Fitch Affirms Pembroke Pines, Florida's $79MM ULTGOs at 'AA'

NEW YORK--()--Fitch Ratings has affirmed the following unlimited tax general obligation bonds (ULTGOs) for the city of Pembroke Pines, FL (city):

--$79 million ULTGOs, series 2005 and 2007, at 'AA'.

The Rating Outlook is stable.

SECURITY

Bonds are payable from an unlimited ad valorem tax levied annually and secured by the city's full faith, credit and taxing power.

SENSITIVITY/RATING DRIVERS

STRONG FINANCIAL RESERVES: Fundamental to the 'AA' rating is the city's demonstrated ability to manage spending and generate budget surpluses. This despite high annual carrying costs and economically sensitive revenues. Financial flexibility is ample and city enjoys a relatively diverse revenue environment.

MATURE, ABOVE AVERAGE ECONOMIC BASE: Long term economic prospects for the mature city are solid with the return of modest tax base (AV) growth and significant building permit activity the past two years. Population is stable, with below average unemployment rates and above average income levels. Residents benefit from access to the large and diverse Miami/Fort Lauderdale metropolitan area.

HIGH DEBT AND PENSION COSTS: Debt levels are high, partially attributable to debt issued to support city sponsored charter schools and to pre-fund pension obligations. Amortization is below average. Substantial pension commitments require a meaningful portion of operating revenues even with recent notable reductions in benefits to current and future recipients.

CONTINGENT LIABILITY: The rating also considers the city's operation of charter schools; although the schools have not been funded with city revenues and have exhibited a stable enrollment base, Fitch believes that the general government is exposed to some risk as the schools are vulnerable to state funding reductions.

CREDIT PROFILE

Pembroke Pines is the second largest city in Broward County and the eleventh largest city in Florida, with a population of 154,889 in 2011. The city covers 34.25 square miles in the southwestern portion of the County, approximately six miles southwest of the Ft. Lauderdale/Hollywood International Airport and 16 miles north of Miami.

STRONG FINANCIAL PERFORMANCE

Over the past three years, the city has implemented measures including labor concessions, departmental reorganizations and privatization to affect expenditure savings. This while maintaining high quality services and strong reserve levels. Financial operations are strong and the city enjoys a relatively diverse revenue environment. In the general fund property taxes account for about one-third of revenues while charges for services and special assessments account for an additional third. Rental revenue, utility taxes and intergovernmental revenues largely account for the remainder.

The city has increased general fund reserves since at least fiscal year 2007 and added nearly $2 million to the fund balance on an unaudited basis in fiscal 2012. The unreserved general fund balance at the end of fiscal 2011 totaled $38.5 million and represented approximately 26% of expenditures and transfers out. Year-to-date performance for fiscal 2013 is reportedly favorable. The city expects to end the year with balanced operations and no reduction to current reserve levels.

The fiscal 2013 budget maintains property tax and fire assessment rates at prior year levels and is balanced utilizing a small reserve appropriation of 2.5% of the budget. The city's routinely includes such reserve draws but they have historically not been required.

The city's operating tax rate of 5.6368 mills affords ample flexibility under the 10-mill statutory limit plus various fees and charges diversify general fund revenues. Expenditures are pressured by salaries, wages and benefits and regular pay-go funding for replacement of capital items. The city's water and sewer operations remain balanced. However, the city faces additional capital improvement needs that are expected to be funded through rates.

HIGH DEBT AND PENSION COSTS

Overall debt levels are high at $4,000 per capita and 5% of 2012 market value. Amortization is below average, with only 30% retired in ten years. Overall carrying costs for debt service, pensions and OPEB are high at 35% of general and debt service fund expenditures.

A large portion of the city's outstanding debt is secured by specific non-ad valorem revenue streams. Approximately $63 million or 17% of the city's outstanding direct debt was issued to fund the construction of city-operated charter schools. School operations have historically funded the related debt service through facility rental payments made to the city. However, the city could be pressured if school state funding declines and operations deteriorate. An additional 22% of the city's direct debt represents pension obligation bonds. The city has no plans for additional tax supported debt and Fitch expects debt and carrying costs to remain high given the slow amortization.

Pension costs associated with the city's two single-employer defined benefit plans have increased over the last seven years, pressuring operations. The city's portion of the ARC for police and firefighter pension plan increased over 475% between fiscal year 2004 and 2011 and comprises a high 14% of general and debt service fund spending. Combined general employee and safety plans (ARC) plus debt service associated with pension bonds consumed a substantial 19% of general fund revenues.

The city was successful in reducing benefits notably and the magnitude of the annual funding for the liability (ARC payments and debt service). Fiscal 2013 related costs relative to total spending are flat with prior years with a slight decline expected in 2014. While reduced benefits should help mitigate liability growth, the expense will continue to utilize a meaningful portion of operating revenues and management of the cost over the long term will require astute financial planning.

Using Fitch's 7% investment rate of return assumption, the general employees plan is well funded at 83%. Conversely, the police and fire plan's funding status is weak at 55%. Other post-employment benefits (OPEB) are generally limited to the implied subsidy as required by state law and the city has established a trust and fully funds the ARC which Fitch views favorably. The city made additional OPEB contributions in 2010 and 2011 to eliminate the net OPEB obligation.

ABOVE AVERAGE ECONOMIC PERFORMANCE

Pembroke Pines is a largely developed residential community, with a downtown center which is experiencing several redevelopment projects. The city experienced significant population growth in the early 1990s as Floridians displaced by Hurricane Andrew sought a community with established infrastructure. Population more than doubled from 1990-2000 and grew an additional 12.7% since the 2000 census.

City wealth levels consistently exceed state and national averages and the individual poverty rate is low. Unemployment increased during the recent economic downturn. That said, the city's unemployment remains below regional, state and national levels illustrating its central location. This provides residents with vast employment opportunities in the nearby cities of Ft. Lauderdale and Miami and the greater metropolitan area.

STABILIZING TAX BASE, SIGNIFICANT PERMIT ACTIVITY

AV, which declined 29% between 2009 and 2011, has begun to stabilize with modest growth for 2012 and 2013. Regional housing data indicate year-over-year home price increases and a significant decline in foreclosures. Residential and commercial building permit activity in the city has been significant over the past two years. Total construction value stands at over $850 million and is expected to further stabilize AV. Leading taxpayers are a diverse mix of residential and commercial properties with no concentration. Fitch expects the tax base to continue to stabilize with modest growth.

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 Ratings
Primary Analyst:
Bernhard Fischer, +1-212-908-9167
Director
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Secondary Analyst:
Leora Lipton, +1-212-908-1507
Analyst
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Bernhard Fischer, +1-212-908-9167
Director
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Secondary Analyst:
Leora Lipton, +1-212-908-1507
Analyst
or
Committee Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com