NEW YORK--()--Fitch Ratings assigns an 'A+' rating to the following North Miami Beach, Florida (the city) revenue bonds:
--Approximately $55 million utilities system revenue refunding bonds, series 2012.
Bond proceeds will be used to refund the city's outstanding series 2002B bonds issued for the water system through the Florida Municipal Loan Council (FMLC) for interest savings.
The bonds are scheduled for negotiated sale the week of Dec. 10.
In addition, Fitch affirms the following rating:
--Approximately $60 million outstanding FMLC (North Miami Beach Water Project) revenue bonds at 'A+.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the city's water system (the system). Excluded from the pledge are surcharge revenues collected from customers outside the city limits.
KEY RATING DRIVERS
STRONG, STABLE FINANCIAL PERFORMANCE: The system has demonstrated strong operating margins and debt service coverage (DSC) over the past several years. With limited capital needs and no additional bonding plans, these trends are expected to continue.
LIQUIDITY IMPROVED, STILL RELATIVELY MODEST: Liquidity and working capital returned to positive levels in fiscal 2011. While fiscal 2012 results are not available, management expects to add to its liquidity position, which remains below that of similarly rated systems.
MODERATE DEBT BURDEN: While the system remains somewhat leveraged, the service area is built-out and capital needs are expected to be manageable and funded on a pay-as-you-go basis. Debt ratios approximate the medians for systems rated in the 'A' category by Fitch.
SOLID SYSTEM INFRASTRUCTURE: Capacity is ample in terms of both water treatment and water supply. The city has no plans to add significantly to either for the long term. An interconnection with the Miami-Dade County water system provides redundancy and emergency supply.
IMPROVING LOCAL ECONOMY: The area economy is showing signs of stabilization and improvement. The city's unemployment rate is 9.3% in September 2012, which is still elevated but a significant improvement over the 13.8% rate in September 2010. Demographic indicators remain below average.
STABLE RESIDENTIAL CUSTOMER BASE
The city of North Miami Beach (general obligation bonds rated 'AA-' by Fitch) is located in northeast Miami-Dade County, midway between the cities of Miami and Fort Lauderdale. The city's population is roughly 42,000, but the system serves a much larger service area that includes the nearby communities of Sunny Isles and Golden Beach to the east, Norland and Bunche Park to the west, and Ojus to the northeast for a total population served estimated at 185,000. The 25 square mile service area, like much of southeast Florida, is almost fully developed, and customer growth is expected to be limited. In fiscal 2011, the system served a mostly residential and stable customer base of approximately 32,000.
STRONG FINANCIAL RESULTS EXPECTED TO CONTINUE
The system has produced strong operating margins over the past several years - thanks to steady rate increases and a decline in operating expenses, leading to high DSC levels. However, a combination of pay-go capital funding, repayment of interfund borrowings, and system support of the general fund (through annual transfers) led to the systematic use of excess cash flows, and low liquidity.
The system ended each of the past four fiscal years with very strong margins and at least 3.0x coverage of senior bonds; however, days cash on hand has never been higher than 90 days (accomplished in fiscal 2011), and until fiscal 2011 working capital ratios were negative. Fiscal 2012 results were not yet available but are expected to be once again positive, and the city expects to add to the system's unrestricted cash position (closer to 120 days cash).
Annual transfers from the system to the general fund consist of a 10% return on investment based on gross operating revenues, and the proceeds of the moneys collected from the surcharge levied on customers residing outside of the city limits (the latter is not included in the revenue pledge). Fitch notes the city has taken steps to close a large general fund budget gap with significant cost controls for fiscal 2012. However, the system is expected to continue making the annual transfers. When including these transfers, coverage of total system obligations is lower, although still solid at 1.8x in fiscal 2010, and 2.5x in fiscal 2011.
Financial projections provided by the city's financial feasibility consultant show the trend in strong financial performance continuing over the forecast period (through 2017) with high DSC and surplus revenues sufficient to support the general fund transfers and pay-go capital funding requirements. Fitch notes the assumptions in the forecast appear reasonable, with minimal increases in rates and customer count projected.
SOLID SYSTEM INFRASTRUCTURE, LIMITED FUTURE CAPITAL NEEDS
The city's raw water supply consists of groundwater from the Floridan and Biscayne aquifers pursuant to a 20-year consumptive use permit (CUP) granted by the South Florida Water Management District (SFWMD) in 2007. Supply is well in excess of average demand, which has stabilized at about 20 million gallons per day (mgd) after experiencing declines in demand during the economic recession.
The city historically purchased a portion of its water from Miami-Dade County. However, reliance on county-supplied water has decreased as a result of the reduced demand, along with the construction of new wells and expansion of the system's water treatment plant (financed with the 2002B bonds). At 32 mgd, treatment capacity at the system's plant comfortably exceeds current demand. The five-year CIP totals just $20 million through 2017 and will focus on water treatment and distribution.
MODERATE DEBT BURDEN
With roughly $75 million in bonds and loans outstanding as of fiscal 2012, leverage remains moderate. Debt to net capital assets of approximately 50% and debt per customer around $2,300 approximate Fitch's medians for systems rated in the 'A' category. Amortization of outstanding debt is initially slow with just 36% retired within 10 years, but all debt is retired in 20 years. The city does not anticipate additional debt at this time, which should allow debt ratios to improve over the near term.
AFFORDABLE RATES PROVIDE FLEXIBILITY
The city maintains independent rate setting authority. Fairly sizable rate increases between fiscal 2008 and 2011 raised the average residential bill for customers living in North Miami Beach to about $24 per month (assuming 7,000 gallons of use). The 25% outside city surcharge raises the bill to a still reasonable $30. Previously approved rate increases were waived by city council for fiscals 2012 and 2013, pending completion of a comprehensive capital needs assessment and updated rate study to be performed early next year.
LOCAL EMPLOYMENT AND HOUSING MARKET SHOWING IMPROVEMENT
The local economy, driven by retail commercial activity, leisure, and entertainment, is showing signs of improvement. Employment growth has led to a steady decline in the city's unemployment rate, which while still elevated at 9.3% in September 2012 is a significant improvement over the 13.8% rate in September 2010. A rise in account delinquencies caused by the recession has not led to an appreciable increase in bad debt write-offs as the city has been aggressive in shutting service for delinquent accounts. The local housing market has also shown signs of stability, with city-wide taxable property values having declined only marginally over the past two years. City income levels remain low at roughly 75% of the national average, although most customers reside outside the city where incomes are a little higher.
AVERAGE LEGAL COVENANTS
The rate covenant requires the city to raise rates so that net revenues are at least equal to 120% of annual debt service requirements. To issue additional bonds, net revenues for the most recently audited fiscal year, or any 12 of the preceding 24 months must equal at least 120% of the proposed maximum annual debt service. The series 2012 bonds are not expected to carry a debt service reserve fund.
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 U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria