NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Miami-Dade County, Florida (the county):
--$250 million general obligation (GO) bonds, series 2005 at 'AA';
--$128.6 million public service tax revenue bonds, series 2006, 2007A, and 2011 at 'AA';
--$1.48 billion transit system sales surtax revenue bonds, series 2006, 2008, 2009A, 2009B, 2010A, 2010B, and 2012 at 'AA-';
--$78.9 million public facilities revenue bonds (Jackson Health System), series 2009 at 'AA-';
--$316.2 million professional sports franchise facilities tax revenue bonds, series 2009A,B,C,D, and E at 'A+';
--$61.9 million special obligation bonds, series 1996B at 'A+';
--$751.3 million subordinate special obligation bonds, series 2005A, 2005B, 2009, 2012A, and 2012B at 'A+'.
The Rating Outlook is Stable.
Please see the end of the press release for a description of the security provisions for each of the bonds rated herein.
KEY RATING DRIVERS
MODEST FINANCIAL FLEXIBILITY: The general fund reserve position remains improved from the trough of the recession, but Fitch still views it as thin for the rating category. Financial challenges associated solving a fairly sizable budget gap for fiscal 2015 are a growing concern.
FAVORABLE ECONOMIC POSITION: Fitch expects the broad expanse of the economy and its significant depth to stimulate growth and lend stability to the rating over time.
MODERATE DEBT: Overall debt levels are moderate as are costs for pension and retiree health benefits. The debt structure back-loads repayment of principal, which could impair the county's ability to finance future capital needs.
SPECIAL TAX RATINGS: The ratings assigned to the public service tax revenue bonds and transit system sales surtax revenue bonds reflect the broad-based nature of the pledged revenue streams and respective coverage of debt service.
COVENANT DEBT: The rating on the public facilities revenue bonds (Jackson Health System) and professional sports franchise facilities tax revenue bonds both reflect the county's covenant to budget and appropriate non-ad valorem revenues to secure bondholders - the latter is a notch lower as this covenant can be released if pledged taxes on rental accommodations equal at least 150% of MADS in each of the preceding two fiscal periods.
CONVENTION DEVELOPMENT TAX BONDS: The rating on the senior and subordinate special obligation bonds (convention development tax) reflects the thin coverage of debt service by pledged convention development tax (CDT) revenues supplemented by the county's covenant to apply its share of the local government one-half cent sales tax to cover any shortfalls in CDT revenue.
BUDGET BALANCE: General creditworthiness is most sensitive to the maintenance of an adequate financial position and the county's willingness and ability to address existing budget gaps without material reliance on non-recurring solutions.
SPECIAL TAX BONDS: The ratings on the various special tax bonds are sensitive to changes in debt service coverage. The transit system sales surtax revenue bonds would appear most susceptible to negative rating pressure given plans for significant additional issuance.
MODEST RESERVE POSITION
Entering fiscal 2014 the county's general fund unrestricted fund balance totaled $213.5 million or 11.3% of operating expenditures and transfers out. Included within the unrestricted fund balance is an emergency contingency reserve of $42.9 million. The county's reserve position, ranging from 4% and 12% of spending since fiscal 2000, has been very modest compared to other 'AA'-category counties rated by Fitch.
BUDGETARY CHALLENGES A GROWING CONCERN
Consecutive general fund operating deficits of $3.9 million and $23.4 million in fiscal 2012 and 2013, respectively, are not overly concerning when viewed in context of a general fund budget in excess of $1.8 billion. However, Fitch views with some concern certain budgetary decisions that are counter to achieving structural balance. The fiscal 2014 budget relies on $26 million in one-time revenue, which follows the use of $9 million from the emergency contingency reserve to fund operations of the fire rescue district in fiscal 2013.
Furthermore the board of county commissioners voted to discontinue a 5% employee healthcare contribution effective January 1 (for employees covered under collective bargaining), which appears to be a reversal of progress made several years ago in controlling labor costs. The cost of this action, an estimated $24 million annually for the general fund, was not built into the current year budget. The county has not released a formal mid-year projection for the current fiscal year, but estimated property tax revenues are down about $20 million due to appeal activity which may ultimately come out of fund balance.
The mayor has yet to propose a detailed plan to close the budget gap for fiscal 2015, currently estimated between $100 million to $150 million. Revenues will likely perform better than the forecast assumes based on preliminary estimates for fiscal 2015 taxable assessed value and other indicators. Significant service delivery reductions including government-wide layoffs remain possible, and the outcome of upcoming labor negotiations will have a significant impact on the county's financial position. Unfortunately, new contracts are not expected until after the September budget hearings. Fitch will monitor the upcoming budget deliberations and labor negotiations closely, noting that the current level of reserves does not offer much margin for error going forward or a significant resource to address existing budgetary pressures.
HISTORY OF UNEVEN OPERATING RESULTS
General fund operating results have been variable over an extended period of time, often sensitive to broader economic conditions that impact its property and sales tax revenue streams. Approximately 50% of general fund revenue is derived from property taxes, and while the county has adequate capacity to increase tax revenue within the statutory cap, raising taxes has historically been difficult from a policy point of view. The county's fiscal 2014 tax rate of 7.33 mills is also somewhat high relative to peer in-state counties.
Additional budgetary pressures are evident in the general fund's support for Miami-Dade Transit (MDT) and Jackson Memorial Hospital (JMH), budgeted at $168 million and $138 million, respectively, in fiscal 2014. The county's contributions to these entities are formulaically determined, somewhat limiting discretionary spending flexibility. Conversely, the county's cost for servicing its debt, pension, and other post-employment benefits (OPEB), a key pressure for many local governments, remain affordable at 13% of governmental spending.
FAVORABLE LONG-TERM ECONOMIC PROSPECTS
Fitch believes Miami-Dade's economic fundamentals remain an important credit strength. The employment base of the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA) is significant in its size with nearly 2.8 million non-farm jobs and well represented across employment sectors. Certain vulnerability exists given a dependence on housing and tourism, which is the case for most local governments in Florida. Home prices continue to rebound strongly, and the attractiveness of the Miami market is reflected in a full market value per capita exceeding $100,000.
The county owns and operates significant transportation assets, most notably the Port of Miami and Miami International Airport, which support its role as an international gateway, particularly to Latin America and the Caribbean. A desirable geographic location and abundance of recreational amenities position Miami as a significant destination for leisure travelers and retirees. Economic activity driven by visitors somewhat tempers the weak income and poverty metrics of the county. The county's unemployment rate was 7.5% in March, hovering above the state and U.S. as has generally been the case historically.
MODERATE DEBT AND RETIREE LIABILITIES
Fitch estimates the county's overall debt at a moderate 3.4% of market value or $3,505 per capita. Carrying costs are affordable, as noted previously, but reflected therein is the very slow pace of principal amortization at 30% of all tax-supported debt retired in 10 years. Absent continued revenue growth this slow pace of amortization could hinder the funding of future capital needs.
Capital needs are significant with $14.9 billion in future project costs identified, but mostly tied to the operation of the water and sewer utility system ($12.6 billion). Additional tax-supported issuance plans are not expected to have a meaningful impact on the county's overall debt profile.
The county's general government pension liability is limited to its participation in the Florida Retirement System, which is relatively well-funded. OPEB obligations are modest compared to the county's resource base and annual payments on a pay-as-you-go basis are fairly close to the annually required contribution.
VERY STRONG COVERAGE ON PUBLIC SERVICE TAX BONDS
The 'AA' rating on the public service tax revenue bonds reflects continued strong coverage of debt service, with fiscal 2013 receipts totaling $119.1 million or 9.5x MADS. These revenues are an important funding source for general operations of the county, creating a practical impediment to over-leveraging. Another favorable rating factor is that the performance of this revenue stream is driven by consumption of essential electricity, water, and gas utility services. The telecommunication component of the revenue stream, which accounts for roughly one-third of total pledged revenues, continues to soften reflecting increased industry competition; however, given strong coverage levels Fitch does not view this as a concern.
TRANSIT SALES TAX SHOWING STRONG GROWTH
The 'AA-' rating assigned to the transit system sales surtax revenue bonds reflects adequate coverage debt service, with fiscal 2013 receipts totaling $172.9 million or 1.67x MADS. Coverage is viewed as being fairly thin for the rating category, thus more susceptible to any downshifts in the economy and sales tax performance. The sales tax is imposed on all transactions occurring in the county that are subject to the state tax on sales, use, services, rentals, and admissions, and thus its base is considered very broad.
Recent revenue performance has been very strong. Revenues improved for the fourth consecutive year in fiscal 2013 (a 6.7% increase) and have now rebounded 25.1% following the cumulative 9.7% loss experienced in fiscal 2008 and 2009. However, the county plans to fund approximately $430 million of MDT capital needs with additional debt over the next 3-4 years which will suppress improvement in the debt service coverage ratio. The additional bonds test requires a 1.5x coverage requirement for parity indebtedness and 1.25x for subordinate debt.
RATINGS INCORPORATING NON-AD VALOREM COVENANT
The 'AA-' rating on the public facilities bonds reflects the county's covenant to budget and appropriate sufficient non-ad valorem revenue to replenish any draws from the DSRF. The DSRF is funded with cash equal to MADS ($24.9 million). The county's legally available non-ad valorem revenue totaled approximately $820 million in fiscal 2013 after adjusting for debt service on other non-ad valorem supported debt. Fitch notes that despite a history of operating difficulties at Jackson Memorial and rate covenant violations the DSRF has not been tapped to pay bondholders. Significant operating expense reductions has led to much improved hospital net revenue performance and debt service coverage reported at 5.0x in fiscal 2013.
The 'A+' rating on the professional sports franchise facilities tax revenue bonds reflects the county's non-ad valorem covenant as well as a provision whereby this covenant can be released if pledged taxes on rental accommodations equal at least 150% of MADS in each of the preceding two fiscal periods (the county would hold an option to reinstate the covenant if released at any point). Pledged receipts totaled $32 million in fiscal 2013, having increased an exceptional 48.7% following a 19.1% decline in fiscal 2009. The bonds' debt service requirements increase from $12.1 million in the current year to roughly $30 million in bond year 2031 before reaching a maximum annual requirement of $71.1 million in bond year 2048. Fitch estimates that rental accommodation revenue would need to increase by a compound annual growth rate (CAGR) of 2.4% to cover annual debt service through final maturity without non-ad valorem support (the historical growth rate since fiscal 2000 is 4.7%).
HIGH CDT LEVERAGE; SALES TAX SUPPORT IMPORTANT RATING FACTOR
Convention development tax (CDT) revenues remain on the upswing, increasing 9.9% in fiscal 2013 and 57% overall since fiscal 2009 to a total of $63.9 million. Debt service on the special obligation bonds (both senior and subordinate) plus certain defined annual prior payments will total $55 million next year resulting in a thin 1.15x coverage ratio. Furthermore annual debt service and prior payment obligations ascend gradually to a maximum of $121.6 million by fiscal 2039. Importantly, the county has covenanted to apply its share of the local government half-cent sales tax, totaling $140.4 million in fiscal 2013, to pay debt service if CDT revenues are insufficient. Fitch estimates CDT revenue would need to increase by a CAGR of roughly 3% to cover annual debt service through final maturity without sales tax support.
The following is a summary of the security provisions for each of the bonds rated herein:
General obligation: GO bonds are backed by the county's full faith and credit and unlimited taxing power.
Public service tax revenue bonds: Secured by a pledge of the public service tax (PST) levied by the county in the unincorporated areas of the county on the sale of electricity, gas, coal, fuel oil, water service and telecommunications (CST). The bonds are secured by a surety-funded DSRF. The test for additional bonds requires 1.2x coverage of proposed MADS.
Transit system sales surtax revenue bonds: Secured by a first lien on revenues from a one-half-cent sales surtax levied countywide, net of an administrative fee and a 20% allocation to cities within the county incorporated at the time the tax was approved. Also pledged are hedged receipts and federal direct payments. The bonds are secured by a DSRF, largely cash funded. The test for additional bonds requires 1.5x coverage of proposed senior-lien MADS.
Public facilities revenue bonds (Jackson Health System): Secured by the gross revenues of the Public Health Trust (PHT), an independent body responsible for the governance, operation, and maintenance of certain county health facilities. The bonds are additionally backed by the county's covenant to budget and appropriation non-ad valorem revenues to replenish any draws from the debt service reserve fund on an ongoing basis which serves as the basis for the Fitch rating.
Professional sports franchise facilities tax revenue bonds: Secured by a 1% professional sports franchise facilities tax (PSFFT) and a 2% tourist development tax (TDT), both on the rental of facilities such as hotels, motels and apartments countywide (except in Miami Beach, Bal Harbour and Surfside). In addition, if the county determines that the PSFT and TDT are not sufficient to pay debt service on any payment date or if there is a deficiency in the DSRF, the county has covenanted to budget and appropriate non-ad valorem revenues to cure such deficiency. The county can be released from the covenant to budget and appropriate non-ad valorem revenues if the PSFT and TDT in each of the preceding two fiscal periods equaled at least 150% of MADS. The bonds are secured by a surety-funded DSRF. The test for additional bonds requires 1.5x coverage of MADS or 1.0x if the county covenant with respect to non-ad valorem revenue is in effect.
Special obligation bonds (convention development tax): Secured by a pledge of 2/3 of the receipts of the convention development tax (CDT), which is imposed at the rate of 3% of the total consideration charged for rental of facilities such as hotels, motels and apartments countywide (except in Bal Harbour and Surfside) and a surety-funded DSRF. The subordinate lien bonds are secured by a subordinate lien on the 2/3 CDT in addition to a senior lien on the remaining 1/3 CDT and Omni tax increment revenues up to $1.43 million annually. The subordinate lien bonds are also secured by a cash-funded DSRF. The subordinate CDT revenues are net of certain contractually obligated prior payments equal to a maximum of $13.9 million per year through 2026 and $9.5 million thereafter. As additional security for all bonds the county has covenanted to apply its share of the local government half-cent sales tax to the payment of debt service, to the extent necessary and available. The county has covenanted not to issue additional senior lien bonds (except refunding bonds) while subordinate lien bonds are outstanding. Additional subordinate lien bonds could be issued if CDT revenue, tax increment revenue, and sales tax revenue is 1.5x the sum of all CDT bonds debt service, the prior payments, and the debt service on any parity sales tax obligations, if any.
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, and IHS Global Insight.
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