NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following rating on Butler County, Ohio Transportation Improvement District (BCTID) obligations:
--$41 million outstanding highway improvement bonds, series 2007 at 'BBB+'.
The Rating Outlook is Stable.
The bonds are special obligations of the district payable from moneys generated from three tax increment financing (TIF) districts (the primary pledge). The bonds are also secured by a secondary pledge consisting of (a) 25% of non-tax revenues in Butler County's general fund available 60 days prior to a given debt service payment date and (b) 95% of income tax revenues available to Liberty Township from the Joint Economic Development District (JEDD).
KEY RATING DRIVERS
TIGHT DEBT SERVICE COVERAGE: Coverage of maximum annual debt service (MADS) is 1.43x based on combined fiscal 2013 primary and secondary pledged revenue sources. Primary fiscal 2013 pledged TIF revenues alone do not provide 1x MADS coverage.
LIMITED BACK-UP SECURITY: The legal structure for the TIF revenue is strong, requiring retention of revenue for future debt service if available. However, structural elements of the secondary pledge limit the additional security provided for bondholders.
VOLATILE REVENUES; POTENTIAL STRENGTHENING: Pledged revenues consist of historically variable tax increment revenues as well as volatile county non-tax revenues (charges, fees, and interest earnings). Non-tax revenues have declined by more than 50% since fiscal 2007, but recent year declines have moderated and fiscal 2013 saw revenue growth. TIF revenues stand to benefit from various district development projects currently in process, which would add to the tax base.
MATERIAL SHIFTS IN REVENUE: The rating is sensitive to shifts in pledged revenues due to tax base or other changes that affect the amount of available revenues. Material decreases in pledged revenues would have a negative effect on ratings. Rating improvement would require significant strengthening and demonstrated long-term stability in pledged revenues.
The BCTID was created in 1993 to facilitate common transportation goals among local governments within Butler County. The three tax increment financing districts providing pledged revenue are Butler County tax increment financing district (TIF), West Chester TIF, and Liberty township residential incentive district (RID), which includes four separate sub-districts. The districts' base years were established in 1997 through 2004.
EXISTING TAX INCREMENT REVENUES INSUFFICIENT TO COVER MADS
The BCTID anticipates repaying the bonds from the primary pledge of tax increment revenues generated from development districts, located near the highway interchange financed with the bonds. Management reports continued development in the districts, including the construction of a 1.1 million square foot retail/commercial/residential center to be completed by 2015, hospital expansion projects, a new large sporting goods store, and potential new hotel development.
TIF revenues provided 1.7x debt service coverage in 2013, down from 1.9x in fiscal 2012. However, debt service escalates annually and 2013 TIF revenues cover MADS in 2031 by only 0.7x. Revenue growth would therefore be been needed for TIF revenue to fully support debt service. Management projects good growth in revenues, which Fitch believes is reasonable given development projects in the TIF districts.
There are no additional parity debt issuance plans as the funded project has been completed and additional debt was permitted only to ensure project completion. Debt issuance in the amount of $10 million is planned, which will have subordinate lien on TIF revenues and a secondary pledge of a separate 25% of county non-tax general fund revenues. Fitch will monitor additional debt issuance to assess any impact on the Series 2007 bonds.
Additional security is provided by the capture of excess TIF revenues pursuant to the flow of funds. Excess TIF revenues are retained in the revenue fund until the cash balance in the fund is equal to the subsequent year's debt service payment and the current year TIF revenues are equal to 1.5x subsequent year's debt service. On meeting these conditions, surplus funds may be returned to the individual development districts. The fund acts as a quasi-supplemental reserve. Fitch gives no credit in its rating to the surety-funded debt service reserve.
If the primary pledge provides at least 1.75x coverage of MADS for three consecutive years and the revenue fund is at least equal to the next year's debt service, the secondary pledge is suspended. However, if coverage from the primary pledge ever declines below 1.75x, the county non-tax pledge portion of the secondary pledge is automatically reinstated.
COUNTY NON-TAX REVENUE PLEDGE PROVIDES SOME ADDITIONAL SECURITY
The rating additionally reflects the secondary pledge of 25% of county non-tax general fund revenues, which with the primary pledge provides MADS coverage of a Fitch-estimated 1.4x. This assumes even cash flow of non-tax revenue throughout the year and reflects the 60-day notification period from the trustee in cases of insufficient funds.
Pledged non-tax revenues consist of charges for services, interest earnings, licenses and permits, and other revenues. Charges for services represents the largest revenue category (over 80% in recent years), followed by licenses and permits (7-9%). Investment income has, in some years, been a major contributor, but has fluctuated greatly. In 2013, charges for services consisted mainly of boarding of federal, state, and local government prisoners (31%) and the property transfer tax (22%). Pledged non-tax revenue totaled about 6.5% of 2013 general fund revenues.
Pledged non-tax revenues have declined 52% since 2007. More recent declines have primarily been driven by lower interest earnings and volatility in charges for services. As debt service is ascending, this trend represented a considerable risk. However, declines have moderated in recent years and revenues saw growth of 1.6% in fiscal 2013, with growth in charges for services balancing investment earnings declines.
Pledged county non-tax revenues in 2013 could still just cover MADS assuming all revenues were fully available at the time the trustee must make a determination as to their required use for debt service. However, Fitch believes only a limited amount would be available at that time, limiting the value of this pledged source.
WEAK SECONDARY PLEDGE LEGAL STRUCTURE
The county is not obligated to annually reserve or budget pledged non-tax revenues to pay debt service, limiting their value as a security feature. The trustee is required to notify the county and JEDD 60 days prior to a debt service payment if there is a shortfall from TIF revenue. The county and JEDD have a joint and several obligation to transfer immediately adequate funds, if available, to the trustee from pledged sources, based on an allocation formula. JEDD revenues have exhibited consistent growth, but fiscal 2013 revenues still accounted for only 14% of MADS and about two-thirds of the revenues come from a single payer.
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
U.S. Local Government Tax-Supported Rating Criteria