NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following actions on Port St. Lucie, Florida's (the city) general obligation (GO) bonds:
-- Approximately $82 million outstanding GO bonds affirmed at 'AA-'.
The Rating Outlook is Negative.
SECURITY
The GO bonds are general obligations of the city backed by a pledge of the city's full faith and credit and ad valorem taxing authority without limit as to rate or amount.
KEY RATING DRIVERS
CONTINUED BUDGETARY PRESSURE: The Negative Outlook continues to reflect Fitch's view that budgetary stress resulting from general fund support of several bond series carrying a city backup pledge may reduce budgetary flexibility beyond a level consistent with the current rating. A recent, one-time restructuring of one series carrying the city's covenant to budget and appropriate (CB&A), issued for a failed digital production studio, has lessened the immediate burden on the general fund although a structural imbalance is expected to persist over the near- to mid-term.
REALISTIC PLANS FOR MANAGING IMBALANCE: The city's current multi-year general fund projections through fiscal 2018 show manageable drawdowns for debt service payments on CB&A bonds now relying on the backup general fund support and reserves remaining just above the city's 15% policy level. Fitch believes that the city's projections appear conservative, given options for reducing or eliminating the city's CB&A obligation, although execution risk remains.
ECONOMIC IMPROVEMENT EVIDENT: Increased construction permit activity and an improving housing market led the city's assessed value (AV) to resume growth in fiscal 2014 and 2015 following several years of dramatic declines. Ongoing expansion in the city's biotechnology corridor continues to support strong improvement in the city's employment statistics.
HIGH DEBT BURDEN: City debt levels should remain high as amortization is slightly below average and additional issuance is planned. Carrying costs related to debt service are an exceptionally high proportion of the city's overall budget. The city has extensively utilized special assessment debt with a secondary CB&A pledge over the past two decades, exposing the city to a potentially large contingent liability.
RATING SENSITIVITIES
CONTINUED EFFORT TOWARDS ACHIEVING STRUCTURAL BALANCE: The city has demonstrated some progress towards achieving budgetary balance and current near- to mid-term general fund projections are improved compared to previous forecasts. Continued effort toward financial stability may result in an Outlook Revision to Stable.
LARGER THAN EXPECTED DRAWDOWNS: Fund balance draws beyond what is currently forecast, either to manage CB&A exposure or for other unexpected needs, could put negative pressure on the rating.
CREDIT PROFILE
Port St. Lucie is located in southeast Florida along the Atlantic coast and encompasses about 116 square miles. The city saw very strong growth in the mid-2000s, and the 2013 population of 171,016 represents growth of over 90% compared to 2000.
DEBT RESTRUCTURING EASES SOME PRESSURE
The city has historically produced steady financial results leading to very high reserves, which sustained them through the recession. The city concluded fiscal 2013 with a surplus of $4.8 million and unrestricted fund balance of $23.4 million, a very high 35.6% of general fund spending.
The city's practice of extending contingent credit support to various bond issues, in some cases for economic development, has led to sizable current and projected draws for four such series for which the originally intended sources of debt service have fallen short.
Fitch's concern lies with the city's financial forecast which projects notable fund balance draws for CB&A debt originally intended to be paid from other sources. These pressures have created a structural imbalance in the general fund that is expected to persist through fiscal 2018. Fitch believes that a restructuring of one obligation, potential avenues of resolution for other obligations, general improvement in the city's revenue environment, and currently robust reserve levels support the city's ability to keep the imbalance manageable through fiscal 2018, although execution risk remains.
A large part of the city's debt service is either lease revenue or related to various special assessment districts with a city CB&A back-up pledge from non-ad valorem (NAV) revenue. Most of the latter remains self-supporting, save for four issues that have required general fund appropriations. In particular, the bankruptcy of a digital production studio whose lease payments supported 2010 lease revenue bonds led to an additional $3.5 million in annual debt service burden on the city's general fund beginning in fiscal 2012. The city recently sold its public service tax (PST) revenue bonds, series 2014 (not rated by Fitch) to refund the 2010 lease revenue bonds. The final maturity is extended by 10 years, reducing the annual debt service payments from the general fund by $2 million, to $1.5 million annually. The 2014 PST bonds feature an extraordinary call component to redeem a portion of principal should the city find a buyer for the studio property.
DEBT SERVICE APPROPRIATIONS EXPECTED TO INCREASE
The city expects the general fund to begin supporting a portion of the debt service on the city's community redevelopment agency (CRA) redevelopment trust fund revenue bonds, series 2006 next year. The cost to the general fund will increase from $400,000 in fiscal 2016 to $2 million in fiscal 2017, reflecting prior declines in AV within the CRA and the spend-down of prior accumulated CRA fund balance. The city has no legal obligation to pay the debt service on the CRA bonds; however the city has chosen to cover the debt because the city council serves as the CRA board and the facilities within the CRA benefit the city.
Debt related to the City Center Special Assessment District continues to require annual debt service payments of about $1.7 million. A change of ownership has not had a material impact on the city's obligation to appropriate, as the new owner continues a three year trend of failing to pay special assessments to the city. The surrounding Port Lucie County has struggled to find bidders for the city's delinquent tax certificates related to this property given the multiple years of unpaid taxes. The city's current general fund projections show the city continuing to make full debt service payments with no benefit from tax certificate sales.
LIMITED REMAINING FINANCIAL FLEXIBILITY
Fitch believes that expenditure flexibility remains tight for the city, as the city has reduced its pre-recession workforce by over 20% and management does not intend to cut city services any further. The city retains some revenue flexibility, as its fiscal 2014 property tax rate of 4.41-mills is well below the 10-mill cap; however, city management expects tax base growth to enhance revenue and wishes to maintain the current tax rate over the next several years, which creates a practical limitation.
SOUND RESERVE POSITION PROVIDES CUSHION
The city currently estimates a $3.8 million deficit for the fiscal year ending Sept. 30, 2014. If the deficit were to materialize in this amount, unrestricted general fund balance would be reduced to $19.6 million, a still solid 28.5% of fiscal 2014 general fund spending.
The restructuring of the 2010 lease revenue bonds has improved the city's near-term financial prospects. Pre-restructuring, the city budgeted for a $4.4 million deficit in fiscal 2015 and projected deficit spending through fiscal 2019 with unrestricted reserves reduced to $3.8 million, a very low 5% of spending. Post-restructuring, the city's fiscal 2015 budget deficit is reduced to $2.3 million and the city projects deficit spending through fiscal 2018 with unrestricted reserves reduced to $10.8 million, an adequate 15% of general fund spending.
RECENT ECONOMIC IMPROVEMENT
A serious weakening in the housing sector during the recession negatively affected the city's tax base. Following strong growth in prior years, taxable values fell by 50% between fiscals 2008 and 2014. AV resumed growth in fiscal 2014 and posted a solid 5.3% gain from fiscal 2014 to fiscal 2015. The city is projecting continued growth of about 4% annually based on increased construction activity and improved home prices.
The city has been attracting health and bio-tech firms, creating the potential for a more robust local economy and continues to benefit from this growth. City employment continues to grow at a rate much faster than the city's labor force. This trend has led to a reduction in the unemployment rate from 8.9% in June 2013 to 6.6% in June 2014, a rate just slightly higher than the national average but well below the rate of the surrounding county. City wealth levels are below the national average, although the poverty rate is lower than the national average.
DEBT LEVELS ARE HIGH; INCLUDE SPECIAL ASSESSMENT DEBT
City debt levels ($3,852 per capita and 7.2% of market value) are high. Fiscal 2013 debt service was an extremely high 36.6% of governmental expenditures. The city issued extensively during the past decade to accommodate its rapid population growth. About 54% of the city's direct debt consists of bonds secondarily backed by the city's CB&A pledge. Principal amortization is average with about 46.5% repaid within 10 years.
The city's capital improvement plan includes the construction of $150 million bridge for the Crosstown Parkway project, which the city plans to fund with a combination of bonds and grants. Previously authorized GO issuance related to the project is not expected to have a material impact on the city's already high debt levels. The remainder of the city's capital improvement plan is manageable.
The city provides pension benefits to its retired employees through three defined contribution plans and one single-employer defined benefit plan for police. The funding ratio of the defined benefit plan is an estimated 66.8% under Fitch's more conservative 7% discount rate assumptions. However, the unfunded actuarial accrued liability (UAAL) of $18.1 million is considered very small. Retired employees also receive other post-employment benefits (OPEB) from the city. OPEB is provided on a pay-go basis and the unfunded OPEB liability was a low 0.1% of market value at fiscal yearend 2013. Total combined spending related to OPEB and pensions costs is a low 3.5% of total governmental spending.
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, and Zillow.
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=880095
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