Fitch Affirms Okaloosa County, FL's Implied ULTGO & Sales Tax Rev Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings for the following Okaloosa County, Florida's (the county) bonds:

--$26.3 million sales tax revenue bonds, series 2009A and 2009B at 'A+';

--Implied unlimited tax general obligation (ULTGO) rating at 'A+'.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are secured by the county's proceeds from a 1/2 cent local government sales tax as well as any Build America Bond subsidy payments (BABs) received by the county with respect to the taxable series 2009B bonds.

KEY RATING DRIVERS

IMPROVING FINANCIAL RESERVES: Unaudited fiscal 2012 general fund projections indicate improved budgetary balance and increased reserves following several years of deficits which eroded the county financial position to a very low level.

STABLE TOURISM AND MILITARY-BASED ECONOMY: The county economy remains stable, anchored by Eglin Air Force Base and tourism along the Gulf of Mexico. It features consistently below average unemployment rates and slightly above average income levels.

STRONG SALES TAX COVERAGE: While sales tax revenues bond debt service coverage remains strong at over 7.0x in 2012, the 'A+' rating for the bonds is based on the county's overall credit profile and capped at the implied ULTGO rating.

SLOWING VALUATION DECLINES: County property valuations have declined since the peak in 2008 but the rate of decline has slowed and modest current development is expected to stabilize valuations. The county maintains considerable property and other tax revenue raising flexibility if needed.

FAVORABLE DEBT POSITION: Debt levels are low and are expected to remain low over the next few years. Funding sources are likely to be sales, tourism or other non-property taxes.

WHAT COULD TRIGGER A RATING ACTION

The county's ability to sustain structural budgetary balance and stronger reserve levels while maintaining other credit characteristics could lead to a positive rating outlook or rating upgrade.

CREDIT PROFILE

Okaloosa County is located on Florida's panhandle, bordered by Alabama to the north. Its 2011 population of approximately 181,679 is concentrated most heavily near its southern border on the Gulf of Mexico.

STABILIZING SALES TAX REVENUES; STRONG COVERAGE

Pledged sales tax revenues declined over 21% from their peak in fiscal 2006 to fiscal 2010, rebounding by 9% in 2011 and 1.6% in 2012. The outlook for 2013 is for growth of 4% based on strengthening tourism and general economic activity. The first two months of fiscal 2013 are up 2.6% from the year prior. Debt service coverage remains robust at over 7.0x for fiscal 2012, excluding any Build America Bonds (BABs) subsidy that is received.

Legal provisions are adequate, including a 1.35x coverage test for additional bonds. The debt service reserve requirement of maximum annual debt service is fulfilled by a surety from Assured Guaranteed Corporation in the amount of $1.56 million. The series 2009 bonds funded the acquisition and construction of a new judicial center complex and have a final maturity on Oct. 1, 2039. Fitch does not expect the county to significantly leverage the sales tax and believes the stability of the underlying county economy will generate sales tax revenues sufficient to provide continued strong debt service coverage.

MILITARY AND TOURISM-BASED ECONOMY

Despite the general economic slowdown over the past five years, the area economy is stable, anchored by Eglin Air Force Base and bolstered by tourism as well as military technical support providers and health care. County unemployment rates have consistently remained below state and national levels through the economic downturn. Like the rest of the state, the county has experienced some loss of population over the past few years, although the rate of decline appears to be lessening. The recent increase in base personnel is expected to stabilize county population over the near to medium term. Wealth levels are slightly higher than average.

The base, established in 1935, with over 10,000 military and 4,000 civilian personnel plus over 3,000 contractors, plays a major role in national defense; it recently added the 7th special-forces group with approximately 6,000 military and dependents and the F35 training center. Significant downsizing at the base is unlikely in the near term. The tourism sector within the county generates significant employment and continues to recover from an economic and environmental (2010 Gulf oil spill) downturn over the past few years -- as demonstrated by the improvement in local sales tax revenues. Residents and tourists are attracted by the natural attractions and recreational activities within the county including several miles of beaches along the gulf.

IMPROVING BUDGETARY BALANCE AND RESERVES

Following several years of operating deficits driven by property and sales tax revenue declines, moderate expenditure reductions and planned use of reserves, unaudited fiscal 2012 performance indicates improved budgetary balance and a sizable increase in reserves. Tax base declines over the past four years, including a more than 10% decrease in fiscal 2011, coupled with the county's decision not to increase the millage rate, have contributed to a decline in total revenues.

While a portion of the revenue decrease has been offset by expenditure reductions, the county has also used reserves for capital funding; this practice has resulted in operating deficits for the past three audited years which reduced fund balance to a low $1.9 million or 2.4% of budget in fiscal 2010. A fiscal 2011 deficit of $658,000 was offset by a GASB 54 adjustment which consolidated approximately $1.6 million from a previously separate fines and forfeiture fund into the GF, along with some other adjustments -- resulting in a larger but still low ending fund balance of $3.6 million or 4.1% of spending.

Unaudited fiscal 2012 results show a sizable $3.0 million increase in fund balance. While budgetary balance improved in fiscal 2012, the increase is largely due to a sale of county property for $2.8 million. The unaudited $6.9 million fund balance equals an improved 8.5% of spending. Fitch expects stabilizing valuations and improving economic conditions will generate more revenues, which coupled with recurring expenditure reductions from reduced staffing and operational expenditures should enable the county to maintain budgetary balance and strengthen reserve levels.

The fiscal 2013 budget again anticipates no property tax rate increase and implements further spending reductions including departmental reorganization, benefits adjustments and fewer capital projects. Fitch believes the county's reluctance to raise taxes (particularly the property tax rate) will make its task to maintain budgetary balance and strengthen reserves more difficult.

LOW DEBT AND CARRYING COSTS

Debt levels are low at $593 per capita and 0.6% of tax base. The county's capital improvement plan has been revised downward over the past few years and is currently under review; it currently totals an approximate $100 million. Projects include facility renovations, roads and parks. Funding is likely to come from sales or tourism tax revenues with little debt funding. The county has $98 million of revenue debt outstanding, which is supported by dedicated fees, charges or non-property taxes. Additionally, the county has several authorized outstanding industrial development bonds totaling $33 million which are supported the specific industries. Fitch expects overall county debt levels to remain low.

Pension and OPEB obligations are well-managed. The county is part of the state's cost-sharing multi-employer defined benefit plan, the Florida Retirement System (FRS). The county continues to contribute 100% of its actuarial determined contribution (ARC), which equaled $7.8 million for fiscal 2011. Pension contributions have been relatively level over the past few years. The plan as a whole remains well funded at 86.9% as of June 30, 2011, with a 7.75% assumed investment return. Using Fitch's more conservative 7% discount rate assumption, the pension system would still be adequately funded at 80.3%.

Other post-employment benefits (OPEB) are funded on a pay-go basis and totaled $182,026 or 45% of the ARC for fiscal 2011; the unfunded actuarial accrued liability was $3.48 million at fiscal 2010 year-end. Carrying costs for debt service, pensions and OPEB were a low 11% of fiscal 2011 GF spending. The county has no variable rate or derivative exposure and does not utilize short-term borrowing for liquidity.

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 and IHS Global Insight

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch, Inc.
Primary Analyst
Bernhard Fischer, +1-212-908-9167
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Ginny Glenn, +1-212-908-9130
Associate Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch, Inc.
Primary Analyst
Bernhard Fischer, +1-212-908-9167
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Ginny Glenn, +1-212-908-9130
Associate Director
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com