NEW YORK--()--Fitch Ratings has affirmed the following ratings for the City of Sarasota, Florida (the city):
--$40.5 million general obligation (GO) bonds, series 2007 at 'AA+';
--$8.3 million sales tax payments revenue bonds, series 2010 at 'AA'.
The Rating Outlook is Stable.
The sales tax payments bonds are limited obligations of the city, secured by a first lien on certain statutorily defined payments received from the State of Florida and direct subsidy payments and secondarily by a covenant to budget and appropriate (CB&A), by amendment if necessary, an amount of legally available non ad valorem revenues sufficient to meet debt service.
KEY RATING DRIVERS
RESERVE COVENANT AS BASIS FOR RATING: The rating on the sales tax bonds is based on the city's reserve fund deficiency covenant, and reflects the city's general credit quality and sound debt service coverage from available non ad valorem revenues.
MAINTENANCE OF HIGH RESERVES KEY: Fitch considers the city's maintenance of very healthy fund balance levels as important to its 'AA+' ULTGO rating given the limitations placed on financial flexibility by the city's high fixed cost burden.
STRONG FINANCIAL PROFILE: The city's financial profile is highlighted by its consistently high reserve levels. Revenue pressure from substantial reductions in the city's taxable values has been tempered by recent increases in the millage rate. Millage rate capacity remains nonetheless, enhancing budgetary flexibility. Liquidity levels are robust.
STRAINED ECONOMIC CONDITIONS: The area economy is still recovering from the serious losses sustained due to the national recession and housing correction. Job growth has driven down unemployment to a rate that is now on par with the state average. Wealth indicators are average.
HIGH FIXED COST BURDEN: Annual debt service and post-employment benefit costs consume over one-third of annual spending, although other key leverage ratios are manageable and expected to remain so given the city's limited capital needs and average principal payout.
MAINTENANCE OF ROBUST RESERVE LEVELS DESPITE PRESSURED OPERATING ENVIRONMENT
Credit strength centers on the city's maintenance of sizable reserve levels, with general fund unreserved/unrestricted balance ranging from 25% to 41% of spending dating back to fiscal 2002. High levels of liquidity have also been preserved, with the ratio of available cash and investments to liabilities at 15 times (x) in fiscal 2011.
The city ended fiscal 2011 with a marginal $186,000 drawdown (0.4% of spending) for a year-end unrestricted fund balance (the sum of assigned, unassigned and committed fund balances under GASB 54) of $21.3 million (a strong 41.2% of spending). Though the city drew down reserves in fiscal 2011 to plug budget gaps, past drawdowns (fiscal 2008 and 2009) have been to fund capital projects.
Operating pressures stem from a $3.5 billion (33.6%) decline in taxable value from fiscal 2008 to 2012 and a very high fixed cost burden. The city's competitive tax rate of 2.92 mills is far below the state's 10-mill cap. Since fiscal 2007, the city has reduced spending largely through reductions in its work force (down 24%). The city has also achieved savings on employee healthcare benefits through operation of its own health clinic, which opened in fiscal 2011. After the first full year of operations, the city estimates $2 million in savings or 3.6% of spending.
FISCAL 2012 - 2013 BUDGET AND ESTIMATES
The fiscal 2012 budget appropriated $1.2 million (2.2% of spending) of reserves for operating needs and increased the millage to rate of 2.92 mills per $1,000 assessed value (AV). City projections based on 10 months of actual results show a slight addition to fund balance ($800,000 or 1.5% of spending) due to favorable variances to budget for expenditures. The city will use $200,000 of this surplus to offset a budget deficit in its parking fund.
The proposed fiscal 2013 budget includes a $1.8 million use of fund balance (3.3% of spending). Fitch notes actual results have generally outperformed the budget due to the conservative revenue budgeting. No changes to the millage rate or levy are planned.
LOW RISK DEBT PROFILE
Overall debt levels are moderate on a per capita basis ($3,035) and low as a percentage of market value (1.5% of MV). Fiscal 2011 debt service totaled $9.7 million or an elevated 13.9% of general and debt service funds spending. Approximately 51% of outstanding principal is repaid in ten years, which Fitch considers average. The city has no exposure to variable rate debt or derivative instruments.
Future capital needs appear manageable, and the city has no future tax-supported debt plans. The fiscal 2012 - 2016 tax-supported capital improvement plan (CIP) totals $65.9 million (a moderate 0.6% of MV). The majority of projects included in the CIP are for economic development ($30.4 million) and transportation ($16 million) and will be funded through grants and special taxes. Pay-go is expected to provide $180,000 of funding over this time period.
ABOVE-AVERAGE FIXED COST BURDEN
Post-employment benefits represent a large percentage of annual spending. In aggregate, the city contributed $12.5 million (an above-average 24% of spending) toward general fund contributions to its pension and other post-employment benefits (OPEB) plans.
The city maintains three defined benefit plans for its general, police and fire employees. For fiscal 2011, the general fund's contribution to the city's three pension plans totaled $6.6 million (an elevated 12.8% of spending). The most recent actuarial report from September 2011 reports a combined unfunded liability of $142 million across all three plans (a moderate 1.3% of MV). Funding levels for the plans are weak at 64% when Fitch adjusts the rate of return from the city's 8% assumption to a more conservative 7%.
Fitch views positively recent actions taken by city management to limit its long-term pension obligation. In fiscal 2011, the city decreased certain benefits in its defined benefit pension plan for general employees and closed the plan to new hires, enrolling them in a defined contribution plan instead. The city commission also voted to impose a series of benefit reductions for its police pension plan for future and current employees. Based on actuarial estimates, the changes will result in $160 million of savings for the city over a 30-year time period.
The city offers medical, prescription and dental benefits to its retirees. In fiscal 2011, the general fund contributed $5.9 million (a sizable 11.4% of spending) toward the city's $10.8 million ARC for all funds. As of Oct. 1, 2010, the most recent actuarial valuation date, the unfunded liability of $121.6 million represented a moderate 1.1% of MV.
CB&A PROVIDES SUPPORT
The availability of non-ad valorem revenues to support the sales tax payment bonds depends on the use of revenues for essential government services and the potential future securitization of specific non-ad valorem revenue bonds. The city's non-ad valorem revenues have decreased over the past several years driven by declines in intergovernmental revenues. Nonetheless, Fitch takes comfort in the diverse nature of non-ad valorem revenues and the city's ample reserve levels.
Fitch does not view the potential loss of subsidy payments as a material threat to debt service payments given that their loss would modestly increase CB&A debt service. The CB&A non-ad valorem revenues are cumulative to the extent not paid, and shall continue until such non-ad valorem revenues or other legally available funds shall have been budgeted, appropriated and actually paid. The GO bonds are backed by the city's full faith and credit and unlimited ad valorem taxing ability.
STILL-RECOVERING LOCAL ECONOMY
The City of Sarasota is located on the southwestern coast of Florida within Sarasota County, rated 'AAA' with a Stable Outlook by Fitch. A popular tourist and retiree destination, the city (2010 population of 52,341) has a local economy concentrated in service-based industries, such as healthcare and education. Sarasota Memorial Hospital and Venice Regional Hospital are the city's first and third largest private employers, with almost 4,400 employees in aggregate.
The housing crisis has had a serious impact on the county, decreasing TAV by over half. Declines continued in fiscal 2012 (6.3%), but the city expects modest growth in 2013 (0.4%). Fitch believes there is downside risk to this projection based on continued declines through the most recent Case-Schiller Index. The city's tax base displays diversity, and property tax collection rates have remained constant at over 96%.
Economic indicators for the city are mixed. The unemployment rate spiked to a high of 11.7% in 2010 but has decreased steadily since due to employment gains. As of July 2012, the city's unemployment rate of 9.2% was on par with the state average (9.3%) but above the national average (8.6%). Wealth levels are comparable to those of the nation.
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, 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