Fitch Affirms Boca Raton, FL's GO Bonds at 'AAA'; Outlook Stable

NEW YORK & BOGOTA--()--Fitch Ratings has affirmed the following ratings on the city of Boca Raton, Florida (the city):

--$36.5 million outstanding GO bonds at 'AAA';

--$11.9 million outstanding (Visions 90 Project) special assessment improvement bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the city's full faith, credit and taxing power and are payable from unlimited ad valorem taxes levied on all taxable property in the City.

The special assessment bonds are secured by the proceeds of special assessments to be levied against the real property within the Downtown Special Assessment District specially benefited by the project.

Secondarily, the special assessment bonds are secured by the city's covenant to budget and appropriate non-ad valorem revenues (CB&A), 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.

KEY RATING DRIVERS

VERY STRONG FINANCIAL MANAGEMENT: City finances are conservatively managed, characterized by ample reserves and strong liquidity. Prudent budgeting and tight expenditure controls have enabled officials to maintain high fund balance levels, even during the recession.

DIVERSIFIED AND EXPANDING EMPLOYMENT BASE: The city's economy has experienced sustained growth since 2011, with employment increasing every year. The city's diversified economic base heightens the prospects of continued growth.

MANAGEABLE DEBT: The city's debt profile includes moderate debt burden, rapid amortization of direct debt, limited capital needs and modest plans for additional debt beginning in fiscal 2017.

BELOW AVERAGE PENSION FUNDING: The police and firefighters' and executive employees' pension plans are currently underfunded. Management is in the process of identifying measures to address the funding gaps.

CB&A PLEDGE PROVIDES WIDE COVERAGE: The 'AA+' rating on the special assessment bonds is based on the CB&A pledge including a diverse sources of available non-ad valorem revenues which provide wide coverage of CB&A-secured debt service, even when essential government expenditures are taken into account.

RATING SENSITIVITIES

DEPLETION OF FINANCIAL RESERVES: Significant drawdowns of accumulated fund balance could pressure the rating; however, the stable outlook is indicative of Fitch's view that such an outcome is unlikely.

CREDIT PROFILE

Boca Raton is located in Palm Beach County approximately 40 miles north of Miami along the Atlantic Ocean. The city encompasses 28 square miles with a population of approximately 88,000 as of 2012.

BROAD AND DIVERSIFIED ECONOMIC BASE

The city's economy is broad-based and diverse encompassing a significant education and healthcare network along with its traditional underpinnings of tourism, agriculture, and related service industries. A regional employment center, the city hosts a number of Fortune 500 companies, such as Office Depot and IBM, as well several business parks. Florida Atlantic University (FAU), the leading employer, enrolls about 20,000 students within the city with plans to further expand enrollment. Boca Raton Regional Hospital, the third top employer, operates 400 inpatient beds and employs approximately 2,250.

EMPLOYMENT CONTINUES TO RECOVER

City employment has experienced several years of recovery after losing 14% of its employment base during the recession. Jobs increased by 2.3% and 3.5% in 2011 and 2012, respectively and were up 1.5% as of June 2013 from 12 months prior. Unemployment rates have historically trended below the state and national averages and continued to do so even during the recession. The June 2013 unemployment rate of 5.7% compares favorably with the state (7.4%) and national (7.8%) rates.

ELEVATED WEALTH LEVELS

The city's residential base is affluent as indicated by per capita income levels which are 185% and 177% of the state and national benchmarks. Educational attainment levels exceed national average. Over 20% of residents have received an advanced degree; nearly double that of the nation.

The city's housing market is also in the process of a solid recovery. The decline in housing values of about 20% between 2008 and October 2011 according to Zillow.com, was significantly lower than housing losses in most Florida cities. Since 2011, home prices have gained steadily and as of July 2013 are up nearly 14% year over year.

Taxable assessed value (TAV) trends have followed a similar pattern as with housing, falling 20% between fiscals 2008 and 2012, a relatively mild hit when compared with trends across much of the state. TAV jumped 1.3% in fiscal 2013 reflecting the housing recovery and is up 3.45% in fiscal 2014. Officials anticipate tax base growth to average about 3% over the next three or four years which Fitch considers to be conservative. The tax base is diverse with the ten leading taxpayers accounting for only 6.8% of TAV.

FINANCIAL STRENGTH DERIVES FROM STRONG MANAGEMENT PRACTICES

City finances are prudently managed, characterized by conservative budgeting, maintenance of substantial reserve margins and a diverse revenue stream. Fiscal 2012 unrestricted general fund balance of $51.6 million represented a very high 43% of general fund expenditures and transfers out. Management has set aside $10.6 million of the fiscal 2012 general fund balance for emergency/disaster preparedness and designated $25.7 million or 19% of spending as unassigned, well above the city's 10% minimum unassigned fund balance target.

In response to declining revenues beginning in fiscal 2008, the city implemented cost reductions measures including personnel reductions, wage freezes, and downsized or delayed capital spending. In addition, management increased sanitation disposal fees in order to eliminate general fund support. The city reported three consecutive years of general fund net deficits from fiscals 2009 to 2011; however, the drawdowns were modest and were attributable to one-time spending needs.

DIVERSE REVENUE STREAM

The city's revenues are diverse with property taxes constituting less than 40% of general fund revenues, a below average share of the revenue stream when compared with most Florida local governments. This revenue mix has served to shield the revenue base from the full effects of tax base declines. Other important revenues include charges for service (17%), utility taxes (13%), and franchise fees (10%).

FISCAL 2012 GENERAL FUND SURPLUS REVERSES TREND

Fiscal 2012 general fund operations reported a surplus of $5.3 million, the first in four years. The city had budgeted a $3.1 million deficit but building permit, red light camera and metered parking revenues came in better than expected while expenditures were about $3 million below budget. The city budgets conservatively with actual results generally exceeding budget.

For fiscal 2013 the city increased its operating millage by 8% (6% when combined with a reduced debt service millage) in order to meet increased spending needs. However, the fiscal 2013 operating tax rate of 3.4 mills remains well below the 10 mill limit, affording significant revenue flexibility. The fiscal 2013 budget projected a small general fund drawdown of $1.8 million; however, officials expect at least a $2.6 million year-end general fund surplus due to higher than expected building permit revenues and expenditures which are below budget.

The proposed fiscal 2014 budget includes a one-time $20 million transfer from the general fund to establish funds for economic development and retirement sustainability. Part of the transfer includes $12 million of general fund balance already designated as a retirement reserve. Even with the outflow, unrestricted general fund balance would remain ample at over 19% of spending.

The city's long range five year financial forecast assumes that spending increases will outstrip revenue growth. However, the projections are conservative and based on current levels of city services. The city has been proactive at addressing its budgetary shortfalls. Fitch believes that management will continue to take actions necessary to maintain adequate reserve levels.

MODEST DEBT WITH MANAGEABLE CAPITAL NEEDS

Overall debt levels are moderate at 2.4% of market value and $5,692 on a per capita basis. Most of the debt burden is attributable to the overlapping debt of the county and school district. Amortization is very rapid with 92% of principal scheduled to mature within the next ten years.

The city's proposed fiscals 2014 to 2019 six year capital plan includes about $279 million of projects with much of the spending attributable to the city's utility funds. Approximately $19 million of GO bonds are planned to finance the renovation of a police services facility and other police-related projects. Issuance is currently planned in increments beginning in fiscal 2017 with final issuance in fiscal 2019.

BELOW AVERAGE PENSION FUNDING LEVELS

The city sponsors three defined benefit retirement plans: general employees, police and firefighters and executive employees. While the general employees' plan is relatively well-funded, the police and firefighters' and executive employees' plans are less than adequately funded with funding levels of 62.8% and 65.8%, respectively as of fiscal 2012. Under Fitch's assumed discount rate of 7%, the funding ratio for the two plans drops to 56.6% and 60.8%. The city has implemented several plan changes in recent years to reduce benefits for new employees in order to produce future savings. In addition, elevated investment returns achieved in fiscal 2013 are expected to improve funding levels and management has commissioned an actuarial study to be completed next month to evaluate various measures in order to achieve additional pension cost savings. Despite subpar funding, the combined unfunded actuarial accrued liability of the city's pension plans represents a modest 0.8% of fiscal 2013 market value.

Other post-employment benefits (OPEB) are provided by the city through an implicit subsidy allowing retirees to participate in the city's health care plan at their own cost. The city funds this benefit on a pay-go basis. The city's combined debt service, pension and OPEB costs for fiscal 2012 represented a moderate 21.6% of governmental non-capital spending.

SPECIAL ASSESSMENT RATING BASED ON CB&A BACKUP

The 'AA+' rating on the special assessment bonds is based on the city's CB&A non ad valorem pledge. The city's diverse stream of available non-ad valorem revenues provides wide debt service coverage. Fiscal 2012 non-ad valorem revenues net of essential expenditures cover maximum annual debt service (MADS) on all CB&A-secured bonds by nearly 6.0x. The anti-dilution test requiring 2.0x MADS coverage of all non-ad valorem-secured debt is somewhat weak; however, the city's reliance upon these revenues for operations effectively limits additional issuance.

Despite the strong CB&A pledge the city has been repaying the special assessment bonds solely from special assessment revenues. Special assessments are determined annually in proportion to the benefits derived from projects among the properties in the district. Assessment collection rates have been satisfactory, and the strong collection method includes a timely foreclosure process. Potential use of covenant revenues presents minimal risk to the general fund given the modest debt service (less than 1% of general fund spending) and debt service coverage provided by special assessment revenues.

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, 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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=800911

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Senior Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Brendan Scher
Analyst
+1-212-908-0686
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Senior Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Brendan Scher
Analyst
+1-212-908-0686
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com