Fitch Upgrades Palm Beach Gardens, FL's GO Bonds to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following ratings on the city of Palm Beach Gardens, Florida (the city):

--$111,589 general obligation (GO) bonds, series 2000 to 'AAA' from 'AA+';

--$2.8 million public improvement refunding bonds, series 2011A to 'AA+' from 'AA';

--$8.2 million taxable public improvement refunding bonds, series 2011B to 'AA+' from 'AA'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The GO bonds are general obligations of the city secured by its full faith and credit and unlimited taxing power.

The public improvement bonds are backed by the city's covenant to budget and appropriate non-ad valorem revenues to pay debt service, subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. The covenant is cumulative and continues until the bonds have been paid in full.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: The rating upgrade recognizes the city's conservative budgeting practices, consistently positive operating results, and maintenance of high reserves. Recent negotiated pension reforms have led to moderately improved funded levels and lower contribution costs.

EXPANDING ECONOMY, AFFLUENT TAX BASE: The city's employment base continues to expand and diversify. Resident income metrics are well above the Florida and U.S. norm, as are educational attainment levels.

MODERATE DEBT BURDEN: Debt levels are moderate and are primarily driven by overlapping debt of the county and school board. All city issued debt is scheduled to be retired in the next 10 years.

COVENANT DEBT NOTCHING: A one-notch rating distinction from the GO bonds reflects the absence of a pledge of specific revenue securing the public improvement bonds and inability to compel the city to increase non-ad valorem revenues.

RATING SENSITIVITIES

STABLE CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Palm Beach Gardens is located in southeast Florida in Palm Beach County (GO bonds rated 'AAA' with a Stable Outlook by Fitch) approximately 10 miles north of West Palm Beach and 70 miles north of Miami. The city had a 2013 population of 50,699 and is a relatively upscale residential community with a large retiree presence.

FINANCIAL PROFILE A KEY RATING STRENGTH

Palm Beach Gardens has a history of conservative budgeting, and its consistently strong reserve levels are evidence of prudent financial management. The city produced an operating surplus after transfers over seven consecutive fiscal years from 2006-2013. The city ended fiscal 2013 with an operating surplus after transfers of $5.9 million, increasing the unrestricted general fund balance to $31.2 million or 44.8% of spending. The city's fund balance policy recommends maintenance of at least 17% or two months of operating expenditures, which Fitch deems satisfactory given the city's dependence on property taxes, generally a very predictable revenue stream.

The city adopted a balanced budget for fiscal 2014 that did not appropriate existing fund balance. Officials are estimating that year-end revenue will be about $2.6 million above budget with a roughly $484,000 use of general fund balance. The reduction in fund balance is largely tied to an increase in capital spending for the construction of a fire station.

The city is still formulating the fiscal 2015 budget. The city annually updates a detailed multi-year financial forecast. The current projection, which Fitch believes is designed with fairly reasonable revenue assumptions, shows some use of fund balance for capital but maintains the city's strong financial position.

Property taxes account for approximately two-thirds of general fund sources. The city's operating millage rate of 5.74 mills is competitive and comfortably under the 10 mill statutory cap. No change is expected to the operating millage for fiscal 2015. The city's tax base appears to be on the rebound, posting growth of 3.6% and 7.9% for fiscal 2014 and 2015, respectively. The city further maintains a healthy degree of revenue-raising flexibility via utility taxes, communication service taxes, and fees for solid waste and storm water.

MODERATE DEBT, RAPID REPAYMENT

The city's overall debt burden is moderate at $3,829 per capita and 1.9% of full market value. The majority of the city's debt profile is driven by overlapping debt of the county and school board. Future capital needs total only $25.5 million (or 0.3% of market value) through fiscal year 2018. All outstanding debt of the city is repaid within 10 years, which offers capacity to address longer-term infrastructure needs should any arise.

MANAGEABLE PENSION COSTS

Pension benefits are offered through several city administered plans and the well-funded state run Florida Retirement System (FRS). The city's defined benefit pension plans cover fire, police, and general employees (the general employees plan was closed to new hires in 1995). Fitch notes that the city has negotiated pension reforms with its unions (including reducing the multiplier, changing pensionable earnings to base pay only, and reducing the maximum benefit from 100% to 75% of average final compensation), leading to moderately improved funded levels.

On an aggregate basis the city's pension plans have a 73.3% reported funded rate, adjusted to an estimated 70.1% by Fitch assuming a 7% investment rate of return. This funding level is up from a relatively low 51.2% in 2008. As a result of the program modifications the city's total pension contribution was reduced from $8.3 million in fiscal 2012 to $6.6 million in fiscal 2013.

The city continues to make 100% of the actuarial required contribution to each plan. The $40.8 million combined unfunded actuarial accrued liability (UAAL) for the plans remains moderate relative to market value (0.4%).

Other post-employment benefits (OPEB) are limited, with an unfunded liability of 0.1% of market value. The city contributes the pay-as-you-go amount. Carrying costs for debt, pension, and OPEB are manageable at 15.4% of fiscal 2013 governmental fund spending.

DIVERSE ECONOMIC BASE

Palm Beach Gardens enjoys a fairly diverse economic base including healthcare (meeting the needs of the high concentration of retirees), tourism and leisure, engineering, and education (including Nova Southeastern University, Barry University, and Palm Beach State College). The regional economy also benefits from the established presence of The Scripps Research Institute and the Max Planck Society, which attract high-quality jobs and younger professionals to the region.

Income metrics are very strong. Per capita income measures more than 200% of the state and U.S. norm, and the city's labor force exhibits a high level of educational attainment. The city's May 2014 unemployment rate of 4.4% compares well to the state (6.1%) and nation (6.1%).

COVENANT DEBT

Non-ad valorem revenue in fiscal 2013 totaled $24.4 million, compared to maximum annual debt service (MADS) on the outstanding public improvement bonds of $2.4 million. Fitch adjusts non-ad valorem revenue to consider the prior obligation to fund essential governmental services, resulting in available non-ad valorem revenue of an estimated $16.2 million.

Non-ad valorem revenues are very diverse and include franchise fees ($5.1 million in fiscal 2013), licenses and permits ($3.5 million), intergovernmental revenues ($6.5 million), utility taxes ($2.2 million), and service charges ($4 million).

Leveraging risk is tempered by the dependence on non-ad valorem revenue to fund governmental operations. In addition, the bond resolution imposes a standard 2.0x MADS anti-dilution test.

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, Underwriter, Bond Counsel, Underwriter Counsel, and 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=839954

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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
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Steve Murray
Senior Director
+1 512-215-3729
or
Media Relations, New York
Elizabeth Fogerty, +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
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Steve Murray
Senior Director
+1 512-215-3729
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com