NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following Riviera Beach, FL (the city) bonds:
--$22.3 million public improvement revenue bonds, series 2014.
The bonds are expected to sell September 9 via competitive sale. Proceeds are being used to finance the costs of certain infrastructure improvements as well as to make a loan to the Riviera Beach Community Redevelopment Agency (CRA).
In addition, Fitch rates the city's implied general obligation 'A+'.
The Rating Outlook is Stable.
SECURITY
The public improvement revenue bonds are special obligations of the city, payable from its covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem revenues. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant shall be cumulative to the extent not paid, and shall continue until all required amounts payable under the indenture have been paid.
KEY RATING DRIVERS
IMPLIED GO 'A+' RATING: The 'A+' rating on the implied GO reflects the city's below-average wealth indicators, balanced finances, tight liquidity, opportunity for economic growth given its location within Palm Beach County, moderate debt and weak pension funding levels. Management efforts to reform its pension system and prospects for a significant enlargement of the city's revenue base in fiscal 2016 are expected to improve the city's credit profile.
WEAKER DEMOGRAPHIC PROFILE: The city, while part of the strong Palm Beach County economy, presents a much weaker demographic profile including low wealth indices, high rates of poverty and above-average unemployment trends. Recent economic movement, however, has been positive.
SATISFACTORY FISCAL BALANCES/TIGHT LIQUIDITY: General fund financial reserves are maintained at relatively high levels, but fund balance is mostly composed of large receivables from the other city funds, including the Community Redevelopment Agency (CRA). As a result of these internal loans, liquidity remains tight.
AVERAGE DEBT LOAD: Debt levels are moderate and direct debt amortization is average. Capital needs are manageable with no plans for additional debt, although officials are analyzing a possible pension bond issuance.
LOW LEVELS OF PENSION FUNDING: The city's general employees' pension plan is poorly funded. Officials are planning on transitioning new employees to the state-run Florida Retirement System.
CB&A DEBT ONE NOTCH OFF GO: The city's non-ad valorem revenues are broad-based and provide strong coverage of CB&A debt. The bonds are rated one notch below the city's GO bonds due to the prior payment requirements of essential government service costs, the absence of a specific pledge, and the inability to compel the county to generate non-ad valorem revenues sufficient to pay debt service.
RATING SENSITIVITIES
IMPROVEMENT IN LIQUIDITY LEVELS: Improved balance sheet metrics including a substantial increase in overall liquidity could lead to upward rating mobility.
FINANCIAL DETERIORATION: Significant deficits or a further squeeze on already tight cash reserves could pressure the rating.
NARROWED DEBT SERVICE COVERAGE: Additional leveraging of the city's non-ad valorem revenues which reduces coverage could have negative rating consequences.
CREDIT PROFILE
Riviera Beach is located in east central Palm Beach County (the county), along the Atlantic coast. A portion of the city is situated on Singer Island, just off the mainland. Encompassing an area of approximately 8.5 square miles with an estimated 2013 population of 33,560, the city is primarily urban and mostly built out.
LOCAL ECONOMY MORE LIMITED THAN COUNTYWIDE ECONOMIC ACTIVITY
The city participates in the county's broad and diverse economy although local economic activity is much more limited. The city does benefit from the location of the Port of Palm Beach (Port revenue bonds rated 'BBB-' with a Stable Outlook) within its jurisdiction. The port handles cruise ship traffic as well as regular cargo shipments. Leading employers include a Veterans Affairs Medical Center, Tropical Shipping, Cheney Brothers (food distribution) and Pepsi Cola Bottling, Inc.
City employment levels were hit much harder during the recent recession than those of the county, state or nation. Between 2007 and 2010, the city lost nearly 3,600 jobs or 23% of its employment base. Since 2010, employment growth has been relatively strong and consistent, increasing by over 9% through 2013. Unemployment rates for the city spiked up in 2010 to over 13%, but rates have moderated with job growth to 8.8% in 2013. Historically, city unemployment rates have trended above those of the county or the state. The city's economic recovery has continued into 2014. June 2014 employment was up by 3.6% from the previous year while the unemployment rate fell to 6.9%.
City wealth indices are much lower than those of the county. Per capita income as of 2012 was 70% of county and 87% of state income metrics. Since 2008, city wealth levels have gained relative to county and state indicators but have declined in comparison to national per capita income averages. Poverty rates remain elevated at over 25% compared with 16% statewide.
HOUSING MARKET AND TAX BASE CONTINUE TO RECOVER
The city's housing market was devastated by the recession with high rates of foreclosures and average home values falling by 65% between 2006 and 2012, according to Zillow.com. Since 2012, the housing market has slowly recovered and home values as of June 2014 were nearly 20% higher than the year before. Despite the bounce back, home values remain well below pre-recession highs. Foreclosures have also declined since a bump-up in 2012. The housing crisis set back the city's tax base, which declined by 25% between 2009 and 2013. With the recovery, taxable assessed values increased by 6.2% in fiscal 2014 and 5.8% for fiscal 2015.
FINANCES HAMPERED BY TIGHT CASH
The city's financial position is characterized by solid reserves combined with tight liquidity. General fund balance as of fiscal 2013 totaled $16.8 million or a strong 34.6% of expenditures. Unrestricted reserves represent over 31% of spending. Management has maintained unassigned fund balances for at least the past three fiscal years above its informal target of 90 days of operations (25% of spending).
General fund available cash resources, however, are below average. Fiscal 2013 unrestricted cash and investments in the general fund totaled $3.7 million or less than one month of operations. The tight cash position is a product in part of loans made from the general fund to other funds to finance several large city-sponsored projects. Repayment of advances is not expected to occur for at least several years. The city is afforded some flexibility with its cash squeeze in that two-thirds of the city's general fund liabilities consist of internal obligations. Furthermore, sizable cash reserves in the city's utility fund could be tapped temporarily to cover a cash shortfall. Fitch expects the city's general fund cash position to remain tight, however, for at least the foreseeable future.
SPENDING CONTROLS OFFSET VOLATILE REVENUES
Property taxes make up slightly over half of general fund revenues. The city reported general fund operating surpluses in fiscals 2011 and 2013 sandwiched around a more modest deficit which increased fund balance by over $3 million or 23%. Despite some volatility in year-to-year revenues, officials were able to keep spending in check with measures including hiring freezes, furloughs and wage freezes. As a result, the increase in operating expenditures over this period was less than 1%.
The fiscal 2014 general fund budget represents a $3.1 million or 6.7% increase over the fiscal 2013 budget. Spending growth is attributable to a 3% wage hike for general employees and step increases for police and firefighters, as well as higher pension and health insurance costs. The cost growth is balanced by higher property taxes due to tax base expansion. Management is projecting fiscal 2014 operations to end with a modest $1.5 million surplus.
The tentative budget for fiscal 2015, which begins on October 1, is balanced with additional salary growth and elevated pension contribution requirements offset by expanded property tax and utility tax revenues. Management has agreements in place with all four of its unions for the next three fiscal years, which should enhance financial planning.
Management anticipates a large influx of revenues in fiscal 2016 when a new $1.3 billion Florida Power & Light generating facility is added to the tax rolls. This is expected to generate up to $25 million in additional property tax revenues in all funds, including a near tripling of CRA revenues to over $12 million. The CRA owes the city over $10 million from city advances.
MODERATE DEBT METRICS
Debt levels are moderate with a debt-to-market value ratio of 3.4% and debt per capita at $3,746. Payout of the city's direct debt is average with 56% of principal amortized within 10 years. Capital needs are modest and no additional debt is currently planned with the exception of a possible pension bond issue. Officials are currently evaluating the utility of issuing pension bonds to cover the unfunded actuarial accrued liability (UAAL) in its pension funds, currently valued at $58 million. The bonds would be secured by non-ad valorem revenues. Carrying costs for fiscal 2013 including debt service, pension contributions and OPEB requirements are elevated at 27% of spending. However, debt service costs include a $7.9 million additional principal payment as a result of a refunding performed during the year. Without the refunded principal, carrying costs would have been a much more moderate 15% of spending.
CITY TO TRANSITION NEW EMPLOYEES TO STATE PENSION PLAN
The city sponsors three separate defined benefit pension plans, for general employees, police and firefighters. The general employees' plan is poorly funded with the funded ratio as of Oct. 1, 2013 of 62.5%, or an estimated 59.2% using Fitch's 7% discount rate. The other two plans are better funded. In order to reduce costs, the city is planning on transitioning new employees and current employees at their option to the state-run Florida Retirement System (FRS). A preliminary analysis prepared by an outside actuarial firm estimated that the conversion to FRS could generate significant savings over the next 30 years. As discussed above, officials are considering the issuance of pension obligation bonds. The city provides medical and prescription drug coverage to retirees at cost. This implicit subsidy is currently unfunded but the liability is modest at $9 million, representing less than 1% of market value.
NAV REVENUES PROVIDE STRONG COVERAGE
Net asset value (NAV) revenues include almost all city general government revenues except for property taxes. NAV movement has been mixed over the past five fiscal years but has generally trended upward. Intergovernmental revenues, which include the half-cent sales tax and state revenue sharing distributions, are the largest non-ad valorem revenue source, representing 23% of total NAV revenues in fiscal 2013.
Available NAV revenues provide wide coverage of maximum annual debt service (MADS) for all city debt secured by the CB&A pledge, even when essential service expenditures are taken into account. Legal provisions are somewhat weak. There is no provision for a debt service reserve fund, which concerns Fitch less given the wide levels of coverage. An anti-dilution test limiting MADS, including the proposed debt to no more than 50% of NAV revenues in the most recent fiscal year, is not particularly rigorous, as a significant amount of additional debt can be issued under this test. The city's use of NAV funds for general operations serves as a more practical check against over-issuance.
Additional information is available at 'www.fitchratings.com'
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=852634
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