NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for the City of Sarasota, Florida (the city):
--$37.7 million general obligation (GO) bonds, series 2007 at 'AA+';
--$7.6 million sales tax payments revenue bonds, series 2010 at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by the city's full faith and credit and unlimited ad valorem taxing ability.
The sales tax payments bonds are limited obligations of the city, secured by a first lien on certain statutorily defined payments received from the State of Florida and direct federal subsidy payments and secondarily by a covenant to budget and appropriate (CB&A), by amendment if necessary, an amount of legally available non ad valorem revenues sufficient to meet debt service.
KEY RATING DRIVERS
GO BOND RATING: The 'AA+' rating on the city's GO bonds reflects solid levels of reserves, moderate debt, a recovering economy and elevated pension and other post-employment benefit (OPEB) costs. Maintenance of superior reserve balances and the city's ability to trim its high fixed cost burden will be key rating factors in the future.
COVENANT AS BASIS FOR RATING: The rating on the sales tax bonds is based on the city's debt service deficiency covenant, and reflects the city's general credit quality and sound debt service coverage from available non ad valorem revenues.
FINANCIAL PROFILE REMAINS SOLID: Despite a series of recent operating deficits, the city's reserve and liquidity levels remain ample. However, further drawdowns resulting in significant fund balance contraction could squeeze financial flexibility.
STRONG ECONOMIC RECOVERY: The area economy is in the fourth year of a strengthening recovery characterized by accelerating job and tax growth and a housing market rebound. Wealth indicators are mixed reflecting in part the presence of a sizable retiree population.
HIGH FIXED COST BURDEN: Annual debt service and retirement benefit costs consume a very high one-third of annual spending. Debt service costs are scheduled to decline while post-retirement benefit modifications enacted by the city over the past several years are intended to chip away at pension and OPEB liabilities over the long term.
RATING SENSITIVITIES
ADDITIONAL LARGE RESERVE REDUCTIONS: Continued drawdowns of reserves narrowing financial margins would be a concern given elevated fixed costs.
NARROWING COVERAGE OF CB&A BONDS: Significant leveraging of non-ad valorem revenues, reducing revenues available for debt service, would be viewed negatively by Fitch.
CREDIT PROFILE
The city is located along the Gulf of Mexico on the southwest coast of Florida and is the largest city and county seat of Sarasota County (implied ULTGO rated 'AAA' with a Stable Outlook). Encompassing 24 square miles, the city's estimated 2013 population of 53,326 represents an increase of less than 1% over 2010 levels. The city's population grew very rapidly from 1950 through the middle of the last decade and then slowed considerably as a consequence of the recession.
SOLID RESERVE LEVELS DESPITE PRESSURED OPERATING ENVIRONMENT
Finances have historically exhibited high levels of reserves and liquidity, maintaining unreserved/unrestricted general fund reserves at over 30% of spending. Fiscal 2013 unrestricted cash and investments in the general fund are sufficient to cover four months of operations. Since fiscal 2010, management has utilized reserves in conjunction with spending controls to offset sizable declines in property tax revenues, reporting modest operating deficits in each of the past three fiscal years. Despite the drawdowns, reserves have been maintained above the city's minimum combined unassigned and emergency fund balance total of two to three months of spending.
The city reported general fund operating deficits for fiscals 2012 and 2013 of $821,000 and $1.2 million, respectively. These results combined have reduced general fund balance by over 9%. However, reserves remain ample with fiscal 2013 unrestricted general fund at $19.2 million or 35% of spending.
For fiscal 2014, management budgeted the use of $1.1 million of stabilization fund monies within the general fund to support operations. Based on actual results, the projected year-end drawdown of $2.3 million is more double the budgeted deficit. Over-optimistic revenue forecasts were only partially offset by department-wide spending reductions. Estimated unrestricted general fund balance equals a still-solid 28% of spending. Fiscal 2015 budgeted general fund operations are balanced but only as a result of the city slicing its contribution to its OPEB plan by nearly $4 million.
Financial operations have been pressured by unusually high retirement costs which limit the city's ability to control spending. While superior levels of reserves have historically served as an offset to the city's high fixed cost burden, these reserves have been declining in recent years. Additional fund balance reductions would be a concern given the city's restricted financial flexibility. Fitch views management's ability to reduce its pension and OPEB costs as a key factor in the restoration of the city's fiscal balance.
MODERATE DEBT PROFILE
Overall debt levels are moderate on a per capita basis ($2,750) and low (1.5%) as a percentage of market value (MV). Approximately 53% of outstanding principal is repaid in 10 years, which Fitch considers average.
Future capital needs appear manageable. The fiscal 2014-2018 tax-supported capital improvement plan (CIP) totals $83 million. Most of projects included in the CIP are for critical infrastructure maintenance and reconstruction ($58.2 million) and quality of life purposes ($23.4 million) and will be funded through grants and special taxes. There are no plans for additional new debt.
HIGH FIXED COST BURDEN
Carrying costs for debt service, pension contributions and OPEB costs were very high at 33.7% of general government spending for fiscal 2013. Much of the high fixed cost burden is attributable to elevated pension and retiree health care costs.
The city maintains three defined benefit plans for its general, police and fire employees. For fiscal 2013, the city contributed $10.2 million to its three pension plans or an elevated 12.1% of spending. Funding levels have improved over the past two fiscal years but remain weak at 68.2%, 71.2% and 70.6% for general employee, police and firefighter pension plans, respectively. Management recently switched to a more conservative 7% discount rate from 8.3% for general employees and 8% for the police plan. The discount rate for the firefighters plan was reduced from 8% to 7.5% net of investment fees which equates to an effective 7% rate. The combined unfunded liability of $167 million across all three plans represents a moderate 1.7% of MV.
Management has taken steps to limit its long term pension liability. In fiscal 2011, the city decreased certain benefits in its defined benefit pension plan for general employees and closed the plan to new hires, enrolling them in a defined contribution plan instead. Despite these measures, near term costs are expected to remain elevated. As part of its negotiations for a new contract with the police union, management is attempting to institute changes to the police pension plan which would result in cost savings.
Retirees who were employed with the city before Oct. 1, 1993 receive a significant OPEB subsidy which was eliminated for subsequent employees. Management has established an OPEB trust fund to fund its liabilities. In fiscal 2013, the city contributed a sizable 10.3% of spending toward the city's $11.8 million ARC for all funds. As of Oct. 1, 2012, the most recent audited actuarial valuation date, the plan was 13.9% funded and the unfunded liability of $123 million represented a moderate 1.2% of MV. A draft revised actuarial valuation of the OPEB plan for fiscal 2015 raises the discount rate to 7%, up from 5.25% the year before, due to the level of prefunding. The higher discount rate, which Fitch believes is unusual for an OPEB system as their funding levels are generally small, and strong investment returns reduced the fiscal 2013 unfunded liability to $81 million while increasing the funding ratio to 29%, still modest but higher than most OPEB plans with which Fitch is familiar. Management is considering further changes to the plan intended to reduce future costs.
CB&A PROVIDES SUPPORT
Non-ad valorem revenues constitute a broad and diverse revenue stream. The availability of non-ad valorem revenues to support the sales tax payment bonds is subject to the use of revenues for essential government services and the potential future securitization of specific non-ad valorem revenue bonds. The city's non-ad valorem revenues have trended within a narrow range over the past several years driven by changes in the receipt of intergovernmental revenues. Available revenues are supplemented by the city's ample reserve levels.
Pledged sales tax revenues of $500,000 annually paid by the Florida Department of Revenue to the city narrowly cover debt service requirements, net of the federal interest rate subsidy in every year except final maturity in 2037, when net debt service rises to $540,000. The CB&A pledge will be utilized to cover the difference in state sales tax payments and MADS in 2037 or in any year in which scheduled federal subsidy payments are not fully received.
Federal subsidy payments were reduced by 7.2% in fiscal 2014 and the city covered the deficit with funds on hand. Available non-ad valorem revenues, net of essential service expenditures and prior lien debt, provide strong coverage of CB&A-secured MADS, including the subsidy payments.
ECONOMIC INDICATORS POINT TO SUSTAINED RECOVERY
The city is part of the county's service-oriented economy which includes health care, education, professional and business services, retail, and tourism sectors. There is a significant manufacturing as well. After being battered by the recession and its aftermath, the area economy is experiencing a sustained recovery.
The city's employment base began to erode even before the recession began in 2005. Following 2005, the city experienced five consecutive years of job declines aggregating in a 25% loss in overall employment. Job growth resumed in 2011 and has since accelerated. Employment gains of 3.2% and 3.5% in 2012 and 2013, respectively underscore the increased pace of growth. The upward trend has extended into 2014 as May 2014 job numbers were up 4.5% over May 2013 jobs data. The employment growth has nudged unemployment rates down from nearly 12% in 2010 to 5.9% this past May, below the state and national rates. Sizable increases in building permit and business license activity and a substantial rise in countywide sales tax collections are additional indicators of economic expansion. Tourism within the county reported a very strong fiscal 2014 with tourist development tax collections up 14% over the prior year.
HOUSING AND TAXABLE VALUES MAKE A STRONG COMEBACK
Housing values declined by nearly 60% between 2006 and the end of 2011, according to Zillow.com. However, values have since steadily increased and were up 10.7% year over year as of August 2014. Despite the gains, housing levels remain significantly below pre-recession highs. A number of substantial housing and commercial projects in development also attest to the expansive housing climate. The county's mostly residential tax base is reflective of the area housing collapse as well as its subsequent rise. Taxable valuations lost nearly $3.5 billion or over 33% of value between fiscals 2008 and 2013. This pattern was reversed in fiscals 2013 and 2014 with annual increases of .5% and 4.7%, respectively followed by a further 5.1% gain in fiscal 2015.
DISPARATE WEALTH INDICATORS
Wealth indices are mixed. Median household income levels are low at 86% and 77% of the state and national averages, respectively. Poverty rates are elevated with over one in five residents at or below the poverty line. Conversely, per capita income exceeds the state and national benchmarks with educational attainment levels above the national averages.
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
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=877614
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