Fitch Affirms Ratings on Orange County, FL's Various Bonds; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings on the following Orange County, Florida (the county) bonds:

--$769.1 million outstanding tourist development tax (TDT) revenue bonds at 'AA-';

--$37.9 million outstanding public service tax (PST) refunding revenue bonds, series 2013 at 'AA+';

--$263.7 million outstanding sales tax revenue bonds at 'AA+';

--$21.5 million outstanding capital improvement revenue bonds, series 2009 (CIRB) at 'AA+'.

In addition, Fitch affirms the county's implied unlimited tax general obligation (ULTGO) rating at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The TDT revenue bonds are limited obligations of the county payable from pledged revenues. Pledged revenues consist of 5% TDT collections net of costs for operating, maintenance and promotion of the county's convention center capped at the greater of $0.4 million or 1.74% of the prior year's TDT collections. Additionally pledged are net convention center operating revenues, naming rights revenues, and investment earnings, which have historically been insignificant.

The PST revenue bonds are secured by a pledge of the PST levied and collected by the county on the purchase of electricity, gas, water and fuel oil within the unincorporated areas of the county.

The sales tax revenue bonds are secured by a pledge and lien upon that portion of the local government one-half cent sales tax distributed to the county.

The CIRB bonds are secured by revenues received by the county from the State Revenue Sharing Trust Fund (the trust fund) in an amount equal to 50% of state revenue sharing moneys received by the county in the immediately preceding year.

KEY RATING DRIVERS

IMPLIED ULTGO RATING: The implied ULTGO rating of 'AAA' is based on the county's strong financial management, broad-based tourist-oriented economy and manageable debt load.

HIGH AND CONSISTENT RESERVES: The county maintains ample general fund and other tax-supported reserves, even after budgeted draw-downs for various operating and capital needs. A low and stable tax rate provides the county with significant revenue raising capabilities.

TDT RATING REFLECTS REVENUE VOLATILITY: The 'AA-' rating for the TDT bonds recognizes the relatively strong 2.0x TDT coverage of maximum annual debt service (MADS), significant available reserves, absence of firm debt plans which mitigate potential revenue volatility, and a weak 1.33x additional bonds test (ABT).

AMPLE DEBT SERVICE COVERAGE: Debt service coverage for the PST, Sales Tax and CIRB bonds is notably strong and expected to remain so given recent growth trends and no borrowing plans.

DIVERSE EMPLOYMENT OPPORTUNITIES: The growing health and education sector, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based in tourism. The above-average growth rate of area employment is expected to lift county income indicators, which are currently below national levels.

POSITIVE DEBT PROFILE: The county has shifted part of its moderate debt burden from its residents, with tourism-related revenues servicing a substantial portion of the debt. Management has demonstrated its willingness to defer capital financing in response to periods of economic softening.

RATING SENSITIVITIES

PRECIPITOUS DECLINES IN REVENUES: Sharp and sustained declines in pledged revenues could lead to negative rating action.

DETERIORATION OF FINANCIAL RESERVES: While not expected, a significant drop-off in financial performance coupled with reduced levels of reserves could pressure the ratings.

CREDIT PROFILE

Orange County is located in the approximate center of Florida, encompassing an area of about 1,000 square miles. The City of Orlando (Implied GO rated 'AAA'; Outlook Stable) is the county seat and principal city. The county's population, estimated at 1.2 million, experienced rapid growth during the previous decade, averaging about 2.5% annually.

DIVERSIFYING EMPLOYMENT BASE

The county's economy anchors the central portion of the state. Professional and business services, education, health care, and biotechnology augment the historically strong tourism sector. Two of the leading employers in the county are health care systems, Adventist Health System and Orlando Health, which together employ 32,000 workers. The Medical City at Lake Nona embodies the recent growth in the biomedical field, and recent and upcoming opening of medical facilities at Lake Nona are intended to serve as a breeding ground for new ideas in the biosciences.

Tourism remains a considerable economic force. Walt Disney World (Disney) is the county's largest taxpayer at 8.0% of taxable assessed value and the largest employer (53,500 employees). Nine of the top ten taxpayers, representing 15.4% of AV, are in the hospitality industry. Tourism recovered in 2011 and 2012 and remained strong in 2013, buoyed by pent-up theme park demand, the opening of The Wizarding World of Harry Potter at Universal Studios resort and the expansion of Fantasyland at DisneyWorld.

Both Disney and Universal are in the process of making substantial investments in their Florida theme parks. While Disney and Universal are firm anchors to the historically volatile tourism sector, Fitch believes the increasing diversification of the area economy enhances stability and the prospects of future economic growth.

County per capita income levels fall below state and national averages, reflecting the elevated employment in the tourism industry. Wealth indicators have steadily declined relative to state and national benchmarks between 2007 through 2011, a result of the severe recession in central Florida. Fitch expects this trend to reverse with the economic recovery. County employment trends demonstrate strong gains increasing by over 3% in 2012 and an additional 2.8% in 2013. Unemployment rates have come down in tandem with the employment growth from a high of over 11% in 2010 to 5.4% as of December 2013 - well below 7.4% of the prior year and lower than the current state and national averages.

PROSPECTS FOR CONTINUED ECONOMIC EXPANSION

Fitch views the county's long-term prospects for tax base growth as sound. In fiscal 2013, the tax base reversed a four year trend of contraction, stabilizing in fiscal 2013 and expanding by 4% in fiscal 2014, boosted by new construction coming onto the tax rolls. The 24% tax base decline between fiscals 2009 and 2012, although substantial, was not as severe as that which occurred in other parts of the state. Fitch anticipates continued near-term expansion of taxable values as the economic recovery takes hold. The county has revenue raising flexibility, with a 4.43 millage rate is well-below the 10 mill cap.

AMPLE RESERVE LEVELS

Reserves are consistent and healthy, a hallmark of the county's sound financial management. The county previously had built up reserves for one-time uses. Despite planned draw-downs in recent years the unrestricted general fund balance has remained elevated and well above the county's minimum target range of 7% of revenues. In addition, the county has substantial additional unrestricted balances in other funds that can be used for operations if needed.

For fiscal 2012, the county reported a modest $11 million general fund surplus. The county had originally budgeted a sizable drawdown for the year but conservative budgeting and higher than expected sales tax revenues rendered the drawdown unnecessary. The ending unrestricted general fund balance of $133 million equaled a sizable 19% of spending.

The county's fiscal 2013 budget called for a further decline in unrestricted general fund reserves due in part to a 3% wage increase, the first in four years. However, the county typically budgets very conservatively with actual results substantially outperforming budget. Officials are projecting balanced operations for fiscal 2013. Revenues outperformed expectations attributable to the improving economy while tight monitoring of spending maintained expenditures below budget.

WELL-MANAGED LONG-TERM OBLIGATIONS

Overall debt levels are moderate at 3.3% of market value and $3,043 per capita. About two-thirds of the county's direct debt is secured by tourism-related taxes, partially alleviating the burden on county residents. Carrying costs are modest, with fiscal 2012 debt service constituting 3.7% of general government non-capital spending. Carrying costs rise to a still modest 8.9% with TDT debt service included. Amortization is average as 49% of principal is amortized within the next 10 years.

The county's fiscal 2014 - 2018 capital improvement plan totals $1.3 billion, with the largest components including public works ($362 million) and utilities ($673 million). Officials have prudently deferred capital projects in response to past economic declines. One of the larger tax-supported projects is the renovation of the county convention center, estimated at $185 million. There are no near-term plans for tax-supported debt issuance, although the county intends to issue TDT-secured bonds if TDT revenues are insufficient to fund the convention center project on a pay-as-you-go basis.

RETIREMENT OBLIGATIONS ARE MANAGEABLE

The county's pension and other post-employment benefit (OPEB) obligations do not pressure the credit. County employees participate in the state administered Florida Retirement System (FRS). Contribution requirements declined in fiscal 2012 due to changes enacted by the state, including longer vesting periods and the requirement that employees contribute 3% of their salary to FRS each year. The county's fiscal 2012 contribution requirement was $36 million lower than the prior year and equaled a modest 3.5% of general government spending. The FRS plan is relatively well-funded.

OPEB consist of a county subsidy to retirees for the cost of health insurance. The county typically contributes more to the plan than the annual required contribution (ARC) with the fiscal 2012 contribution approximately $2 million above the $5.7 million ARC. As a result of these funding practices, the county's OPEB plan was nearly $10 million overfunded, which Fitch views positively.

TDT REVENUES BOUNCE BACK

After a 15% drop in fiscal 2009, TDT collections have increased each year since with one exception, gaining 31.5% overall. TDT growth has been spurred by surging tourist activity over the past four years. In fiscal 2011 the county also received a litigation settlement reportedly totalling $9 million from Expedia.com that was tacked on to collections, elevating year over year growth by 19%. Fiscal 2013 TDT expanded by an additional 6.7% while three month fiscal year-to-date collections for fiscal 2014 are up 9.2% over same period collection in fiscal 2013.

TDT debt service coverage was solid as fiscal 2013 collections covered MADS by 2.1x. TDT revenues would have to drop by nearly 53% to reach 1.0x coverage. While the ABT of 1.33x MADS is weak, substantial reserves are maintained and are available to cover any shortfalls. These include a debt service reserve fund (DSRF) cash-funded to MADS (approximately $73 million), a convention center renewal and replacement fund of $57 million (equal to county's targeted level of 4% of the value of convention center plant and equipment), and $42 million of additional reserves. Combined reserves total $172 million or about 2.4x TDT MADS.

ELEVATED COVERAGE OF PST BONDS

The county levies the PST at the maximum rate of 10% on sales of electricity, metered or bottled gas and water service, and 4% per gallon on fuel oil. PST revenues are dominated by the levy on electric sales which typically compose 82%-84% of total PST revenues. Declines in electric purchases in fiscals 2011 and 2012 drove down overall PST revenues by 8.6%. Revenues rebounded in fiscal 2013 with a 4.5% year over year increase. A refunding issue in fiscal 2013 (which lowered debt service) increased already wide debt service coverage to over 9.0x MADS. Lack of a DSRF is balanced by the extensive coverage margins. Also, the ability of the county to lower the levy rate such that pledged revenues are limited to 1.35x MADS are offset by the county's lack of plans to do so.

SOLID FOUR YEAR SALES TAX GROWTH

One-half cent sales tax revenues are sourced from state sales tax collections. Distributions to counties are based on a combination each county's population, unincorporated population and sales tax collections relative to those of the state. Allocations of the sales tax among the county and its municipalities are determined by the relationship of each municipality's population to total and unincorporated county population.

County sales tax revenues have steadily climbed since fiscal 2009, increasing a total of 24% through fiscal 2013. This expansion has pushed fiscal 2013 coverage of MADS up to a hefty 5.4x. The bond resolution provides for a DSRF to be funded by the county only if debt service coverage falls below 3.0x MADS. A weak 1.35x MADS ABT is offset by wide coverage and the county's need of excess pledged revenues to support general operations.

WIDE COVERAGE BALANCES ABSENCE OF A DSRF

The CIRB bonds are secured by 50% of prior year revenue sharing distributions to the county from the state revenue sharing trust fund for counties. These revenues are derived from a portion of sales taxes and cigarette taxes collected by the state. Distribution to the county is based on county population and tax receipts relative to state totals. The county's revenue sharing distributions increased consistently since fiscal 2010 and are up by 3.3% in the first quarter of fiscal 2014 year over year. Debt service coverage is substantial totalling 4.8x MADS from fiscal 2013 revenues and mitigating the absence of a DSRF.

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=821515

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patty McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Douglas Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212 908 0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patty McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Douglas Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212 908 0526
elizabeth.fogerty@fitchratings.com