Fitch Rates Winter Haven FL's Non-Ad Valorem Revenue Rfdg Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a rating of 'A+' to the following bonds to be issued by Winter Haven, Florida (the city).

--$13 million non-ad valorem refunding revenue bonds, series 2015A.

The bond proceeds will be used to refund a portion of the city's public improvement bonds, series 2007, for debt service savings without extending final maturity. The bonds are expected to sell via competitive sale on January 29.

In addition, Fitch affirms the following ratings:

--$19.9 million public improvement bonds, series 2007 at 'AA-';

--Implied unlimited tax general obligation bonds (ULTGO) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The non-ad valorem revenue bonds are payable by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem revenues sufficient to pay debt service. The availability of non-ad valorem revenue is subject to the prior payment of essential governmental expenditures and bonds with a prior claim on non-ad valorem revenues.

The public improvement bonds are payable from a first-lien pledge of the city's communication services tax (CST) revenues, public services tax (PST) revenues and guaranteed entitlement revenues.

KEY RATING DRIVERS

COVENANT DEBT NOTCHING: The rating on the non-ad valorem bonds is linked to the general credit quality of Winter Haven, FL, as reflected in its implied ULTGO rating. A one-notch distinction in the rating on the non-ad valorem bonds from the implied ULTGO reflects the limited source of bond repayment from certain legally available non-ad valorem revenues subject to the CB&A, and the inability to compel the city to generate non-ad valorem revenues sufficient to pay bondholders.

STRONG COVERAGE FOR PUBLIC IMPROVEMENT BONDS: CST, PST and guaranteed entitlement revenues pledged for the public improvement bonds remain strong, with an estimated coverage of roughly 5.6x on maximum annual debt service (MADS) following the current refunding.

STABLE FINANCES, HIGH TRANSFER DEPENDENCE: The 'AA-' implied ULTGO rating considers the city's solid reserve position and relatively stable operating results. The city's recent financial performance has depended on increased utility transfers to help offset declines in tax revenue and higher pension costs.

WEAK PENSION FUNDING: Pension funded ratios remain weak and previously rapid growth in contributions appears to be slowing. The city has absorbed increases to date but has made few reforms to improve pension sustainability over time. The rating and Stable Outlook assume that management will take action to address this issue and continue to fully fund its pension obligation going forward.

MANAGEABLE DEBT PROFILE: Debt metrics are manageable and capital needs are not expected to pressure the current debt profile.

PRIMARILY RESIDENTIAL LOCAL ECONOMY: The city's economy remains limited and primarily residential, although recent developments provide some optimism for additional expansion. The city's tax base has begun to stabilize but remains well below pre-recession levels. Income metrics are below both the state and national averages.

RATING SENSITIVITIES

FINANCIAL STABILITY: The implied ULTGO and non-ad valorem revenue bond ratings are sensitive to changes in the city's overall financial health, including its ability to proactively manage risks associated with funding retiree obligations.

PUBLIC IMPROVEMENT BONDS COVERAGE: Material changes in collection of the pledged revenues for the public improvement bonds and/or additional leveraging could result in coverage inconsistent with the current rating.

CREDIT PROFILE

The city of Winter Haven is located in Polk County, approximately 50 miles east of Tampa and 50 miles southwest of Orlando. The city has an estimated 2013 population of 35,531, covers over 25 square miles, and has been expanding in recent years through annexation.

SOLID RESERVE POSITION

Fiscal 2013 ended with a modest general fund deficit, after transfers, of $407,116 or 1.2% of spending. Nonetheless, the fiscal 2013 unrestricted general fund balance was $7.7 million or an ample 22.3% of expenditures, above the city's internal reserve policy of 17%. Preliminary projections for fiscal 2014 indicate that the city will have a deficit of roughly $260,000, below the budgeted use of fund balance of $1 million. The resultant unrestricted fund balance would approximate $7.4 million or 20% of spending. The fiscal 2015 budget is balanced without the use of reserves. Management reports revenues and expenditures are on track relative to the budget through the first few months of the fiscal year.

INCREASED DEPENDENCE ON UTILITY TRANSFERS

The fiscal 2015 budget includes $8.8 million in utility transfers from the water and wastewater utility (bonds rated 'AA', Stable Outlook by Fitch) and the solid waste utility. Utility transfers account for roughly 25% of budgeted general fund revenue. Transfers from these funds have historically accounted for approximately 12-17% of general fund revenues but were increased beginning in fiscal 2012 to offset declines in taxable value and property tax revenues in lieu of a tax rate increase, enabling the city to absorb rapidly rising pension contributions.

City management believes that the current transfers are at the maximum that the utility funds can support and hope to reduce transfers in the next few years based on expectations for continued tax base growth. The city's tax base increased 4.3% in fiscal 2014 and 4.9% in fiscal 2015. The city is also considering alternative revenue sources including a fire assessment fee to augment its revenue base. The city retains considerable tax rate flexibility, although it has not tapped this source of revenue to date.

WEAK PENSION FUNDING AND HIGH CARRYING COSTS

The city administers three defined benefit single-employer pension plans for general administrative workers, police, and fire fighters. Funding levels for all three plans are weak, at 57%, 73%, and 60%, respectively, using a Fitch-adjusted 7% investment rate of return. On a combined basis the Fitch-adjusted pension funded ratio of 61.3% translates to an unfunded actuarial accrued liability (UAAL) of $40.9 million or a moderately high 2.1% of market value.

Annual required contributions rose rapidly in the years following the last recession, although growth in the ARC appears to have slowed and the city has fully absorbed rising contributions to date.

The city has hired a consultant to advise them on reforms to all three pension plans, but any benefit reforms will have to be negotiated with the city's labor unions. Reforms may be targeted towards new hires resulting in only a modest impact on near-term funding levels and contributions, but may contribute to a more sustainable pension position over time.

In contrast to pensions, debt levels are fairly low at $1,626 per capita and 2.7% of market value and amortization is slightly above average with 60% of principal retired within 10 years. The city plans to issue new debt later this year to help fund park improvements but it is not expected to materially increase debt levels. Other post-employment benefits (OPEB) are provided on a paygo basis and the UAAL represents 1.6% of full market value. Total carrying costs for debt service, pension, and OPEB are high at 26% of general government spending.

UNCERTAIN OUTCOME TO LANDINGS LITIGATION

The city is facing litigation tied to a development project in which the city agreed to sell property to a developer, the Landings Partners LLC, for a mixed-use project. The city terminated the land sale citing a breach of contract by the developer and the developer has since filed a lawsuit against the city. The developer is seeking damages of as much as $31 million. The city believes the damages claim is excessive, and has stated it would satisfy a judgment, if any, from any one or a combination of reserves, operating resources, or additional indebtedness. A timeframe for resolution of the litigation is unknown. Fitch will closely monitor the legal proceedings given the magnitude of the damages claim.

LIMITED ECONOMY

The city is mainly residential in nature without good proximity to broader employment markets. The city's unemployment rate proved more volatile than both the nation and the state during the recession and its October 2014 rate of 7% remains above both the state (5.8%) and nation (5.5%). Per capita money income and median household income are below the national average at 79% and 71%, respectively.

The city's tax base of $1.5 billion in fiscal 2014 is down roughly 27% from its peak level in fiscal 2009, although it has shown signs of stabilization, increasing 4.3% in fiscal 2014 and 4.9% in fiscal 2015. A CSX Transportation, Inc. railroad terminal has recently been completed and the city expects that this project will have a significant impact on both the tax base and the local economy. Commercial activity in the area has already begun to pick up with a 407,000 square foot warehouse that broke ground in 2014. Legoland opened just outside of the city in October 2011 and added 1,000 new jobs; the park is currently the world's largest Legoland and a Legoland hotel is expected to open in 2015.

AMPLE NON-AD VALOREM RESOURCES AVAILABLE FOR BOND REPAYMENT

Non-ad valorem revenues available after the payment of essential governmental services and bonds with a prior claim on non-ad valorem revenue was estimated by Fitch at $6 million in fiscal 2013 compared to $1.1 million MADS on the proposed issuance. The anti-dilution test is satisfactory, requiring that the total amount of non-ad valorem revenue from the prior fiscal year be at least 2x MADS.

AMPLE COVERAGE FOR PUBLIC IMPROVEMENT BONDS

The PST, imposed on the sale of electric, water and gas services in the city alone has provided 1.5x or better coverage of MADS on public improvement bonds since 2005. The CST, which is imposed on a broad base of telecommunication and cable services, and the guaranteed entitlement revenue, which represents a fixed amount received from the state revenue sharing trust fund, further increase coverage.

For fiscal 2013 MADS coverage was ample at 3.6x. The coverage level is projected to increase significantly following the current refunding as MADS will be markedly lower. The additional bonds test imposes a relatively lenient 1.35x coverage of MADS threshold; however, there are no plans to issue additional parity debt and residual revenues comprise an important resource for general governmental spending, creating a practical impediment to over leveraging.

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, Underwriter, Bond Counsel, Underwriter Counsel, and Trustee.

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=965775

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Contacts

Fitch Ratings
Primary Analyst:
Andrew Hoffman, +1-212-908-0527
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Andrew Hoffman, +1-212-908-0527
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com