NEW YORK--()--Fitch Ratings has affirmed the following ratings for Marco Island, FL (the city) bonds:
--$6.42 million general obligation (GO) bonds series 2004 at 'AA+';
--$4.57 million sales tax revenue bonds series 2005 at 'AA';
The Rating Outlook is Stable.
The GO bonds are secured by the city's full faith and credit and unlimited taxing power.
The sales tax bonds are secured by the proceeds of the local government half cent sales tax, which is levied countywide, collected by the state, and distributed between the county and its incorporated municipalities based on a population driven formula.
KEY RATING DRIVERS
AMPLE FINANCIAL FLEXIBILITY: The city maintains a sound level of reserves which combined with the city's lower than average property tax rate provides ample financial flexibility.
SOUND FISCAL MANAGEMENT: City management has demonstrated a history of prudent financial stewardship utilizing conservative budgeting and sound fiscal policies.
ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage on the sales tax bonds was strong at over 3.0 times (x) in fiscal 2012. The city does not plan to issue additional sales tax bonds.
FAVORABLE DEBT PROFILE: Key debt ratios are generally moderate, and carrying costs including debt service, pension, and other post-employment benefits (OPEB) are manageable and not expected to increase materially in the near term given the city's very rapid debt amortization, absence of additional issuance plans, and pension plan funding levels.
LIMITED LOCAL ECONOMY: The local economy is based mainly in tourism; however, above-average economic indicators partially mitigate this concern.
SALES TAX REVENUES REMAIN STABLE
After declining more than 12% on the year in fiscal 2009, pledged sales tax revenues improved by 7.3% in fiscal 2010, 4.7% in fiscal 2011, and 12.1% in fiscal 2012 based on unaudited results. Coverage of maximum annual debt service (MADS) is sound at 3.0x based on fiscal 2012 revenues.
Fitch expects revenues to demonstrate a degree of volatility going forward as they are highly dependent on the region's economically sensitive tourism industry. However, coverage is expected to remain adequate for the rating level. The additional bonds test requires a somewhat lenient 1.35x MADS coverage to issue additional debt, though the city has no plans to further leverage the security. The debt service reserve account is cash funded.
AMPLE FINANCIAL FLEXIBILITY
Financial operations have historically been strong, highlighted by conservative budgeting policies and strong management. Most notably, the city has a self-imposed spending cap, which limits all governmental funds spending to an annual increase of 3% plus a cost of living adjustment (COLA). The city's fiscal policy establishes an emergency reserve equal to 25% of the general fund operating budget. The city has consistently exceeded this prudent benchmark, with reserves equal to 40% or higher.
A large general fund deficit after transfers in fiscal 2011 was largely due to the reallocation of nearly $6.7 million to the capital projects fund due to the implementation of GASB 54. The general fund fiscal 2011 unrestricted fund balance (the sum of committed, uncommitted and unassigned per GASB 54) remains strong at $6.4 million or 24% of operating expenditures and transfers out. In addition to general fund reserves, the capital improvement fund balance of approximately $5 million can be used for general fund purposes if necessary. The sum of the unrestricted general fund balance and the capital improvement fund balance equals a robust 42% of spending.
FISCAL 2012 RESULTS AND 2013 BUDGET
The fiscal 2012 budget was balanced with the use of just under $1 million of available general fund reserves. However, preliminary results indicate an operating surplus after transfers of approximately $800 thousand. The surplus is a result of both under-budget expenditures and better than expected revenues. The fiscal 2013 budget is balanced without the use of general fund reserves and is additionally constrained by the above mentioned expenditure cap; as such, no material changes to general fund reserves are expected in the near term.
LIMITED LOCAL ECONOMY
Marco Island is located off the southeastern coast of Florida in Collier County (implied GO rating of 'AA+' by Fitch). The city is a popular tourism destination with the peak season population roughly tripling the year-round population, which stands at 16,756. Wealth levels are above average with median household income at 154% of the state and 141% of the national levels. The unemployment rate, which is only available at the county level, remains elevated at 9.6% in August 2012. This was a considerable decrease from the 11.6% recorded a year prior. The improvement was driven by employment gains of 4.3%, well above the rate of job growth for both the state (2.2%) and nation (1.6%) during the same period.
DECLINES IN ASSESSED VALUE (AV)
The city experienced sizable declines in AV in fiscals 2011 and 2012 of 11% and 8.5%, respectively; another small decline is expected for fiscal 2013. AV in 2012 was approximately $7.6 billion. The city has not reduced services due to the decline in property tax revenue. Property tax is by far the city's largest revenue source accounting for approximately 68% of total general fund revenues in fiscal 2011. The city's tax base is diverse and the low property tax rate (1.89 mills) is well below the statewide cap of 10 mills even after increases to offset tax base declines, leaving ample revenue raising flexibility.
MANAGEABLE CARRYING COSTS
Overall debt levels for the city are moderate on a per capita basis at $3,710 but very low as a percentage of AV at 0.75%, reflecting both the seasonal nature of the city's population and its high home values. There are no immediate plans for additional debt and amortization is rapid with 100% of the outstanding principle retired within the next 10 years.
Overall carrying costs including debt, pension and OPEB liabilities were a manageable 18% of general fund expenditures in 2011. The city administers three single-employer pension plans, one each for firefighters, police and general employees. Additionally, a very small number of employees participate in the state multi-employer retirement plan. The city's plans for fire and police defined benefit plans while the general employee plan is a defined contribution plan. The funded status of the fire and police plans is 77% and 44%, respectively, based on the Fitch-adjusted 7% investment rate of return, and on an aggregate basis a low 60%. The low funded ratio for the police plan considers its recent formation in 2005. The city fully funds its actuarial required contribution for, and the aggregate unfunded liability totals just $4.3 million or less than 0.1% of market value which tempers any rating concern related to the weak pension funded status.
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 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