NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of the following revenue bonds of the city of Jacksonville, Florida (the city):
-- $37,885,000 local government sales tax revenue bonds, series 2001 at 'AA+';
-- $559,565,000 transportation revenue bonds, series 2007, 2008A, 2012A, and 2012B at 'AA-';
-- $580,235,000 Better Jacksonville sales tax revenue bonds, series 2003, 2008, 2011, 2011A, 2012, and 2012A at 'A+'.
In addition, Fitch affirms the 'AA+' rating on the implied unlimited tax general obligation (ULTGO) rating on the city, and the 'AA' rating on approximately $700 million of outstanding special revenue bonds.
The Rating Outlook remains Negative for the implied ULTGO, special revenue bonds, and the local government sales tax revenue bonds.
The Rating Outlook for the transportation revenue bonds and Better Jacksonville sales tax revenue bonds is Stable.
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.
The transportation revenue bonds are secured by a pledge of a discretionary 0.5% sales tax approved by voter referendum in March 1988 with no stated expiration date, and a 2-cent per gallon gas tax.
The Better Jacksonville sales tax revenue bonds are secured by a pledge of a discretionary 0.5% sales tax approved by voter referendum in September 2000, effective for a 30 year period terminating Dec. 31, 2030.
The special revenue bonds are limited obligations of the city payable from the city's covenant to budget and appropriate non-ad valorem revenues to pay debt service, by amendment if necessary.
KEY RATING DRIVERS
SALES TAX COVERAGE: The respective ratings on the city's sales tax revenue bonds principally reflect the level of debt service coverage from pledged funds. Sales tax performance remains on the upswing and the outlook for retail sales activity is improved. An important rating consideration for all securities is the absence of additional leveraging expectations.
IMPLIED ULTGO CAP: The implied ULTGO rating on the city serves as the cap for all sales tax revenue bonds. The Negative Outlook on the local government sales tax revenue bonds reflects this cap, as coverage from pledged revenues remains quite strong at 6.5 times maximum annual debt service (MADS).
PENSION CREDIT RISK: The Negative Outlook on the implied ULTGO rating reflects the city's significant unfunded pension liability, rapid escalation of pension payments, and inability to reach consensus among labor, elected, and appointed officials on a plan to address this challenge.
STABLE CREDIT FACTORS: General fund operations have been prudently managed and a history of surplus results has contributed to a healthy fund balance position. Debt levels are expected to remain moderate, and the Jacksonville economy fairly stable.
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.
Fitch anticipates resolving the Negative Outlook by the end of the calendar year. A downgrade of at least one notch is expected absent agreement on a pension deal that shows progress towards reducing the unfunded liability in a way that is affordable and preserves financial flexibility. A reversal of the city's long-standing stable financial performance, although not expected, could also pressure the rating.
SALES TAX PROJECTIONS IMPROVES
The local government sales tax revenue bonds continue to exhibit a high level of coverage with fiscal 2013 pledged receipts of $76.8 million equal to 6.5x MADS. Coverage has remained high in part due to the city's reliance on available revenue after the payment of debt service to fund operations. Scheduled final maturity is October 1, 2018.
Revenues pledged to the transportation revenue bonds and the Better Jacksonville sales tax revenue bonds have demonstrated positive growth for three consecutive fiscal years, boosting MADS coverage to 1.61x and 1.45x, respectively. Sales tax revenues were up close to 5% in fiscal 2013 aided by continued job gains and lower unemployment. IHG Global Insight forecasts retail sales to grow at an average rate of 4.7% from 2014-2018 which should boost coverage further as no additional debt is expected to be issued.
VERY HIGH PENSION BURDEN
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 as of September 30, 2012. Pension pressures have escalated rapidly reflecting plan benefit structures (including an automatic 3% cost-of-living adjustment for all plans) and asset performance during the recession. The city's annual pension costs more than doubled from $65.3 million in fiscal 2006 to approximately $150 million in fiscal 2014 (about 11.5% of the governmental fund budget) while the UAAL has increased by more than $1.3 billion.
RATING DIRECTION WILL REFLECT DECISIONS ON PENSION
In July 2013 the Jacksonville city council voted 11 to 7 to reject pension legislation related to police and fire, following reform agreements reached with the majority of the city's collective bargaining units. Although the plan would have left existing employees largely unaffected, pension savings of $1.2 billion to $1.8 billion were estimated over a 30-year period.
A pension task force comprised of local business leaders has spent the last several months reviewing multiple plan designs with support from The Pew Charitable Trusts. The task force is expected to make a formal recommendation to the city council later this week. Solutions under consideration include an additional property tax, sales tax, or fire/rescue assessment, as well as reduced benefits for both existing and new employees. The mayor has proposed increasing the transfer amount from The Jacksonville Electric Authority (JEA), which currently contributes $109 million to the general fund in the form of a payment-in-lieu-of-tax.
Fitch would consider an optimal pension outcome one that improves the funded position of the city's pension plans over a reasonable timeframe with sustainable contributions that preserve overall financial flexibility.
GENERAL FUND POSITION REMAINS HEALTHY
Fiscal 2012 marked the seventh consecutive year of surplus operating results, ending with an unrestricted fund balance of $145 million or a healthy 15.3% of spending. 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.
Fiscal 2013 results are not yet available; however, the city is projecting an operating deficit after transfers of $7.7 million in large measure due to revenue shortfalls related to fire and rescue transport fees and red light cameras ($11.6 million), and JEA franchise fees and utility service taxes ($6.6 million). The city still expects to report a $25.2 million addition to the general fund balance reflecting the dissolution of the Jacksonville Economic Development Commission (JEDC) and consolidation within the general fund.
The current year budget reflects a $7.2 million reduction in fund balance (a modest 0.7% of spending); however, the city is estimating a $5 million fund balance increase at year-end based on year-to-date results. Budgeted ad valorem taxes were estimated to increase $58.2 million over the prior year following a 14% increase in the tax rate to 11.44 mills.
The city's tax rate is capped at 20-mills providing ample legal capacity to increase revenue. Taxable values increase about 1.2% in fiscal 2014 following four straight years of decline. Residential home prices are exhibiting much stronger growth according to both Zillow and Trulia, which bodes well for the fiscal 2015 property tax revenue stream.
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 new money borrowing is not expected to exceed $70 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.
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