NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'AA-' rating on the following Gainesville, Florida (the city) bonds:
--$14.5 million capital improvement revenue bonds series 2014.
The bonds will be sold competitively on December 3rd. Proceeds will be used to fund various capital projects within the city, including a new fire station.
Fitch also affirms the 'AA-' ratings on the following non-ad valorem bonds:
--$18.5 million capital improvement revenue bonds series 2005 and 2010;
--$79.2 million pension obligation bonds series 2003A and 2003B.
The Rating Outlook is Stable.
SECURITY
All bonds are payable by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, from non-ad valorem revenues amounts sufficient to pay debt service. The covenant is cumulative, and shall continue until all required payments shall have been budgeted, appropriated, and actually paid. The bonds do not have a debt service reserve account.
KEY RATING DRIVERS
COVENANT DEBT NOTCHING: A one-notch distinction in the rating on the revenue bonds from the implied ULTGO reflects the absence of a pledge of specific revenue and inability to compel the city to generate non-ad valorem revenue sufficient to pay bondholders.
DIVERSE, STABLE ECONOMY: The city's economy is anchored by the University of Florida, supplemented by a strong presence of health care and local government. Historically low income metrics are partly driven by the large student population and unemployment trends lower than state and national averages.
SOLID FINANCIAL PERFORMANCE: General fund reserve levels are historically sufficient and operations balanced, aided by the reliance on a significant transfer from the utility system. A modest dip in transfer payments beginning in fiscal 2015 is not expected to have a material effect on finances.
MANAGEABLE DEBT AND LONG-TERM LIABILITIES: Overall debt is moderate and capital needs are manageable. Management's recent restructuring of the city's pension plans is viewed favorably as it will reduce the fixed-cost burden over the long-term. The city's OPEB plan is well-funded.
RATING SENSITIVITIES
PRESSURED OPERATIONS: The Stable Outlook reflects Fitch's expectation that the city will manage certain budgetary pressures driven by flat revenue forecasts in the near-term and continue to produce balanced operations.
CREDIT PROFILE
The city is located in north central Florida and encompasses approximately 63 square miles of land. With an estimated population of 127,500, the city is the most populous city in Alachua County and serves as the county seat. Population growth has been robust, averaging about 2.7% annually over the past decade.
DIVERSE, STABLE ECONOMY ANCHORED BY UNIVERSITY
Gainesville is the home to the main campus of the University of Florida (the university or UF), the flagship institution in the state's public university system. UF enrollment exceeds 50,000 and the university remains the largest employer in the county with more than 14,700 employees. Through its medical facilities and focus on research, the university stimulates and attracts private investment and grants and is a source of quality labor for current and prospective employers.
The regional economy is dominated by the government, educational, and health services sectors. The largest healthcare enterprises are Shands Hospital (12,588 employees) and the Veterans Affairs Medical Center (4,317 employees). Shands is affiliated with UF and includes two major teaching hospitals, Shands Children's Hospital and Shands Cancer Hospital.
The city has a history of low unemployment relative to the state and nation. Consistent labor force and employment growth have brought the city's unemployment rate down from a high of 7.8% in 2010 to 5.6% in 2013. The August 2014 unemployment rate of 5.9% was slightly above last year's rate as labor force growth outstripped employment gains. Rates remain below the state and national averages of 6.7% and 6.3%, respectively. Wealth levels are well below average given the city's large student population while educational attainment levels, as to be expected in a university-oriented community, substantially exceed the national profile.
TAX BASE GROWTH AND LOW TAX RATES
City taxable assessed value (TAV) jumped by 9.1% in fiscal 2015 following a negligible increase in fiscal 2014 and three consecutive years of declines. Nearly three quarters of the $474 million increase in TAV is attributable to the addition to the tax rolls of a new 100 megawatt biomass electric generating plant. The city reduced the fiscal 2015 tax rate slightly but is budgeting a nearly $2 million or 8% increase in property tax revenues for fiscal 2015.
The TAV declines between fiscals 2010 and 2013 totaling 12.7% were offset by increases in the millage rate in fiscals 2013 and 2014. The city's current rate of $4.5079 per $1,000 TAV remains well below the statutory cap of $10.00 per $1,000 TAV, providing the city with some revenue raising flexibility. Officials anticipate additional growth in TAV over the next three or four years ranging from 3.6% to over 5% annually. The biomass plant moderately concentrates the formerly diverse tax base. The city estimates that the plant will represent about 5.8% of fiscal 2015 TAV.
SOLID FUND BALANCE POSITION
The city's financial profile is characterized by diverse non-ad-valorem revenues, tight expenditure controls, and solid reserves. Fiscal 2013 ended the year with a slight draw on fund balance of $547,000 after transfers and $14.2 million in unrestricted reserves, or 13.6% of spending. Unrestricted reserves are down from a peak of 17.9% in fiscal 2011 that preceded a $3.3 million draw for non-recurring capital projects in fiscal 2012.
Fiscal 2014 un-audited results show a $1.7 million general fund surplus. While revenues were on par with budget, expenditures were $3.5 million below budget with most of the savings driven by a hiring freeze implemented in November of 2013. The positive outcome is estimated to push up unassigned fund balance from $13.4 million in fiscal 2013 to $15.3 million or nearly 15% of spending.
To further strengthen fiscal discipline, management recently revised the city's fund balance policy of unrestricted reserves to spending from 8.3% to 10%. The revised policy went into effect for the fiscal 2015 year although the city has historically maintained reserves above the new standard. The fiscal 2015 budget proposes a small drawdown of under $1 million due to a decrease in utility transfers.
SIGNIFICANT NON-AD VALOREM REVENUE BASE
Non-ad valorem revenues make up approximately 80% of general fund sources for the city and include utility and communications taxes, intergovernmental, charges for services, and a sizable transfer from the utility system. Including unaudited fiscal 2014 estimates, non-ad valorem revenues are up by over $3 million 3.6% year over year due in part to higher interest earnings. Non-ad valorem revenues have grown 19% from fiscals 2007-2014 to $89.3 million and are more than sufficient to cover maximum annual debt service of $14.7 million for non-ad valorem bonds that are payable from these revenues.
UTILITY TRANSFER DEPENDENCE
The transfer from the city-owned and -operated Gainesville Regional Utilities (GRU), an electric, natural gas, water, wastewater, and telecommunications enterprise system (revenue bonds rated 'AA-' with a Stable Outlook by Fitch) traditionally accounts for roughly one-third of general fund sources. The transfers allow the city to collect some revenue indirectly from tax-exempt properties (over one-half of the city's property is tax-exempt) and provides the city a diverse revenue base.
The transfer amount was historically based on a formula that attempted to capture what the city would receive if the utility were privately owned plus a variable component based on consumption and operating results. This formula was altered for fiscals 2011-2014 to a fixed dollar amount to hedge against weakened profitability. Utility transfers totaled $36.7 million and $37.7 million in fiscals 2013 and 2014, respectively, or about 35% of general fund sources.
Effective fiscal 2015 - 2019, a new transfer formula resets the base transfer to a lower level and grows that base by 1.5% per year, net a deduction of property tax revenues from the biomass facility. Management plans to receive a transfer of $35.1 million in fiscal 2015 based on the new transfer formula, a 6.9% decline from the previous year, thus reducing a significant source of revenue for the city's general fund.
EXPENDITURE CONTROLS IMPLEMENTED TO BALANCE OPERATIONS
The city has prudently implemented expenditure side controls in response to current and anticipated revenue pressures. In addition to the initiation of a hiring freeze, management has also instituted operating cuts, including nine unfilled positions, and trimmed the size of this bond issue by about $7 million. These measures reduced the fiscal 2015 $3.3 million forecasted budget gap to less than $1 million. Given the city's historically conservative budgeting and expenditure side controls, Fitch expects actual fiscal 2015 results to outperform the budget.
SUCCESSFUL NEGOTIATION OF PENSION REFORM
Further evidence of management's proactive approach to cost controls going forward is the recently negotiated pension fund reforms with the city's seven public employee unions. The city sponsors and administers two single-employer defined retirement plans and a single-employer disability plan, whose contributions costs were consuming a growing portion of general fund spending with the total annual required contribution tripling from 2008-2013. Modifications affect both new and existing employees and include changes to the normal retirement period, reduced cost of living increases, and maximum over-time limits, with aggregate present value savings for all three plans estimated at $238 million over the next 30 years. As of Sept. 30, 2013, the funded ratio of the three plans is a satisfactory 72.6%, but a lower 62.3% when adjusted for Fitch's more conservative 7.0% investment return assumption, with a total unfunded liability of $175.0 million.
MODERATE DEBT AND OTHER LONG-TERM LIABILITIES
Overall debt is low at $1,821 per capita and 1.8% of market value. Fiscal 2013 debt service equaled 11.9% of spending and amortization is average with 49.0% of debt retired in 10 years. Debt service, including this issue, declines in fiscal 2015 as the city's series 2005 OPEB bonds have recently matured. Due to the issuance of the OPEB bonds, the city's OPEB plan is nearly 88% funded; an exceptionally high level of funding compared with most local governments. Capital needs are manageable with no further borrowing plans over the next five years.
Fiscal 2013 carrying costs, including debt service, pension actuarially required contribution, and OPEB actual contribution totaled a moderately high 25% of governmental spending but is expected to remain manageable going forward.
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, and the 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=926015
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