion of the debt burden attributable to the overlapping debt of the county and school district. Amortization is slightly above average at 54.9% of principal retired within 10 years. The city has no plans for intermediate-term debt issuances.
Long-term obligations do not pressure the credit, as the city has been able to address underfunding of its police retirement plan without undue financial pressures. General employees participate in either a local defined contribution plan or in the Florida Retirement System (FRS), while members of the police department participate in the city's single-employer defined benefit police employees' pension plan (police plan).
FRS has been overfunded since fiscal 1998, but due to market losses and assumption changes to reflect the results of a 2009 experience study, the funded ratio dropped to a still solid 87% as of July 1, 2011 on a reported basis. The city's police pension is poorly funded at 53.5% using a Fitch adjusted 7% rate of return as of July 1, 2010. To meet its stated goal of achieve 80% funding within the next few years, the city is contributing above the ARC, at $73,000 fiscal 2011, and $100,000 budgeted in fiscal 2012. Additionally, it has reduced benefits for new hires. City OPEB obligations are minimal.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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