NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to bank notes associated with the following city of Jacksonville, Florida (the city) notes:
--Up to $75 million commercial paper (CP) notes, series A.
The rating is being assigned in connection with the execution of a substitution of the letter of credit (LOC) with Barclays Bank PLC (Fitch IDR of 'A' with a Stable Outlook). See Fitch report dated Nov. 19, 2013 regarding the 'F1' rating assigned to the notes based on the support provided by an irrevocable direct-pay LOC.
Proceeds are to be used to fund the city's loan pool program for short-term financing of capital projects.
The Rating Outlook is Negative.
The bank notes are secured by a subordinate lien on taxes pledged to the city's local government sales tax bonds ('AA+', Negative Outlook) and excise tax bonds ('AA+', Negative Outlook). The excise tax revenues include occupational license tax, utility services taxes and communications services taxes. The bank notes are not secured by a debt service reserve fund.
KEY RATING DRIVERS
SUBORDINATE LIEN ON CP: The rating on the bank notes reflects the credit quality of the local government sales tax bonds and excise tax bonds and the subordinate lien on the respective pledged revenue streams.
IMPLIED GO CAP: 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 unlimited tax general obligation (ULTGO) rating of 'AA+' with a Negative Outlook.
PENSION CONCERNS DRIVE OUTLOOK: The Negative Outlook reflects uncertainty as to how the city will resolve a large unfunded pension liability and rapidly rising pension contributions.
FAVORABLE GENERAL CREDIT CHARACTERISTICS: An excellent fiscal track record and solid financial position underscore the city's strong financial operations. The stable economy and manageable debt burden further bolster the credit profile.
NET PLEDGED REVENUES: The rating is sensitive to shifts in pledged revenues, or a change in the implied GO rating.
CONTROL PENSION COSTS: Concerns remain as to the strain placed on the credit profile of the city given its high pension liability; delay in implementing reforms will result in a downgrade of at least one notch.
The city, encompassing 747 square miles, is in the northeastern area of Florida. With a 2012 population of 836,507, the city is the largest in the state.
INTERNAL LOAN PROGRAM PROVIDES LOW-COST FINANCING
The CP provides funding for an internal loan program administered through the city's internal service fund. The maximum term of the internal loans is typically five years. Legally pledged revenues include sales and excise taxes remaining after payment of local government sales tax bonds and excise tax bonds; however, the city's operating practice is to fund repayment from charges to internal borrowers, largely through the General Fund. The largest internal loan is $43 million for stadium improvements which is expected to be funded from long-term financing to be issued as early as next summer, with the outstanding notes to be reduced at that time.
DIVERSE PLEDGE WITH DEMONSTRATED ECONOMIC RESILIANCE
The combined local government sales taxes and excise taxes, net of senior debt service, provide a strong revenue pledge for the bank notes. Pledged tax collections are generally stable; over the past five years only one year posted a decline, which was a modest 2%. Fiscal 2012 pledged net revenues after the payment of senior debt totals $135 million, including $80 million of net excise taxes and $55 million of net sales taxes. The pledged sum is approximately 1.8x total subordinate principal of $75 million. Growth in net pledged revenues is expected: fiscal 2013 net revenues are estimated at $149 million, with the increase largely due to declining senior debt service.
BANK LOAN REPAYMENT TERMS SHOULD BE MANAGEABLE
Fitch does not expect a draw on the LOC to occur, but in such an event the city would have several options to meet bank note repayment terms: acceleration of short-term internal loans, use of excess pledged revenues and the city's demonstrated market access. Upon a draw on the LOC, the city is to begin paying monthly interest, initially approximately 8%, and principal reimbursement begins in six months with full repayment in even quarterly payments over as long as five years. Monthly interest rates climb over time. Also mitigating the reimbursement terms is the planned substantial reduction in the CP notes with the long-term financing for the internal stadium loan.
STRONG SENIOR DEBT COVERAGE
Fiscal 2012 maximum senior debt service coverage for excise and sales tax revenue bonds is 2.8 x and 4.2 x, respectively. Coverage is expected to remain strong given the absence of additional leveraging plans and descending nature of existing debt carrying costs. The debt service reserve on a portion of the senior bonds is funded with an LOC with Wells Fargo; loss of a facility to satisfy the reserve could necessitate cash funding of the reserve. In this scenario net revenues flowing to the subordinate debt would be lower, thereby weakening the subordinate note credit quality. Based on a review of the terms governing bank bonds, it is Fitch's opinion that the incremental risk associated with bank bonds does not have a material impact on the city's outstanding debt ratings.
SIGNIFICANT PENSION LIABILITIES POSE CREDIT RISK
The city's pension burden is high and has risen markedly in recent years. 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. Earlier this year the city council voted to reject pension legislation proposed by Mayor Brown borne out of agreements with various collective bargaining units; a task force currently reviewing alternatives is expected to present recommendations in January.
For more information, see Fitch's press release 'Fitch Rates Various Jacksonville, FL's Special Revenue Bonds; Outlook Revised to Negative'; dated Aug. 27, 2013, available on Fitch's website at 'www.fitchratings.com'.
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 the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria