Fitch Affirms Reedy Creek Improvement District's (FL) Ad Valorem Tax Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following rating on the Reedy Creek Improvement District, Florida (the district):

--$127.3 million ad valorem tax bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The ad valorem tax bonds are payable from a levy of a direct annual tax on all taxable property within the District, not to exceed 30 mills.

SENSITIVITY/RATING DRIVERS

HIGH TAX BASE CONCENTRATION: The Walt Disney Company (Fitch Issuer Default Rating of 'A', Stable Outlook) and its wholly owned subsidiaries (together, Disney) constitute about 90% of the district's taxable value and revenue resources. Such largescale concentration is mitigated in part by Disney World's long-standing position as one of the world's leading tourist destinations and Disney's substantial, ongoing investments in Disney World.

STRONG FINANCIAL MANAGEMENT AND OPERATIONS: Finances are sound as evidenced by substantial reserves and elevated levels of liquidity which serves to offset the district's exposure to the cyclical tourist sector. A wide taxing margin below the 30-mill property tax cap offers additional flexibility.

ESSENTIAL PURPOSE: The district was created to provide essential services to the Walt Disney World Resort including power, water and wastewater services and construction and maintenance of roads, canals and bridges.

ABOVE-AVERAGE DEBT LOAD: Debt levels are elevated as is the debt service burden on the budget. The latter is in part due to the limited purposes of the district and rapid amortization. Future debt plans are manageable and existing debt service requirements can be easily accommodated within the current cap.

WHAT COULD TRIGGER A RATING ACTION

CHANGE IN DISNEY'S CREDIT QUALITY: A significant negative change in the credit profile of Disney could lead to a downgrade of the district's rating.

CREDIT PROFILE

Reedy Creek Improvement District was created in 1967 by a special act of the state legislature for the purpose of supporting and administering certain aspects of the development of the Walt Disney World Resort (Disney World), which opened in 1971. The district provides utility, roadway, and emergency services to all properties within its boundaries.

The enabling legislation gives the district a wide range of governmental powers generally reserved for cities and counties including the ability to issue debt, exercise eminent domain, create land use and building codes, develop and maintain its own infrastructure, and levy taxes.

WALT DISNEY CO. OWNS MAJOR PORTION OF DISTRICT'S LAND

The district encompasses 25,000 acres of land (about 40 square miles) of which approximately 19,000 are located in Orange County and 6,000 acres are within Osceola County. About two-thirds of the land within the district is owned by the Walt Disney Company or its wholly owned subsidiaries (Disney), while 29% belongs to the district and the remaining 4% is split between the state and other entities.

A five-member board of supervisors elected by landowners governs the district. Disney by virtue of its majority ownership of district land determines the composition of the board, which allows for a close working relationship but could potentially threaten the board's independence.

TAX CAP PROVIDES WIDE TAXING MARGIN

The district is permitted to levy an ad valorem tax up to 30 mills to pay principal and interest on any ad valorem bonds as well as fund operations. The limit provides management with abundant legal margin, as the highest property tax levied by the district over at least the past 20 years was 11.4 mills in fiscal 2012 or just 38% of the maximum rate. At current levels of spending, taxable values would have to drop by 63% in order to reach the 30 mill cap. In fiscal 2013, the district levied 3.5 mills for debt service and 7.6 mills for operations for a total levy of 11.1 mills. Growth in the annual property tax levy for operations but not debt service is limited to growth in the CPI plus population increases.

In addition, the district has the ability to impose an additional 10 mills for maintenance and a 10% utility tax. Property tax collections have historically been exceptional, averaging 100% per year. Delinquent property taxes are collected through a tax lien sale, which Fitch considers to be a strong enforcement mechanism.

HIGHLY CONCENTRATED TAX BASE

The tax base is highly concentrated, dominated by Disney and its related subsidiaries which accounted for approximately 89% of the $7.3 billion fiscal 2013 tax base. Disney comprises at least 80% of district taxable values throughout the district's existence. Due to this concentration, a negative change in the credit profile of Disney may result in a downgrade of the district's ad valorem tax bonds.

Fitch's concern regarding the presence of Disney and the cyclical tourist sector are mitigated by Disney World's long-standing record as one of the world's top tourist destinations and the general resilience of theme park performance over the past five years. Disney continues to make substantial investments in Disney World, recently opening the first phase of the New Fantasyland expansion, the largest expansion project in the park's history. In addition, the Art of Animation Resort, a new 2,400-room resort opened in 2012. Future projects include additional phases of the Fantasyland expansion, Disney Vacation Club villas and construction of a 434-room Four Seasons Hotel scheduled to open in 2014.

TAXABLE VALUES EXPERIENCED SIGNIFICANT GROWTH

Despite the high tax base concentration, district property valuations have exhibited less volatility than many Florida taxing jurisdictions which lost a sizable portion of their tax bases after fiscal 2007. The largest decline in the district's tax base during the past two decades totaled only 7% between fiscals 2009 and 2011. The tax base grew slowly in fiscals 2012 and 2013, which officials expect to continue over the next three years due to the Fantasyland, Art of Animation and other projects coming on-line.

TAX RATES INCH UP RECENTLY

Property tax rates increased every year since fiscal 2008 with the exception of the current fiscal year. The tax base declines of fiscals 2010 and 2011 were fully offset by modest increases in tax rates. More recently, higher maintenance costs are driving the growth in operating millages as the district's infrastructure expands, requiring greater levels of upkeep.

MODERATELY HIGH DEBT LEVELS

Debt burden is above average at about 6% of taxable assessed value. Most of the district's $179 million of direct ad valorem debt was used to finance transportation-related projects. The district guarantees $96 million of outstanding Osceola County transportation improvement refunding bonds of 2004. The guaranty is subordinate to the payment of the district's direct debt.

The 2004 bonds, along with $63.5 million of district ad valorem tax bonds, refunded a 1992 issue used to construct the Osceola Parkway and are primarily secured by toll revenues from the project. Since the issuance of the county's bonds, the district has not been required to draw upon its guaranty. To the contrary, excess toll revenues have enabled Osceola County to reimburse the district for debt service on its ad valorem tax bonds.

Debt service costs constitute a high average one-third of general spending, reflecting the limited purposes of district operations and rapid principal amortization at 89% within the next 10 years. New money debt plans over the next five years range from $100 million to $250 million. The additional debt will likely slow amortization but Fitch does not expect it to increase debt ratios or annual debt service notably.

All bonds are fixed rate. The district also issues revenue debt to finance its rate-based operations such as electric, water and sewer service.

WELL-MANAGED FINANCIAL OPERATIONS

District financial operations are well-managed as indicated by strong reserves and superior levels of liquidity. Officials reported a fiscal 2012 general fund net operating surplus of $2.2 million bringing general fund balance up to approximately $25 million or a hefty 45% of spending. Unrestricted fiscal 2012 general fund balance of $17.4 million accounts for strong 31.6% of spending. Property taxes comprise over 90% of revenues. Liquidity levels are elevated, as fiscal 2012 general fund unrestricted cash and investments are over 5.0x of net liabilities.

For fiscal 2013, the district budgeted a $5.9 million general fund net operating deficit, although management typically budgets conservatively with results generally outperforming budget. Based on year-to-date actuals, officials project unrestricted fund balance to end the fiscal year at about $13 million or 21% of spending.

The district maintains an informal unrestricted fund balance target equal to two months of operations plus the amount of the Dec. 1 interest only bond payment in order to bridge the funding gap between the start of the fiscal year on Oct. 1 and the receipt of property taxes in December. With the projected deficit for fiscal 2013, the district may fall somewhat short of its target but can manage the shortfall by adjusting capital spending and certain other payments.

The district has had difficulty resolving contract differences with its firefighters union, which makes up about two-thirds of its employees. After more than two years of negotiations, the new contract will soon be subject to approval by union members. Regardless of the outcome, the relationship between the union and the district remains tense.

RETIREMENT BENEFITS ARE NOT A COST PRESSURE

The district provides pension benefits to its employees through the Florida Retirement System (FRS), a multiple employer cost sharing plan administered by the state. The fiscal 2012 pension contribution to FRS by the district totaled $2.2 million or a modest 4.1% of general fund spending. The fiscal 2012 contribution was lower than those of the previous years due to implementation of the state pension reform requirement that employees contribute 3% of their salaries to FRS.

Qualified district retirees are afforded access to health insurance with costs fully covered by the district. While the district has been funding this other post-employment benefit (OPEB) liability on a pay-go basis, it has also been setting aside funds for future liabilities. The designated set-aside in fiscal 2012 was $2 million and a similar amount is budgeted to be reserved for the current fiscal year. The actual pay-go expense and designated OPEB funding for fiscal 2012 totaled approximately $3 million or an affordable 5.5% of general fund expenditures. Management intends to establish an OPEB trust fund this year in order to begin formal funding of its OPEB unfunded actuarial accrued liability.

Fitch has withdrawn the 'AA-' rating on the Reedy Creek Improvement District (FL) ad valorem tax refunding bonds series 2005C as the bond was not sold.

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, 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:

U.S. Local Government Tax-Supported Rating Criteria

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com