NEW YORK--()--Fitch Ratings affirms the following Sarasota County, FL ratings:
--Implied general obligation (GO) rating at 'AAA';
--$18.9 million outstanding capital improvement revenue bonds, series 2010A and series 2010B (sales tax bonds) taxable Build America Bonds (BABs) at 'AA+';
--$53.1 million outstanding communications services tax (CST) revenue bonds at 'AA+';
--$121.9 million outstanding infrastructure sales tax bonds at 'AA+';
--$10.8 million outstanding five-cent local option fuel tax revenue (LOFT) bonds at 'AA+';
--$1.5 million outstanding stormwater utility revenue bonds at 'AA-'.
The Rating Outlook is Stable.
The sales tax bonds are secured by the county's receipts from the half-cent sales tax collected by the state and distributed to local governments based on the taxable sales within their counties. The county shares the proceeds with its incorporated municipalities according to a population based formula.
The infrastructure sales tax revenue bonds are secured by the county's portion of a one-cent infrastructure sales surtax levied by the county. Twenty five percent of the tax proceeds are distributed to the Sarasota County School Board with the remaining proceeds divided between the county and its incorporated municipalities in accordance with an interlocal agreement that allocates revenues based on population.
The communications services tax (CST) revenue bonds are secured by revenues received by the county from the Local Communications Services Tax Clearing Trust Fund created with the Florida Department of Revenue pursuant to Section 202.193, Florida Statutes. According to the statute, local governments are allowed to levy a tax on the sale of communications services within the entity.
The five-cent LOFT revenue bonds are secured by the county's portion of the 5-cents per gallon local option fuel tax levied in accordance with state statute and distributed to the county pursuant to an interlocal agreement. Collected revenues are divided between the county and its incorporated municipalities based on population.
The stormwater utility revenue bonds are secured by the net proceeds of all special assessments levied against property benefited by the original project and collected by the county. The special assessments are levied on each property owner's property tax bill and must be paid equally with property taxes. Pursuant to the bond resolution, the county agrees to levy for each bond year stormwater assessments in each of five stormwater improvement areas in an aggregate amount sufficient to pay debt service coming due in the upcoming bond year.
KEY RATING DRIVERS
EXCELLENT CREDIT PROFILE: Fitch's implied unlimited tax GO rating of 'AAA' reflects the county's superior financial management, accommodative debt structure moderate debt load and diverse and recovering economic base.
VERY HEALTHY FINANCIAL POSITION: The county's finances are characterized by robust reserve levels, conservative budgeting practices and ample liquidity. Management has instituted financial policies designed to provide a strong base of reserves sufficient to maintain service levels after a natural disaster, economic downturn or after other unforeseen events.
ECONOMY CONTINUES ITS RECOVERY: Employment continues to expand at a healthy clip sustaining the positive trends which began in 2011. Other indicators such as sales tax growth and an uptick in home prices are also indicative of strengthening economic activity.
STRONG COVERAGE ON VARIOUS SALES-RELATED TAX BONDS: Maximum annual debt service (MADS) coverage on bonds secured by the half-cent sales tax, infrastructure sales tax, LOFT, and CST based on fiscal 2012 collections are robust at nearly 2.0x and above. High coverage levels have been maintained despite sizable declines in each of those revenue streams between fiscals 2008 and 2012.
STORMWATER BONDS RETIRED IN FISCAL 2013: County officials historically used the excess special assessment revenues to redeem bonds early. Although final maturity was originally scheduled for fiscal 2019, officials expect to fully redeem all remaining outstanding bonds during this fiscal year (fiscal 2013).
ECONOMIC INDICATORS POINT TO SUSTAINED RECOVERY
Sarasota County is located in southwest Florida, along the Gulf of Mexico. The county's service-oriented economy spans the health care, education, professional and business services, retail and tourism sectors. There is significant manufacturing as well. After being battered by the recession and its aftermath, the county's economy appears to be experiencing a sustained recovery.
Between 2006 and 2010, approximately 24,000 jobs were lost, or 14% of the employment base. Job growth resumed in 2011 and has extended into 2012. Employment increased by 1.6% in 2011 and is up 2.2% as of July 2012 from the prior year. Unemployment rates have dropped from nearly 11% in 2011 down to about 9% currently; about even with the state average but still above the national rate. Modest increases in building permit activity and a more substantial rise in sales tax collections are additional indicators of economic expansion. Tourism reported a strong fiscal 2012 with tourist development tax collections up 16% over the prior year.
HOME VALUES RISE TENTATIVELY BUT HOUSING REMAINS WEAK
Housing values declined by over 50% between 2006 and the first quarter of 2011, according to Case Schiller. However, values inched up during the first quarter of 2012 and significantly lower levels of reported foreclosure activity suggest housing may be stabilizing. A number of substantial housing projects in development also attest to the brightening housing climate. The county's mostly residential tax base reflects the area housing collapse, losing 37% of value between fiscals 2008 and 2012. However, the pace of decline has slowed more recently and officials project the tax base to begin to grow in fiscal 2014. Fitch believes this is reasonable given the recent positive economic trends.
AFFLUENT AND OLDER POPULATION
County wealth indices are above the state and national averages, buttressed by a significant population of affluent retirees. According to the U.S. Census' American Community Survey, approximately 32% of county residents are over 65 years old compared to the Florida average of 18%. The county's population escalated rapidly during the early part of the past decade but growth has subsided more recently.
VERY STRONG FINANCIAL PROFILE
Financial operations are well-maintained as evidenced by abundant reserves, conservative budgeting practices and high levels of liquidity. Since fiscal 2007, the county experienced an over 40% drop in property tax revenues attributable in part to severe tax base declines and the county's decision not to raise tax rates to compensate for the tax base loss. In response, management implemented cost saving measures to maintain structural balance, including workforce reductions, expenditure cuts and wage and hiring freezes. Since fiscal 2007, the county sliced full-time employee positions (FTEs) by over 500 or 13% of total FTEs. As a result, general fund operating expenditures and transfers out fell by $13 million or 5% of total spending between fiscals 2009 and 2011.
After building up reserves in fiscal 2009, the county made a policy decision to budget a portion of available fund balance to support operations. However, the county typically budgets very conservatively and actual results invariably outperform the budget.
In fiscal 2011, officials budgeted a $20 million general fund drawdown but achieved a small net operating surplus due to higher than expected property and sales tax revenues and below-budget actual spending. The $6 million net general fund surplus raised the county's unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) to $148 million or an exceptional 62% of expenditures and transfers out. Unassigned general fund balance totalled $55 million or 23% of general fund spending.
RESERVE POLICY EXPECTED TO HELP MAINTAIN FINANCIAL CUSHION
The county budgeted a $23 million general fund net deficit for fiscal 2012 but officials project a much smaller $10 million drawdown. The fiscal 2012 estimated unrestricted fund balance of approximately $138 million remains well over 50% of spending. A $34 million general fund net deficit is budgeted for fiscal 2013.
Fitch believes that the county will continue to maintain sizable reserve balances due to its conservative budgeting practices and prudent financial reserve policy. The policy requires the county to maintain a disaster recovery fund for natural disasters at a level equal to 60 to 90 days of operations and an economic uncertainty fund sufficient to cover 60 days of operations. Officials intend to budget some of the monies in the economic uncertainty fund for fiscal 2014 operations but Fitch does not expect a large drain on reserves due to the county's cautious budgeting assumptions. Together, the two reserve requirements provide funding for at least four months or 33% of annual operations, ensuring a substantial financial cushion.
Debt levels are relatively modest with direct and total debt to market value at 0.6% and 1.4%, respectively. The county has no ULTGO bonds outstanding but relies upon limited ad valorem debt and revenue-secured bonds to fund their capital program. All bonds are fixed rate and amortization is above average with nearly 60% of principal maturing within ten years. Debt service carrying costs represent a moderate 8.7% of government fund expenditures net of capital spending.
The county's five-year capital plan proposes an affordable $236 million of funded capital projects with most of the spending slated for transportation and utility projects. Fitch expects moderate tax-supported debt issuance over the next two fiscal years.
RETIREMENT LIABILITIES DO NOT REPRESENT A COST PRESSURE
Retirement obligations are not considered to be a cost pressure. All employees except firefighters participate in the Florida Retirement System (FRS), a state administered defined benefit pension plan. FRS is relatively well-funded with a funding ratio of 80% as of June 30, 2011 utilizing Fitch's more conservative 7% discount rate. The county and city of Sarasota's firefighting departments merged in 1996 and by agreement, the county funds a majority of the plan. As of fiscal 2011, the funding ratio for the firefighter's plan was a weak 57%; however, Fitch does not consider this to be a major concern given that contributions to the firefighters' plan represent only 14% of the county's annual pension costs. County contributions to both plans in fiscal 2011 totaled almost $29 million or a moderate 10.8% of general fund spending.
The county provides an implicit subsidy to its retirees for health benefits by allowing them to participate in the county's healthcare plan at the same cost applicable to current employees. In 2008, the county established an OPEB trust fund which is administered by the Florida League of Cities. As of October 2011, the OPEB plan was 89% funded. ARC requirements are minimal representing less than 0.2% of fiscal 2011 general fund spending.
SALES TAX REVENUES PROVIDE WIDE COVERAGE OF MADS
Half-cent sales tax and infrastructure sales tax revenues both grew substantially in fiscal 2011 after three years of significant declines. MADS coverage is very wide at over 9.0x from fiscal 2012 collections. State-required withholding of sales tax distributions to the county to cover the county's unpaid Medicaid reimbursement obligations to the state is not expected to have a material impact on coverage.
The infrastructure sales tax bonds are more heavily leveraged than the sales tax bonds, but MADS coverage remains strong at 2.0x. Officials expect both revenue streams to continue to grow in fiscal 2013 based on the improved economy. While further debt issuance for either bond is subject to an additional bonds test (ABT), the 1.35x MADS ABT infrastructure bond requirement is more relevant as half-cent sales tax revenues are required for general operations. There are no immediate plans to issue additional bonds secured by either revenue. Officials are planning to utilize infrastructure sales surtax revenues as the main source of payment for a covenant to budget and appropriate bond issue planned for fiscal 2014.
CST REVENUES COVER DEBT SERVICE BY COMFORTABLE MARGIN
CST revenue trends have been uneven over the past ten years. Between fiscals 2007 and 2011, collections fell by 7%. The decline is attributable to a combination of factors including the recession, technological changes in communications which have increased the use of services which are not taxed under the CST, and falling prices for wireless services. Collections did rise modestly in fiscal 2012. Despite the volatility of the revenue stream, MADS coverage is still robust at 2.14x, based on fiscal 2012 collections. Officials project the CST to decline in fiscal 2013 by 4.5% due to recent state legislative changes before expanding again in fiscals 2014 and 2015. Absent legislative actions to broaden the CST base, Fitch believes the projected growth in county CST revenues after fiscal 2013 may be optimistic. Nevertheless, CST revenues could decline by over 53% and still cover MADS by at least 1.0x.
LOFT DEBT SERVICE COVERAGE REMAINS ROBUST DESPITE REVENUE DECLINES
Pledged LOFT revenues have decreased in each of the past six fiscal years, falling by over $900,000 or 18% since fiscal 2006. The downward trend is most likely attributable to the weak economy and high gas prices. As the five-cent LOFT revenues are lightly leveraged and no further debt is planned, MADS coverage from fiscal 2012 LOFT revenues continues to be sturdy at 3.8x. Officials have budgeted a 2.8% decrease in LOFT revenues for fiscal 2013.
STORMWATER UTILITY BONDS TO BE REDEEMED IN FISCAL 2013
The assessment bonds are secured by non-ad valorem assessments levied on property owners in five stormwater improvement areas. Historically, county officials have used pledged assessments generated in excess of annual debt service requirements to redeem bonds early. Currently, only $1.5 million of bonds remain outstanding and officials indicate that all bonds will be redeemed during the current fiscal year. The original final maturity date of the bonds was 2019.
Fitch Ratings has withdrawn the 'AA+' rating on the Sarasota County (FL) capital improvement revenue bonds series 2010C as the bond was not sold.
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', dated Aug. 14, 2012.
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria