Fitch Downgrades Florida Muni Loan Council's Rev Bonds (Hialeah), Ser 2012A to 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings takes rating action on the following outstanding Florida Municipal Loan Council's (FMLC) revenue bonds:

--$38.9 million, refunding and improvement revenue bonds, series 2012A (City of Hialeah) downgraded to 'A-' from 'A'.

In addition, Fitch downgrades the City of Hialeah, FL's (the city) implied unlimited tax general obligation (ULTGO) rating to 'A' from 'A+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are limited obligations of the FMLC, payable solely from loan payments made by the city to the FMLC in an amount equal to debt service. Pursuant to the loan agreement, the city covenants to annually budget and appropriate (CB&A), by amendment if necessary, an amount of non-ad valorem revenue sufficient to satisfy its loan payments.

KEY RATING DRIVERS

FINANCIAL PRESSURES DRIVE DOWNGRADE: The downgrade reflects continued revenue declines due to ongoing lower tax base values and management's unwillingness to raise taxes or fees. Although management has successfully reduced expenses over the years to be more in line with revenues, future expenditure growth is expected and there is uncertainty as to sufficient revenues to meet this growth.

MODERATE RESERVE LEVELS: Reserve levels declined to more moderate levels after four years of deficit operations. Reserves are currently in compliance with management's recently adopted 10% general fund balance policy.

COVENANT DEBT NOTCHING: Non-ad valorem revenues are ample relative to debt service and are diverse in nature. A one-notch distinction on the revenue bonds from the implied ULTGO reflects the absence of a pledge of specific non-ad valorem revenues securing these bonds.

MODERATE DEBT BURDEN: Overall debt levels are moderate to low while amortization of outstanding principal is slightly below average. Unfunded pension liabilities are high and management is seeking employee concessions. Liabilities could worsen if full required contributions continue not to be made.

BELOW AVERAGE SOCIOECONOMIC INDICATORS: Wealth indicators are below state and national averages and unemployment rates remain elevated.

RATING SENSITIVITIES

BALANCED OPERATIONS: Management's ability to maintain structurally balanced operations while fully meeting its obligations and holding reserves within policy levels is a key rating factor.

IMPROVED PENSION FUNDING: A return to full funding of the required contribution will help keep pension costs from spiraling and causing future budget pressures.

CREDIT PROFILE

Hialeah, with a 2012 population of approximately 232,000, benefits from its location within Miami-Dade County (general obligation bonds rated 'AA' by Fitch, Stable Outlook).

REVENUES STILL ON THE DECLINE

The considerable tax base decline (35% from fiscal 2008 through 2013) coupled with a determination to maintain the existing tax rate continues to result in significant ad valorem revenue declines. The fiscal 2014 tax rate of 6.3 mils remains comfortably below the state's 10 mill cap. From fiscal 2007 to fiscal 2012, annual property tax revenues have decreased by a total of $24 million (35%). Management has implemented extensive expenditure controls during this period, including layoffs, furloughs, and salary reductions of up to 17%-25% for general employees and police officers. Nevertheless, the rapidity of the revenue erosion exceeded the city's capacity to offset the deterioration, with resulting negative operating margins and the use of reserves.

Unreserved general fund balance levels have fallen precipitously from $30 million (an ample 25.6% of spending) in fiscal 2005 to $12.3 million or an adequate 10.2% of spending in fiscal 2012. This level of reserves is currently at the city's minimum 10% general fund balance policy which was adopted in May of this year.

FISCAL 2012 RESULTS ARE LEVEL; SAME PROJECTED FOR FISCAL 2013

Fiscal 2012 general fund results ended with a $5,171 surplus after transfers. One-time transfers-in of $2.4 million from the streets fund to the general fund were made representing a reimbursement of funds transferred in prior years by the general fund to the streets fund and the transfer of the balance of the capital improvement construction fund of $750,168 was made after the closure of that fund. Besides the decline in ad valorem revenues of $3.7 million from fiscal 2011, utility revenues also declined by $3.7 million, or 14%. Budgeted expenditures were down by $7 million or 5.5% compared to the prior year due to reduced departmental spending helping offset these revenue declines. The millage rate remained at 6.54 mills for the fifth straight year.

For fiscal 2013, the $117 million budget was balanced without the use of reserves despite a 3.6% reduction in the millage rate and projections show a $2 million negative variance in revenues due to county assessor property adjustments. Offsetting this revenue decline is a positive $2 million expenditure variance. Management projects no change in fund balance levels.

TAX BASE DECLINES CONTINUE IN FISCAL 2014

The fiscal 2014 budget of $110 million reflects reductions in ad valorem taxes, utility fees and franchise fees. The tax base declined an additional 3.5% for fiscal 2014 to $6.97 billion, but taxes have been kept level. The city is facing a 10% increase in healthcare costs and a $2.1 million increase in required pension contributions.

The budget only includes a $10 million contribution (37%) toward the $27 million annual required contribution (ARC) equal to the normal costs for the city administered employees' pension plan. The city had historically made close to or in excess of 100% of its ARC. Additionally, an immediate hiring freeze for non-critical positions has been instituted. The city's collective bargaining agreements with its police and fire employees expired June 30, 2013, and will be the subject of negotiations during the year.

MANAGEABLE DEBT LEVELS

Overall debt levels are low on a per capita basis at $690 and moderate at 2.3% of market value. Amortization of outstanding principal is slightly below average with approximately 45% retired within 10 years.

The city engaged in short-term borrowing of $15 million to pre-fund its pension contribution upfront in fiscal 2013 as opposed to quarterly increments which reportedly resulted in interest savings to the city. The $15 million private loan is due Jan. 31, 2014, and according to management is planned to be paid from proceeds of a land sale to the city public works department. The asset is expected to be appraised at an amount greater than $15 million and the transaction will close prior to maturation of the loan. The city's public works department has unrestricted cash of over $53 million as of Sept. 30, 2012.

Future capital needs appear manageable and historically have been grant funded. The city has no future debt plans at this time.

HIGH UNFUNDED FUTURE EMPLOYEE BENEFITS

The city provides two defined benefit pension plans, one for its employees and a smaller one for certain elected officials. The employee plan is 69% funded and has an unfunded liability of $227 million as of Oct. 1, 2012, up from $196 million the year prior. Using Fitch's more conservative 7% rate of return the plan is a low 62% funded.

Management has indicated its intent to seek concessions from its bargaining units during upcoming negotiations for pension contributions and/or reform to help significantly reduce costs. Notably, management closed the general employees' pension plan to new hires effective April 1, 2012, which Fitch views positively. The low level of pension ARC funding budgeted for fiscal 2014 (37% of the ARC), and management's unwillingness to increase revenues, is of credit concern to Fitch. Continued underfunding could significantly pressure the already tight budget, especially considering the statutory 10 mill tax cap, as future ARCs continue to increase.

The city offers other post-employment benefits (OPEB) to its retirees. The city makes pay-as-you-go contributions for its employees and spent $21.2 million (43% of ARC) in fiscal 2012. As of Oct. 1, 2011, the unfunded liability of $310 million represented a high 4.5% of market value. Total carrying costs for debt service, pension ARC and OPEB contributions were $40.2 million in fiscal 2012, representing a moderate 22.9% of total governmental spending.

BROAD REVENUE BASE AVAILABLE FOR CB&A COVERAGE

The CB&A bonds have no direct lien on any specific revenue stream.

Fiscal 2012 available non-ad valorem revenues, including debt service fund reserves of $6.2 million, totaled $28 million. Coverage of maximum annual debt service (MADS) of $8.6 million was a strong 3.3x. Non ad valorem revenues for fiscal 2011 were $26.7 million and included $5.7 million in debt service reserve funds. Coverage of MADS from fiscal 2011 non ad valorem revenues was 3.1x. Fitch takes comfort in the diverse nature of revenues available for debt service and notes that adequate general fund reserve levels provide further debt service cushion for these bonds.

The anti-dilution test requires that the average of non-ad valorem revenues for the prior two fiscal years cover MADS at least 1.5x and projected MADS for all debt secured or payable from non-ad valorem revenues must not exceed 20% of governmental fund revenues.

BELOW-AVERAGE ECONOMIC PROFILE

Hialeah benefits from its location within Miami-Dade County and from the county's broad and diverse labor market. Within city limits, the commercial sector consists of small businesses, specifically industrial, light manufacturing, and service related companies. City management expects the recent completion of a reverse osmosis plant to spur development of its undeveloped quadrant, and Fitch considers this plausible given recent housing construction in the area and planned commercial expansions. In August, the Hialeah Casino opened spurring job creation and other new development in the city.

Wealth indicators have historically been low with median household income at 65% and 59% of state and national levels, respectively. The individual poverty rate at 21.6% is well above local, state, and national levels. Unemployment rates remain elevated at 9.9% as of July but have dropped from the high 12.1% a year earlier. A sharp 3% drop in the labor force for this period combined with a 0.3% decline in employment has contributed to this decline.

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

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=804817

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, Director, +1-212-908-0538
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nicole Wood, Associate Director, +1-212-908-0735
or
Committee Chairperson
Doug Scott, Managing Director, +1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, Director, +1-212-908-0538
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nicole Wood, Associate Director, +1-212-908-0735
or
Committee Chairperson
Doug Scott, Managing Director, +1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com