NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to the following special revenue bonds of the city of Jacksonville, Florida (the city):
--$53,430,000 special revenue and refunding bonds, series 2013A;
--$36,110,000 taxable special revenue refunding bonds, series 2013B;
--$30,970,000 special revenue refunding bonds, series 2013C.
The bonds will be sold via negotiation on September 4. The series 2013A bonds will be issued for the purpose of financing the acquisition and construction of capital equipment and improvements, and refunding a portion of the outstanding special revenue bonds, series 2009C-1 and 2010A. Proceeds of the series 2013B bonds will be used to refund and defease all of the outstanding taxable special revenue bonds, series 2009A, and finance the acquisition of the Jake M. Godbold City Hall Annex, which currently houses the public defender. The series 2013C bonds will be issued for the purpose of refunding a portion of the special revenue bonds, series 2010B and 2011B.
In addition, Fitch affirms the following ratings:
--Implied unlimited tax general obligation (ULTGO) rating at 'AA+';
--Approximately $703 million of outstanding special revenue bonds at 'AA';
--Approximately $350 million of outstanding excise tax revenue bonds at 'AA+';
--Approximately $38 million of outstanding local government sales tax revenue bonds at 'AA+'.
The Rating Outlook for all securities is revised to Negative from Stable.
The special revenue bonds are secured by the city's covenant to budget and appropriate non-ad valorem revenues, by amendment if necessary. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. The issuer's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid.
The excise tax revenue bonds are secured by the proceeds of the utilities service tax and the occupational license tax (collectively, the excise taxes) imposed, collected, and received by the city. The local government sales tax revenue bonds are secured by distributions to the city from the local government half-cent sales tax clearing trust fund in the state treasury.
KEY RATING DRIVERS
PENSION CONCERNS DRIVE OUTLOOK REVISION: The Negative Outlook reflects uncertainty as to how the city will resolve a large unfunded pension liability and rapidly rising pension contributions. The city council recently failed to enact tentative agreements on pension reform reached with the majority of the city's labor units. This decision raises additional questions as to the efficiency of internal decision-making and cooperation level between administrative and legislative officials. The ratings assigned to the city's excise tax and local government sales tax revenue bonds are at the cap of the city's implied ULTGO rating, therefore the Outlook on these bonds is also revised to Negative.
COVENANT DEBT NOTCHING: A one-notch distinction between the special revenue bond rating and the implied ULTGO rating reflects the absence of a pledge of specific revenue and the inability to compel the city to raise non-ad valorem revenue sufficient to pay debt service. The rating on the excise tax revenue bonds and local government half-cent sales tax revenue bonds reflects high debt service coverage and no expectation for additional leveraging.
EXCELLENT FISCAL TRACK RECORD: General fund operations have been prudently managed with surplus results recorded in each of the last seven audited fiscal years despite recession-driven revenue pressures and rising costs associated with employee pension benefits.
SOLID FINANCIAL POSITION: Recent operating surpluses have built up a healthy unrestricted general fund balance that provides a cushion against emergencies or unanticipated spending needs.
STABLE ECONOMY: Jacksonville serves as the economic center for northeast Florida. The considerable operations of the U.S. Navy, trade and transportation activity at the Port of Jacksonville, and a sizable health care and financial services presence promote expectations for long-term stability.
MANAGEABLE DEBT BURDEN: Fitch expects key debt ratios to remain moderate based on Jacksonville's limited future capital needs and borrowing plans.
CONTROL PENSION COSTS: Concerns remain as to the strain placed on the credit profile of the city given its high pension liability . Prolonged delay in implementing reforms that address this concern will result in a downgrade of at least one notch.
SIGNIFICANT PENSION LIABILITIES A RISK TO CREDIT QUALITY
The city's pension burden is considered high, particularly for the 'AA+' implied ULTGO rating. For all city plans, the Fitch-adjusted funded ratio (which assumes a 7% investment rate of return) is very weak at 50.5%, and the unfunded actuarial accrued liability (UAAL) a significant $2.7 billion or 3.5% of market value.
Furthermore, the city's pension costs more than doubled from $65.3 million in fiscal 2006 to approximately $150 million in fiscal 2013. In fiscal 2012 the city's actual pension contribution, which was actuarially determined based on a percent of payroll, was $10.4 million less than the actuarial required contribution (ARC) due to a decline in payroll during the year. The total cost associated with funding pension and other long-term liabilities, including debt service and other post-employment benefits (OPEB), consumed a high 27% of non-capital governmental fund spending in fiscal 2012.
CITY COUNCIL REJECTS PENSION REFORM BILL
The Jacksonville city council voted 11 to 7 to reject pension legislation proposed by Mayor Brown borne out of agreements reached with various collective bargaining units including police and fire. Police and fire account for the bulk of the city's pension UAAL and annual pension funding requirement. The city's actuary estimated savings of $1.2 billion over the next 30 years from the police and fire agreement alone, and up to an additional $600 million from the city's general employee unions (two of the unions representing 686 employees or about 8% of the city's workforce remain at an impasse).
Council members who voted against the deal cited concerns about the sufficiency of savings achieved under the proposal and impact on the UAAL, as well as the 17-year length of the agreement. Savings would largely come from plan design changes affecting new hires, although the proposal would have increased current employees' pension contributions to 9% from 7% of salary and resulted in a one-time transfer of $20 million from an enhanced benefits reserve to base benefits. The transfer would have effectively lowered the city's fiscal 2014 pension contribution, but not improved the funded status of the plan as the $20 million is already included as part of the actuarial asset. The police and fire pension reforms would have yielded a fairly modest $72 million in savings over the ensuing five fiscal years (excluding the one-time reserve transfer).
POLITICAL AND LABOR RISK A CONCERN
The tentative agreements reached on pension reform provided the most significant evidence of a more productive working relationship with labor, and had come on the heels of a three-year deal reached in 2012 that resulted in wage cuts and increased healthcare contributions for employees. Fitch now questions whether rejection of the pension bill could have the effect of resetting the discussion on pension, particularly since the city council's request to extract additional savings would likely necessitate changes to current employees' benefits and/or contributions.
Furthermore, public comments from various city officials point to an uncooperative relationship between its key decision-makers on the pension issue. Councilmembers on both sides of the vote expressed concern that the bill was brought to the floor prior to conclusion of its review by the council's finance committee and separate citizen review task force appointed by Mayor Brown.
FISCAL 2014 BUDGET CONSIDERS TAX INCREASE TO MITIGATE SPENDING CUTS
After closing budget gaps aggregating approximately $170 million from fiscal 2011-2013 the city faced two budget scenarios for fiscal 2014 - a deficit of $64 million without pension reform or $18.9 million with pension reform. To close the $64 million gap the city's finance administrators had proposed a significant 13.9% reduction in controllable costs that would lead to furloughs and layoffs (750-850 employees) and the closure of libraries, fire stations, and recreational facilities.
On the same day the city council rejected the pension bill it took the unexpected step of establishing the maximum property tax rate at 11.54 mills or 1.5 mills above the mayor's proposed budget. An increase of 1.5 mills would generate approximately $65 million in new revenue, roughly equal to the existing budget deficit. The city council will not formally adopt the tax rate for another month and could opt for an increase less than 1.5 mills.
Since agreeing to advertise the higher tax rate, the city council has restored close to $22 million in planned cuts, including $12.5 million of a $15 million reduction in spending for fire protection. The council has yet to consider the county sheriff's budget, which has been asked to absorb a $29 million reduction. The decision to restore certain budget cuts provides some indication of its intent to increase taxes. A tax rate increase would not wholly offset Fitch's pension concerns, but provides a good deal of assurance as to the city's commitment to operational balance and financial stability. The mayor's budget does not propose use of reserves to close the budget gap , nor has the city council publicly considered it.
The maximum proposed tax rate would remain well below Jacksonville's statutory limit of 20 mills and Fitch considers it competitive with the combined city/county tax rate of other major Florida metro areas. Taxable assessed value (TAV) declines in Jacksonville have been slightly more moderate than most other major Florida metro areas, but significant nonetheless, with TAV down 21% between fiscal years 2009-2013. The estimated valuation for fiscal 2014 is down 1% following a 4.8% loss in fiscal 2013. Available housing statistics show single-family home prices appear to be on the rebound through the first six months of 2013 which should reflect favorably on the fiscal 2015 tax roll.
TREND OF POSITIVE OPERATIONS
Management forecasts an operating surplus after transfers of approximately $3-5 million for fiscal 2013, which would mark the eighth consecutive year of positive year-end results. The unrestricted fund balance in the general fund had totaled $145 million or 15.3% of spending entering fiscal 2013. The city has a goal of maintaining a 5% to 7% emergency reserve and a 5% to 7% operating reserve, which Fitch considers a comfortable cushion against unanticipated budgetary pressures.
COVENANT REVENUES OFFER DIVERSITY AND SATISFACTORY COVERAGE
Non-ad valorem revenue in fiscal 2012 totaled $504 million (a 0.5% year-over-year increase) compared to special revenue bond maximum annual debt service (MADS) of $145.7 million. Fitch adjusts non-ad valorem revenue to consider the prior obligation to fund essential governmental services, resulting in available non-ad valorem revenue of $322.6 million.
Non-ad valorem revenues are very diverse and include utility taxes ($123.1 million), contributions from the electric and water and sewer utility operations of the Jacksonville Electric Authority (JEA) ($104.2 million), the city's share of one-half-cent local government sales tax ($72.6 million), and franchise fees ($40.6 million) among other sources.
STRONG COVERAGE FROM PLEDGED TAXES
The local government sales tax revenue bonds continue to exhibit a high level of coverage with fiscal 2012 pledged receipts of $72.6 million close to 6x MADS coverage. No additional issuance is anticipated. Pledged excise taxes declined 3.7% in fiscal 2012 but coverage remains strong at 2.8x MADS. The decline in pledged revenue largely reflects a reduction in electric utility tax receipts, which account for 54% total pledged excise taxes. Coverage is expected to remain strong given the absence of additional leveraging plans and descending nature of existing debt carrying costs. Annual debt charges decline from MADS of $44.2 million in fiscal 2013 to $35.2 million by 2016 and $22.8 million by 2021.
MODERATE DEBT BURDEN
Overall debt metrics remain moderate at 4% of market value or $3,673 per capita in fiscal 2012. Fitch does not anticipate a major change in the city's debt profile, as future borrowing is expected to vary from $30 million to $65 million annually during the 2013-2017 capital improvement plan (CIP) period. The amount of debt to be issued is notably lower than the amount of outstanding debt scheduled to amortize over the same period.
ECONOMIC CENTER FOR NORTHEAST FLORIDA
The Jacksonville job market continues to rebound from the recession. Unemployment spiked to 11.3% in 2010 following the loss of close to 29,000 jobs (a 7.2% decline) during the prior three-year period. The city recorded job growth of 1.3% in 2011 and 2.5% in 2012, and June 2013 employment is 3.1% ahead of the same-month figure in 2012. Unemployment currently stands at 7.4%, which is the same rate for Florida and slightly lower than the national benchmark of 7.8%. Global Insight forecasts non-farm employment to expand a solid 2.2% per year through 2018.
The city's economy and tax base remain diverse but there is a moderate degree of concentration to the U.S. Navy. Naval Air Station (NAS) Jacksonville and NAS Mayport combine to employ 37,910 or 5.8% of the Jacksonville metropolitan statistical area labor force. The Port of Jacksonville continues with major expansion projects that should serve to boost the metro area's sizable trade and transportation sectors. Growth in the healthcare sector has helped diversify the economy, with major employers including Baptist Health (8,270), the Mayo Clinic (4,970), St. Vincent's Health (4,000), and Shands Jacksonville (3,500).
Additional information is available at 'www.fitchratings.com'.
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, and 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