Fitch Affirms FMLC's Deerfield Beach (FL) Revenue Bonds; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed the following Florida Municipal Loan Council (FMLC) ratings:

--$17.9 million refunding and improvement revenue bonds, series 2012B-1 (Deerfield Beach) at 'A-';

--$9.2 million refunding revenue bonds, series 2012B-2 (Deerfield Beach) at 'A'.

The Rating Outlook is Negative.

SECURITY

The bonds are limited obligations of the FMLC. There are two separate loans, both payable solely from payments equal to the debt service made by the borrower, the city of Deerfield Beach, FL (the city).

The loan agreement securing the 2012B-1 bonds is backed by the city's covenant to budget and appropriate, by amendment, if required, non-ad valorem revenues.

The loan agreement securing the 2012B-2 bonds is secured by the full faith and credit and unlimited taxing power of the city.

KEY RATING DRIVERS

SUB-PAR FINANCIAL PERFORMANCE: The 'A' rating largely reflects Fitch's concerns regarding the city's financial management and fiscal imbalance, evidenced in general fund operating deficits in four of the last five years.

NEGATIVE OUTLOOK REFLECTS UNCERTAINTY: Fitch believes the recent tax levy increase and slight recovery in assessed value (AV) positions the city well for fiscal stabilization. However, prior projections have proven aggressive and Fitch remains skeptical about the city's ability to maintain positive momentum.

LOCAL ECONOMIC INDICATORS MIXED: The city's base is largely residential with some tourist activity. The city's unemployment rate compares favorably with both the state and national rates; however, wealth levels are below average and have declined over the past five years.

MODERATE CARRYING COSTS: Carrying costs including pension, other post-employment benefits (OPEB), and debt service are expected to remain a manageable budget item.

BORROWER'S CREDIT PROFILE UNDERLIES RATING: The CB&A and GO ratings are based on the general credit characteristics of the obligor (the city), as well as the security structure of the two loan agreements. The FMLC is a conduit issuer.

RATING SENSITIVITIES

FUTURE FINANCIAL PERFORMANCE: Fitch would regard continued reliance on non-recurring revenues or further depletion of reserves as a negative credit event. Conversely, the achievement of structurally balanced operations could lead to positive rating action.

CREDIT PROFILE

Deerfield Beach is located adjacent to Boca Raton in northern Broward County with an estimated 2013 population of 78,041, an increase of almost 21% from the 2000 census.

LIMITED FINANCIAL RESERVES

The city ended fiscal 2013 with a general fund operating surplus after transfers of $695,511, increasing the unrestricted fund balance to $7 million, or 8.6% of spending. Fiscal 2013 positive results follow four consecutive years of deficit operations in the general fund. The positive results relied in part on non-recurring transfers into the general fund, which equate to approximately 1.5% of total general fund revenues. Unassigned fund balance was $2.8 million, or 3.5% of spending at the close of fiscal 2013; well below its 10% target.

A risk analysis manager was hired by the city during fiscal 2013 in an effort to improve budgetary accuracy by addressing its healthcare and workers compensation spending and forecasting. City management believes that this new position will reduce unanticipated costs which have plagued the city in the past.

Tax base expansion and an increase to the millage rate are the driving factors in favorable year-to-date financial results for fiscal 2014. Management is projecting to end the year with an unrestricted fund balance of roughly $9 million, or over 10% of budgeted spending. The city's taxable AV grew 3% in 2014 to roughly $5 billion. Projections provided by the county to the city show an additional 6.5% increase in 2015 which if realized, with an unchanged tax rate, would provide a solid boost to the revenue base.

There are several contingent liabilities that could affect the financial position of the city, approximating $4 million or 4.9% of the budget. The largest exposure is for a FEMA reimbursement claim, similar to other Florida cities, followed by legal expenses and a liability to one of its labor unions to be repaid over 14 months. Realization of even a portion of these liabilities could adversely affect future financial operations.

The fiscal 2015 budget is still in its initial stages. There is no millage rate increase expected. The city's goal is to increase unrestricted fund balance to roughly $12 million by the end of fiscal 2016, which would put the city in line with its reserve policies.

MIXED LOCAL ECONOMY

The city is primarily residential and the economy is focused on the service sector with a large number of residents commuting to nearby Fort Lauderdale for employment. As of April 2014, the city had an unemployment rate of 4.5%, which compared favorably to the state and national rates of 6.1%. Wealth levels in the city are below the state and national averages and have declined in recent years. The poverty rate of 17.7% in 2012 was higher than the national rate of 14.9%.

MODERATE CARRYING-COST BURDEN

The overall debt burden of the city is moderately low at $1,894 per capita and 1.9% of market value. Debt amortization is average at 53% retired in the first 10 years. Debt levels are expected to remain low as the city does not currently have any future debt plans.

The city participates in three single-employer defined benefit pension plans (for fire, police, and non-uniformed employees hired before Oct. 1, 2011, Jan. 13, 1990, and April 17, 1990, respectively). The pension plans are closed and the city consistently funds the actuarially required contributions and contribution rates are expected to continue to grow over the intermediate term but remain manageable. The city funds its other post-employment benefits on a pay-as-you-go basis. The unfunded liability for pension and OPEB is low at $111.4 million, or 1.5% of market value. Total carrying costs are a manageable 16.8% of governmental spending.

CB&A BONDS

There is no debt service reserve associated with the CB&A bonds; however, this risk is mitigated by the high debt service coverage ratio. The anti-dilution test is satisfactory, requiring that non-ad valorem revenue (average of actual receipts over the prior two years less pro-rata share of essential services) cover maximum annual debt service (MADs) at least by 1.5x. Projected MADs for all debt secured or payable from non-ad valorem revenues must not exceed 20% of governmental fund revenues, less ad valorem revenues restricted for debt service and debt proceeds. Current MADs coverage net of essential service expenditures is ample at 5.4x.

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, Zillow.com, IHS Global Insight, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, & Trustee.

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=838795

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Contacts

Fitch Ratings
Primary Analyst
Andrew Hoffman
Analyst
+1-212-908-0527
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Andrew Hoffman
Analyst
+1-212-908-0527
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com