NEW YORK--()--Fitch Ratings has taken the following rating action on the city of Orlando, Florida's bonds:
--$29.2 million state sales tax payments revenue bonds affirmed at 'AA+'.
The Rating Outlook is Negative.
The bonds are secured by an annual distribution of sales tax pursuant to Florida statutes sections 288.1162 and 212.20(6)(d)6.b. The annual payments are equal to the debt service requirements. A debt service reserve fund (DSRF) cash-funded to 50% of maximum annual debt service (MADS) provides added security.
KEY RATING DRIVERS
STABLE PLEDGED REVENUE: The state sales tax payments are $2 million annual payments to the city. The tight 1.0x annual debt service coverage is mitigated by the fixed level of the sales tax payments.
RATING CAP: The rating is capped by the lower of the city general obligation (GO) rating or one notch below the state GO rating. The city is rated 'AAA' with a Stable Outlook, and the state is rated 'AAA' with a Negative Outlook.
STATE CREDIT STRENGTH: The state's 'AAA' rating reflects its strong financial management, conservative debt position and solid but stressed underlying economy.
NEGATIVE OUTLOOK LINKED TO THE STATE: The Negative Outlook reflects concern regarding the state's ability to maintain a balanced budget and an adequate reserve position, along with the economy's ability to meet forecasted performance.
EXCELLENT CITY CREDIT CHARACTERISTICS: The city's superior credit is exhibited by its large and diverse economy, strong financial management and moderate debt load. Ongoing development of the city's medical and bio-tech sectors broadens the city's world-class tourism base.
WHAT COULD TRIGGER A RATING ACTION
NEGATIVE RATING ACTION ON THE STATE: A downgrade of the state's rating would result in negative rating action on this security.
PLEDGED REVENUES FINANCE SPORTS FACILITIES
The bonds are limited obligations of the city payable solely from an annual $2 million distribution received from state sales tax revenues. The payments are part of a state program to provide funding assistance to local governments for professional sports facilities. Proceeds of the bonds were part of the financing of the Amway Center, home of the Orlando Magic, which was completed in 2010.
AMPLE REVENUES FOR SALES TAX DISTRIBUTIONS
The state sales tax payment is derived from the 6% state sales tax collected by the Florida Department of Revenue (FDOR). Distribution of sales taxes is statutorily determined and funding for state sales tax payments comes after prior allocations, including funding of the half cent sales tax clearing fund for local governments. However, the state's prior funding obligations constitute only about 12% of the approximately $19 billion of sales tax collections in fiscal 2012. This leaves ample revenues available to cover $23.7 million in total sales tax revenue payments to the city and other eligible local governments in fiscal 2013.
FIXED REVENUE STREAM; TIGHT DEBT SERVICE COVERAGE
The professional sports facility payment is distributed to the city monthly in the amount of $166,667. As is typical of debt secured by fixed sales tax distributions, coverage of MADS by the $2 million distribution is only slightly greater than 1.0 times (x).
DSRF FUNDS REQUIRED FOR FINAL DEBT SERVICE PAYMENT
The distribution is payable for 30 years and runs through final maturity of the bonds in 2038. A cash-funded 50% MADS DSRF provides additional security, however, the city is planning on using the reserve fund monies to make the final debt service payment. No additional bonds are permitted under the bond resolution, with the exception of refunding bonds.
CITY ECONOMY CONTINUES TO EXPAND
The local economy is experiencing a sustained recovery as evidenced by solid job growth. Tourism, a major industry, continues to recover as tourist development tax revenues for fiscal 2012 are up over 4% from the prior year, net of a one-time litigation settlement payment in fiscal 2011. Both Disney and Universal are planning or implementing sizable capital investments in their Orlando theme parks and hotel occupancy and room rates have generally expanded during 2012.
Economic diversification continues to take hold, most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, in addition to M.D. Anderson Cancer Center and Sanford-Burnham Medical Research Institute.
SOLID CITY FINANCIAL OPERATIONS
City finances are well-managed, characterized by significant reserves and strong liquidity. Fiscal 2011 unrestricted general fund balance (the sum of committed, assigned and unassigned according to GASB 54) represented a robust 34% of general fund spending. Fiscal 2011 operations benefitted from a one-time transfer of utility service tax fund balance to the general fund but the city has consistently maintained balances at over 20% of spending.
Management responded to large declines in the property tax revenues primarily with expenditure cuts and a one-time increase in property tax rates. Since 2009, the city reduced its workforce by about 20%. For fiscal 2012, officials are projecting a small general fund surplus as sales taxes rebound and the tax base stabilizes. While an operating deficit is budgeted for fiscal 2013, the city historically budgets very conservatively as finances regularly outperform the budget.
CHALLENGED BUT STILL STRONG STATE ECONOMY & FINANCIAL OPERATIONS
Fitch's 'AAA' GO rating for Florida is based on the state's strong management practices, moderate debt burden, well-funded pension system, solid economic prospects and still-satisfactory reserves. The Negative Outlook reflects the severity of the state's economic decline and reduced financial flexibility as well as the pace of the economic and associated revenue recovery.
STATE OFFICIALS EFFECTIVELY RESPONDED TO CONTINUAL REVENUE LOSSES
Revenue sources, including the sales tax and documentary stamp tax have been susceptible to the state's steep housing downturn; the state has no personal income tax. The state legislature has consistently and promptly addressed numerous negative revenue estimate revisions during the downturn, maintaining budget balance and an adequate reserve position. Unencumbered general fund and budget stabilization fund balances totaled $1 billion in fiscal 2011 or 4.5% of fiscal 2011 revenues. A slight increase is expected for fiscal 2012 to 6.2% of general fund revenues.
For more information on the state, please see Fitch's latest release dated Sept. 14, 2012. For more information on the city, please see Fitch's latest release dated Feb. 27, 2012. Both are available on Fitch's website at 'www.fitchratings.com'.
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, 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