NEW YORK--()--Fitch Ratings affirms the following ratings for Leesburg, Florida (the city):
--Implied general obligation (GO) bonds at 'AA-';
--$14.6 million capital improvement revenue bonds, series 2004 at 'AA-';
--$14.6 million non-ad valorem revenue bonds (tax increment bonds) at 'A+'.
The Rating Outlook is Stable.
The capital improvement bonds are secured by the city's receipt of the half-cent sales tax, guaranteed entitlement and public service tax. A reserve fund is funded with a surety from FGIC.
The non-ad valorem revenue bonds are secured by tax increment revenues derived from the U.S. Highway 441/27 Community Redevelopment Area (CRA) and a covenant to budget and appropriate (CB&A), by amendment if necessary, an amount of legally available non ad valorem revenues sufficient to meet debt service payments.
KEY RATING DRIVERS
IMPLIED GO RATING: The implied GO rating of 'AA-' reflects the city's solid finances, moderate debt and limited economy based on agriculture and healthcare.
FINANCES REMAIN STRONG: Management has maintained a strong financial profile with elevated reserve balances and ample liquidity. Reliance upon utility fund transfers from a strong utility system provides diversification to the revenue base.
MODERATE DEBT: Debt costs are manageable although amortization is slow. Absence of new money bonding plans should keep overall debt levels moderate.
STRONG CAPITAL IMPROVEMENT BOND COVERAGE: Pledged revenue debt service coverage on capital improvement revenue bonds is robust at 3.5x maximum annual debt service (MADS). Public service taxes, largest source of pledged revenues, are levied on essential services.
COVENANT DEBT NOTCHING: The rating on the non-ad valorem revenue bonds is based on the city's CB&A back-up pledge. Available non-ad valorem revenues include a broad and diverse mix of city income and provide sufficient debt service coverage, even after taking essential service expenditures into account. The one notch rating difference with the implied GO rating is attributable to the ability of the city to dilute coverage by issuing debt specifically secured by certain non-ad valorem revenues and the lack of a requirement to raise revenues to cover debt service.
EROSION OF RESERVES: Deterioration of the city's financial reserves could lead to negative action on the implied GO rating.
REDUCED BOND COVERAGE: Significant declines in non-ad valorem revenues supporting the capital improvement and non-ad valorem revenue bonds leading to materially narrowed coverage levels would result in downgrades to either or both bonds.
The city is located in north central Florida midway between the Gulf of Mexico and the Atlantic Ocean, about 40 miles northwest of Orlando. It encompasses over 38 square miles with approximately 20,000 residents. Population growth was very rapid between 2000 and 2005-2006 due in part to the city's proximity to Orlando and the availability of affordable land. The rate of growth has slowed recently but remains positive.
SOLID FINANCIAL PROFILE
Financial operations have improved markedly since the early and mid-2000s as evidenced by four consecutive years of general fund operating surpluses (after transfers) from fiscal years 2008 through 2011. Part of the reason for the positive results was due to tight controls on spending, including position reductions and salary freezes. Unaudited fiscal 2012 actuals indicate an additional surplus. The cumulative surpluses more than doubled fund balance during this period from $4 million in fiscal 2007 to $9.5 million at the end of fiscal 2012. Unrestricted fiscal 2012 general fund balance equaled $8.2 million or a healthy 31% of general fund spending.
HISTORICAL RELIANCE UPON UTILITY FUND TRANSFERS
Fitch has noted the city's extensive use of transfers from its enterprise systems to support general operations. In fiscal 2011 utility fund transfers (electric system and utility system revenue bonds both rated 'A+' by Fitch) represented 25% of general fund revenues while transfers from the electric fund alone accounted for 17% of revenues The fiscal 2013 budget projects utility contributions to the general fund to be at or near the city imposed cap of 10% of utility operating revenues. Utility transfers have enabled the city to maintain a very low tax rate (4.3 mills) despite large declines in taxable assessed value (TAV). Fitch does not expect the city to significantly reduce its reliance on utility transfers without a substantial recovery in TAV.
The fiscal 2013 general fund budget projects a minor operating surplus. Expenditures are in-line with fiscal 2012 spending and increased utility transfers offset a further reduction in property taxes. Officials have noted favorable budget variances to date and project either balanced or surplus end-of-the-year results.
WEAK AND VOLATILE ECONOMIC PROFILE
The city's economy remains limited and somewhat volatile. Formerly based on agriculture, the area experienced a residential construction boom from the 1990s through the mid-2000s, with much of the growth driven by incoming retirees. According to the 2010 census, Leesburg residents 65 years and over constituted over 24% of the population compared with the state average of 18%. This influx fostered a growing service sector, particularly in healthcare as well as retail. Central Florida Health Alliance, which includes the Leesburg Regional Medical Center and the Villages Hospital, is the largest employer with 2,355 positions. Lake County employment grew by 20% between 2003 and 2008, including large gains in both construction and service sector jobs.
The past recession stifled overall economic activity. County jobs decreased by over 13% between 2008 and 2010 pushing unemployment rates above 12% in 2010. Housing values suffered a 55% decline from the peak period in 2006 through the end of 2011, among the highest in the state according to Case Schiller. The city's wealth indices are well below state norms and below average educational attainment may serve to inhibit economic development despite city and county efforts.
RECENT SIGNS OF RECOVERY
Recent improvement is evidenced in accelerating job growth and recovering housing valuations. County employment increased by 1.7% in 2011. As of December 2012, year over year employment growth was a healthy 3.3%, well above the state and national averages, pushing unemployment rates down to 8.1% from 10.4% the year before.
Single family home prices in Lake County are up 2.5% on the year according to Case-Shiller. Taxable values, lagging any housing recovery, continued to fall through fiscal 2013, losing a total of 30% since fiscal 2008. However, the fiscal 2013 tax base drop was much lower than in previous years signaling potential near term stabilization.
AVERAGE DEBT LOAD
Debt levels are moderate with a net debt burden of 3.6% or $2,895 on a per capita basis. Direct debt consists primarily of capital improvement bonds and tax increment financings. The city has no general obligation bonds outstanding. Payout is slow as 26% of principal is retired within the next 10 years. Capital plans are manageable. Officials indicate that there are no plans for additional bonds for the foreseeable future. Fiscal 2012 debt service represents an average 9.7% of general government spending (excluding capital related funds).
RETIREMENT LIABILITIES DO NOT PRESSURE FINANCES
The city maintains three separate defined benefit plans for general employees, firemen and police officers. The defined benefit general employee plan was frozen in 2008 and all members transferred to a defined contribution plan. All three plans are well-funded as of October 2010 at 84.4%, 85.3% and 83% for general employees, firemen and police officers, respectively using Fitch's assumed 7% discount rate.
City retirees receive subsidized health care benefits from the city on a pay-go basis. As of fiscal 2010, the unfunded actuarial accrued liability for the city's other post-employment benefit plan was $24.9 million, representing an above average 2.2% of fiscal 2012 taxable values. Total carrying costs of debt service, pension contributions and OPEB contributions represent a manageable 21.4% of general government non-capital spending.
ROBUST DEBT SERVICE COVERAGE
Debt service coverage of MADS on the capital improvement bonds remains robust at 3.5x as of fiscal 2011. Public service taxes, the largest pledged revenue source, decreased by 1% in fiscal 2011 balanced by a similarly sized increase in half cent sales tax collections. While Fitch considers the 1.3x MADS additional bonds test requirement to be weak, current wide coverage levels and the use of excess pledged revenues for operations militates against extensive issuance. The city is planning to refund the series 2004 capital improvement bonds for savings within the next few months.
BROAD AND VARIED NON-AD VALOREM REVENUE BASE
The rating for the non-ad valorem revenue bonds (tax increment bonds) is based upon the city's CB&A back-up should tax increment revenues within the community redevelopment area prove insufficient. Currently, the 441/27 CRA is generating no tax increment revenues as assessed values are below base year valuations. The non-ad valorem revenues available for debt service are broad and diverse with the largest being utility fund transfers. While available revenues have declined modestly over the past two fiscal years, coverage levels of all CB&A obligations is very strong, even when taking into account debt service secured by specific non-ad valorem revenues and essential service expenditures (general government and public safety expenditures). A debt service reserve fund for the 2009 tax increment bonds is funded 50% with cash and 50% with a surety to MADS.
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:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria