NEW YORK--()--Fitch Ratings has affirmed its rating on the following outstanding Polk County, FL (the county) bonds:
--$33 million constitutional fuel tax revenue refunding bonds, series 2006, at 'AA';
--$32 million capital improvement revenue refunding bonds, series 2010, at 'AA';
--$53 million transportation improvement revenue refunding bonds, series 2010, at 'AA';
--$81 million public facilities revenue bonds, series 2005, at 'AA'.
In addition, Fitch has affirmed the county's implied unlimited tax general obligation (ULTGO) rating of 'AA'.
The Rating Outlook is Stable.
Transportation Improvement: Lien on and pledge of the five-cent local option fuel tax and 2% of the 10% county levied public service tax (PST) revenues. A standard size debt service reserve fund (DSRF) is cash funded. Additional bonds are subject to a 1.5 times (x) additional bonds test (ABT).
Capital Improvement: Secured by a lien on and pledge of local government half-cent sales tax revenues. A standard size DSRF is cash funded. Additional bonds are subject to a 1.6x ABT.
Public Facilities: Secured by a lien on and pledge of 8% of the county's 10% PST and 50% of the county's portion of the state revenue sharing trust fund received by the county in the previous fiscal year. The DSRF is funded with a surety bond issued by National Public Finance Guarantee. Additional bonds are subject to a 1.25x ABT.
Constitutional Fuel Tax: Secured by a lien on and pledge of the county's constitutional fuel tax revenues. The DSRF is funded with a surety bond issued by National Public Finance Guarantee. Additional bonds are subject to a 1.5x ABT.
KEY RATING DRIVERS
SUFFICIENT REVENUE BOND COVERAGE: Coverage of maximum annual debt service (MADS) for all special tax bonds is sufficient, in spite of varying degrees of volatility over the last several years; legal provisions are sound.
ADEQUATE FINANCIAL FLEXIBILITY REMAINS: The 'AA' ULTGO reflects the ample financial flexibility that remains despite use of reserves for ongoing expenditures and substantial tax base and subsequent revenue weakening.
LOW DEBT RATIOS: Debt levels are low and should remain so given no immediate debt plans supported by tax revenues.
ECONOMY STILL IN RECOVERY MODE: The economy is still demonstrating weakness as a poor housing market has pressured the tax base, and unemployment rates remain high. Building permit numbers have improved slightly and new construction efforts previously put on hold are beginning to transpire. Residents enjoy easy commuting access to the larger Tampa and Orlando metropolitan areas.
WHAT COULD TRIGGER A RATING ACTION
DECLINING FUEL TAX REVENUES: A continued decline in fuel tax revenues used to support the constitutional fuel tax bonds resulting in lower debt service coverage inconsistent with the 'AA' rating category.
CONTINUED OPERATIONAL DEFICITS: The inability to achieve structural balance and maintain adequate reserve levels consistent with the rating category could result in a downward change in the county's rating.
The 'AA' rating for all bonds reflects solid coverage of MADS despite recent declines in some of the pledged revenue streams, sound legal protections for bondholders and the potential volatility of pledged revenues. Fuel taxes have experienced the most notable decline (-9%) since 2007 due to higher gas prices, but sales tax, another volatile revenue source, have improved due to the opening of Legoland in October 2011 and general, albeit slow, improvement in the economy.
The ratings also consider the general credit characteristics of Polk County, including the somewhat limited but diversifying economic base with below average wealth indicators, low debt levels, and an adequate financial position. The county has faced operating pressures over the past few years due to the declines in sales and fuel taxes as well as declining property tax revenues as a result of continued tax base declines.
SUFFICIENT REVENUE BOND COVERAGE
The transportation improvement revenue bonds are secured by a pledge of the county's five-cent local option fuel tax and 2% of the county's 10% PST levied on sales of electric, gas, water and fuel oil in the unincorporated area of county. Coverage of MADS by fiscal 2011 revenues is a strong 3.0x. Pledged revenues had been relatively stable but have experienced declines since 2011 due to higher fuel costs and a reduction in electricity usage. Debt service coverage may decline marginally in fiscal 2012, but the revenues should continue to provide ample coverage. Fuel tax revenues must be used for transportation related capital expenses while excess PST revenues may be used for general government operations.
The capital improvement bonds are secured by a pledge of local government one-half-cent sales tax (the sales tax) revenues. Under state statute the state levies a 6% sales tax and distributes 8.714% of taxes remitted within a county to its local governments monthly. Taxes are divided between the counties and cities pursuant to a population based formula that guarantees that counties will receive at least 40% of receipts. Coverage of MADS by fiscal 2011 revenues was a solid 2.62x and is projected to increase to over 9.0x in fiscal 2012 as two series of parity bonds have matured in December 2011 reducing annual debt service considerably. Revenues have exhibited some volatility over the last five years, but were up 3.6% in fiscal 2011 and are up 7% fiscal year to date through May. Although coverage levels are projected to be very high, the rating is not likely to be adjusted upward as Fitch caps the rating at the level of the ULTGO of the county.
The public facilities revenue bonds are secured by a pledge of 8% of the county's 10% PST and 50% of the prior fiscal year's revenue the county receives from the State Revenue Sharing Trust Fund for counties, which includes the Guaranteed Entitlement and the Second Guaranteed Entitlement. The revenue is distributed to the county monthly and is comprised of a portion of various state collected taxes. Distribution to counties is based on an apportionment factor composed of three equally weighted portions. Coverage of MADS by fiscal 2011 revenues is a very high 5.0x. Pledged revenues declined by 3.8% in fiscal 2011 and are trending down in 2012 through June 2012 (-4%) due primarily to some negative volatility in the PST tied to increasing fuel costs.
The constitutional fuel tax bonds are secured by a pledge and a lien on the constitutional fuel tax revenue, which is a two-cent per gallon levy on the sale of gasoline and like sources of energy to fuel motor vehicles. Coverage of annual debt service by fiscal 2011 revenues was sound at 1.76x. Coverage on MADS, which occurs in 2016, is lower, but still adequate, at 1.58x. Fitch's long-term 'AA' rating takes into consideration that beginning in 2017 coverage rises to almost 3.0x based on fiscal 2011 revenues and no additional bonds are anticipated at this time. Revenues have weakened slightly in the last few years (down 1%-2% on average annually) but continue to provide adequate protection for bondholders. Revenues through June 2012 are down 1.45% compared to the same period last year.
ECONOMY STILL IN RECOVERY MODE
Polk County's financial flexibility has been reduced the last two years as the county has experienced consistent declines in property values and reductions in economically sensitive non-property tax revenues. Reserves have been tapped to supplement lost revenues, but liquidity remains strong.
ADEQUATE FINANCIAL FLEXIBILITY REMAINS
For fiscal 2011, the county experienced a $20 million positive variance compared to budget as expenditures were $27 million better than budget and revenues were under by $7 million. The negative revenue variance was mostly due to lower than expected tax revenues and interest income. After transfers, this resulted in a $14 million decline in the general fund balance, as opposed to a budgeted decline of $33 million. The county's unassigned general fund balance totaled $71 million or a strong 26% of spending at fiscal end 2011.
For fiscal 2012, management was predicting a total $33 million structural deficit with $26 million projected for fiscal 2012 and $7 million in fiscal 2013. This assumed a 10% decline in assessed value (AV) in 2012 and a 5% reduction in 2013. Actual property valuations came in better than expected and were down only 6.3% county-wide. This change, along with departmental budget reductions and use of $8 million in general fund reserves, helped produce a balanced budget in fiscal 2012. Tax rates were not raised and due to the decline in AV, ad valorem revenues in the general fund were budgeted down $8.8 million.
Management predicts fiscal 2012 results to be close to or slightly better than planned as revenues are coming in roughly 2% higher than budget and expenditures are 2%-3% under budget. Projected ending fund balance is $57.1 million (a sound 22% of the adopted $261 million operating budget). The Board did approve additional allocations of fund balance mid-year totaling $6.1 million representing $2.1 million for capital projects, $3.5 million for a Medicaid backlog payment and a $400,000 legal settlement payment. This $6.1 million is planned to be reimbursed to the general fund in fiscal 2013.
For fiscal 2013, property valuations declined 4.9% with total AV valued at $33.8 billion, down a sizable 35% from fiscal 2009 levels. The estimated preliminary general fund budget deficit was $13.3 million. Management was able to eliminate $7.3 million of the deficit through a combination of changes to revenues and expenses and has appropriated $6 million of its general fund reserves. Additionally, the budget includes the one-time use of a $15 million transfer-in from the county's solid waste closure fund which will be used to cover non-recurring items, including the aforementioned $3.5 million reimbursement to the general fund for the Medicaid backlog payment, $3.1 million for capital improvements and a $4.5 million set-aside for a potential reimbursement to employees for the 3% contributions made by them to the state pension system. The contributions, which were deemed unconstitutional by a lower court ruling, are pending appeal made to the state Supreme Court.
Management has not projected a deficit for fiscal 2014 and expects property values to remain unchanged. Fitch considers the level of reserves maintained by the county as adequate for this rating level but the continued use of reserves to supplement structural deficits could put pressure on the rating if reserve levels decline to below-average levels.
DEBT LEVELS ARE LOW
Overall debt levels, including debt of the county's school district, are low at 1.9% of AV. The county's capital plan has been reduced in the face of the weakened economy and the need to use revenues, such as residual PST revenue to support operations rather than capital. Additional utility debt is planned for approximately $67 million to be supported by user fees.
All full-time county employees participate in the state managed Florida Retirement System (FRS). The county's contribution totaled $26 million in fiscal 2011, of which $21 million was related to the general fund, which equals a slightly high 7.6% of general fund spending. Effective July 1, 2011, all participants in FRS are required to contribute 3% of their gross compensation to the FRS. The county's other post-employment benefit (OPEB) costs in fiscal 2011 were $16 million and its unfunded liability was $228 million, or a low 0.67% of AV, as of Oct. 1, 2010.
DIVERSIFYING BUT STILL PRESSURED ECONOMY
Historically known for its citrus and phosphate mining industries, Polk County's economy has diversified in recent years into health care, light manufacturing and distribution. Residents benefit from the proximity of the Tampa and Orlando metropolitan employment centers. Management reports numerous commercial development projects either underway or nearing startup due to the county's ideal location along Interstate 4 and the opening of the new Florida Polytechnic University campus in 2013. Additionally, Legoland, which opened in October 2011, has reportedly outpaced visitor expectations and is expanding its attractions to meet demand. Off-shoots of this successful theme park include the future development of hotel, restaurant and retail development nearby which is expected to increase county sales tax revenues.
Unemployment has improved to 10% as of June 2012, down from 11.9% the prior year, but still remains above state (9%) and national (8.4%) averages. Per capita income is below average, equal to approximately 82% and 80% of state and national averages, respectively.
Foreclosure activity was very high in 2009 and 2010 and had begun to decline, but filings are up in 2012 compared to 2011 based on information provided by the county. This activity could further dampen housing prices and negatively affect AV.
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, Zillow.com, and 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