NEW YORK--()--Fitch Ratings has taken the following actions on Hillsborough County, Florida's outstanding non-ad valorem (non-AV) revenue bonds):
--$14.1 million outstanding Tampa Arena capital improvement non-AV refunding revenue bonds, series 2005 upgraded to 'AA+' from 'AA';
--$16.4 million outstanding capital improvement non-AV revenue bonds, series 2008 upgraded to 'AA+' from 'AA';
In addition, Fitch affirms the following ratings:
--$70.1 million in outstanding general obligation (GO) bonds at 'AAA';
--$74.2 million in outstanding special assessment revenue bonds, series 2006 at 'A';
--$16.1 million in outstanding 4th cent tourist development tax (TDT) revenue bonds at 'AA-';
--$26.5 million in outstanding 5th cent TDT revenue bonds at 'AA-'.
The Rating Outlook for all of the above bonds is Stable
In addition, Fitch affirms the Tampa Sports Authority (TSA), FL's outstanding debt ratings as follows:
--$92.7 million in outstanding local option sales tax revenue bonds at 'AA+' with a Stable Outlook;
--$21.3 million in outstanding TSA state payment revenue bonds at 'AA+' with a Negative Outlook.
The GO bonds bonds are secured by the full faith, credit and taxing power of the county.
The non-AV revenue bonds are secured by a covenant to budget and appropriate (CB&A), by amendment if necessary, sufficient amounts of non-AV revenues for the payment of debt service on the bonds. Appropriation is mandatory subject to the availability of non-AV revenues, after funding essential government services and obligations with a specific lien on non-AV revenues. The county's CB&A obligation is cumulative and continues until the bonds have been fully paid.
The 4th cent TDT revenue bonds are secured by the county's 4th cent tourist development tax, part of a 5% tax levied on hotel and motel charges. The 5th cent TDT revenue bonds are secured by the county's 5th cent TDT.
The special assessment revenue bonds are secured by a senior lien on all capacity assessment fees levied and collected from approximately 35,000 residential and commercial units included in the bond resolution.
The TSA local option sales tax bonds (LOST) are limited obligations payable solely from the portion of the community investment tax (CIT), a 0.5% discretionary sales tax levied countywide, dedicated to TSA for debt service and capital expenditures according to the interlocal agreement between TSA and the county.
The TSA state sales tax payment bonds are secured by an annual distribution of sales tax pursuant to Florida statutes. Sales tax revenue is collected by the Florida Dept. of Revenue (FDOR) and an amount equal to $166,667 monthly ($2 million annually) is distributed to counties maintaining a professional sports franchise. Pursuant to an interlocal agreement for stadium financing, revenues received by the county from this source are assigned to a trustee for the benefit of bondholders.
KEY RATING DRIVERS
TOP-LINE CREDIT STRENGTH: The 'AAA' GO rating reflects the county's broad based and diverse economy, strong management team, consistently healthy financial position and manageable debt levels.
SOLID FINANCIAL MANAGEMENT: County officials have been able to restore fiscal balance through a concerted effort to reduce spending. Despite a modest projected general fund drawdown in fiscal 2012 for one-time expenditures, reserve levels remain healthy.
NON-AV BONDS UPGRADED TO 'AA+': The upgrade to 'AA+' from 'AA' reflects strong coverage of CB&A debt service from legally available non-AV revenues, healthy recent growth in non-AV revenues, reduced debt service attributable to outstanding bonds secured by specific non-AV revenues and substantial reserves available to cover any potential revenue shortfalls.
STRONG COVERAGE OF TDT BONDS OFFSETS VOLATILITY: Debt service coverage of both the 4th cent and 5th cent TDT bonds is robust at 3.0x and 2.13x, respectively, which offsets the inherent volatility of the pledged revenues.
SPECIAL ASSESSMENT LIEN ON-PARITY WITH PROPERTY TAXES: Pledged capacity assessments securing the special assessment revenue bonds are levied on the tax bill and carry the same lien on property as property taxes. The assessments are derived from a broad residential and commercial base of nearly 35,000 units. The strength of the lien and historically high property tax collection rates balance concerns regarding planned narrow levels of coverage.
VERY STRONG COVERAGE OF TSA LOST BONDS: CIT collections, net of a 25% distribution to the county school system, provide nearly 8.0x coverage of TSA LOST debt service.
TSA SALES TAX BOND RATING NOTCHED OFF STATE AND COUNTY GO RATINGS: The 'AA+' rating on the bonds, and Negative Outlook is one notch below Fitch's rating for the state of Florida ('AAA' with a Negative Outlook) as pledged revenues are derived from state payments to the TSA. The rating is also one notch below the county's 'AAA' GO rating as the county receives the state payments which are then deposited into the funds with the trustee.
BROAD-BASED ECONOMY CHALLENGED BY THE RECESSION
Located at the mid-point of the western coast of Florida, Hillsborough County serves as the economic center for Florida's Gulf Coast with major sectors in business services, government, health care, education and tourism. The county continues to recover from the magnified effect of the recent downturn in the economy. Employment growth has been the highest in the state over the past 12 months, accounting for about 30% of job expansion statewide. Unemployment rates have subsequently dropped to the 9.0% range from nearly 12% reported in 2011. The major areas of growth are in service sectors such as health care, professional and business services, and leisure and tourism. Rising taxable sales and tourist tax receipts are also indicative of the county's ongoing recovery. Wealth levels hover around regional and national averages.
The housing sector, hit hard by the recession, has shown recent signs of improvement. However, home foreclosures increased recently due to the settlement of bank foreclosure processing issues but are still significantly below their peak in 2009 and 2010. Despite a lagging housing market, Fitch believes that underlying breadth and diversity of the county's economy point to its favorable prospects for long-term economic growth and strength.
Taxable values have fallen by over 30% since fiscal 2008 reflecting the housing downturn. More recently, tax base declines have slowed, falling by 4.3% and 2.5%, respectively, for fiscals 2012 and 2013. Officials predict stabilization within the next year or two as the housing sector begins to recover. The tax base is diverse as the top 10 taxpayers represent a modest 6.2% of total valuations.
FINANCES EXHIBIT SOLID RESERVES AND HIGH LIQUIDITY
County financial operations have been consistently sound as evidenced by sizable reserves and strong liquidity. The county reported a $30 million general fund operating surplus for fiscal 2011, boosting unrestricted general fund balance (the sum of assigned, unassigned and committed per GASB 54) to a notable 20% of spending. Management has been proactive in reducing spending in response to planned sizable declines in property taxes, the major source of general fund revenues. Property tax revenues declined at an average annual rate of 8% over the past four years due to falling valuations and the county's long-term policy of reducing tax rates every year.
Cost cutting measures included personnel reductions, operating efficiencies, lowered capital spending and programmatic changes to trim costs. The county has been shrinking its staff since fiscal 2008, eliminating about 25% of full-time positions. In fiscals 2011 and 2012, the county eliminated 250 and 350 positions, respectively, through a combination of layoffs, unfilled vacancies and outsourcing.
The county budgeted for a modest general fund drawdown for fiscal 2012 of about $24 million, but officials are projecting only a $9 million draw on reserves for one-time items. A modest decline in property tax revenues was offset by higher than budgeted half-cent sales taxes and discretionary sales tax receipts. In addition to personnel cuts, employees received no salary increases for the fourth straight year in order to control costs.
The proposed fiscal 2013 budget is essentially balanced with a planned $1.4 million draw on reserves. A modest drop in property tax revenues are offset by higher sales taxes and state shared revenues. The budget contains a $1,500 one-time salary adjustment for employees and some increases in public safety costs. Because the county budgets conservatively, officials expect to achieve a year-end surplus for fiscal 2013; maintaining general fund balance well over the county's target of 15% to 20% of expenditures. High levels of liquidity are consistently maintained with the ratio of available cash and investments to liabilities at well over 2.0x, providing additional financial flexibility.
MODEST DEBT LOAD
County debt levels are manageable as indicated by a debt burden of 2.6%. Most of the debt burden is attributable to the underlying debt of the Hillsborough County School District and the city of Tampa. Direct debt to TAV is a much more modest 0.7%. The majority of the county's debt consists of sales tax-secured bonds, either with the CIT or the half-cent sales tax. Approximately $72 million of GO bonds remain outstanding. Principal amortization rates are about average with 52% of principal retired within the next 10 years. Officials plan on issuing approximately $50 million for a new emergency operations center secured by communications service taxes in late 2013.
RETIREMENT COSTS DO NOT PRESSURE FINANCES
The county participates in the Florida Retirement System (FRS) pension plan, a state-run multiple employer plan for virtually all of its employees. Pension costs have not been a burden for the county, constituting a manageable 7.4% of general fund expenditures in fiscal 2011. The FRS is relatively well-funded compared to most state pension systems. Retiree health care benefits are funded on a pay-go basis. The county does set aside funds for future OPEB costs in an internal service fund but has eschewed establishing a dedicated trust fund in order to retain future flexibility.
4TH AND 5TH CENT TDT BOND COVERAGE REMAINS AMPLE
Pledged 4th and 5th cent TDT revenues have displayed significant volatility since the recession began. Collections fell by nearly 20% between fiscals 2007 and 2010 as the recession tamped down tourist activity but showed a strong recovery in fiscal 2011 as tourism rebounded, increasing by nearly 9%. Collections for nine months of fiscal 2012 through June are up another 9% over the same period the year before. Maximum annual debt service (MADS) coverage of the 4th cent TDT bonds is very strong at over 3.0x in fiscal 2011. MADS coverage on the 5th cent TDT bonds for fiscal 2011 is lower but still adequate at 2.13x as the 5th cent TDT secures a larger amount of debt. A 1.50x MADS additional bonds test (ABT) for each of the TDT issues is somewhat weak given the volatility of the revenue streams but the county has no plans for additional TDT bonding.
NON-AV REVENUE GROWTH ENHANCES DEBT SERVICE COVERAGE
The availability of non-AV revenues for debt service is subject to the prior pledge of bonds secured by specific non-AV revenues (prior lien bonds) as well as essential government services. The upgrade to 'AA+' reflects strong coverage of CB&A debt service attributable to recent growth in non-AV revenues, lower prior lien bond debt service combined and limited plans for additional non-AV issuance. Also incorporated into the rating is the presence of substantial available reserves which could be tapped to cover any revenue shortfalls and the potential for additional issuances of prior lien bonds.
The county's major non-AV revenues rebounded strongly in fiscal 2011 with positive momentum carried forward into fiscal 2012. Half-cent sales tax revenues grew a solid 4.7% in fiscal 2011 and are up 5% year to date in fiscal 2012. CIT revenue increased by 4.0% in fiscal 2011 and ten-month distributions to the county in fiscal 2012 are up over 6.8%.
Over the past year, prior lien bond debt service has been reduced due to final maturity, defeasance and refunding of prior lien bond issues, modestly increasing total available non-AV revenues. Coverage of CB&A MADS from fiscal 2011 non-AV revenues net of current prior bond debt service and essential services is wide at over 3.3 x. An anti-dilution test requiring average non-AV revenues for the two preceding years to cover MADS on all non-AV-secured debt by at least 1.5x restricts additional issuance.
PLEDGED ASSESSMENT FEES ON PARITY LIEN WITH PROPERTY TAXES
Capacity assessment fees securing the series 2006 special assessment revenue bonds are special assessments imposed on property to fund additional water and wastewater capacity projects. Approximately 35,000 residential and commercial units within the unincorporated areas of the county are subject to the assessments. The assessments are levied on the property tax bill and taxpayers are required to pay all property taxes and assessments without preference for any particular tax or fee amount. Coverage was structured to be thin and remains just above 1.1x for fiscals 2010 and fiscal 2011. Property tax collections for at least the past five years have averaged over 100%.
Additionally, the county has $4 million in residual revenues, equal to 1.7x MADs, which although not pledged, is reserved in addition to the debt service reserve fund (DSRF) and may be used for debt service if current revenues ever prove insufficient.
WIDE COVERAGE OF TSA LOST TAX BONDS FROM AVAILABLE CIT REVENUES
According to an interlocal agreement, CIT revenues are distributed to the TSA for debt service after 25% of the CIT is first allocated to the Hillsborough County School District. Once the required allotment to the school district and TSA is distributed, remaining CIT is allocated amongst the county and incorporated municipalities. Coverage of TSA obligations by net CIT LOST revenues is a very healthy 7.7x MADS despite a significant decline in CIT revenues between fiscals 2007 and 2010 before a recent uptick. A DSRF cash-funded at MADS and an additional bonds test provide added security.
NARROW TSA STATE PAYMENT REVENUE BOND COVERAGE
The county receives set monthly payments equal to $2 million annually, in accordance with state statute, for maintaining a professional sports franchise. The distribution is payable for 30 years and runs through maturity of the bonds. Pursuant to an interlocal agreement between TSA and the county, the county is obligated to immediately pay all pledged sales tax revenues distributed to it to the trustee on behalf of the TSA for payment of debt service on the bonds. As such, the rating is one notch below that of the state general obligation rating of 'AAA' and capped at Hillsborough County's 'AAA' GO rating. Coverage on the TSA state payment revenue bonds is constant at slightly over 1x throughout the life of the bonds, which prevents any further leveraging of the security.
Florida's 'AAA' GO rating recognizes the state's strong financial management practices, moderate debt burden, well-funded pension system, solid long-term economic prospects, and still significant reserves, including various trust funds. The Negative Outlook reflects the severity of the state's economic and revenue decline as well as continuing uncertainty associated with the economic and revenue outlook.
In addition, Fitch has withdrawn its ratings on the following bonds due to prerefunding activity:
--Hillsborough County (FL) (MOSI & County Center Project) capital improvement non-ad valorem refunding revenue bonds series 2006.
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 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, Zillow.com, National Association of Realtors
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', Aug. 14, 2012;
'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria