Fitch Rates Osceola County, FL's Sales Tax Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA-' rating to the following Osceola County, Florida (the county) sales tax revenue bonds:

--$61.0 million sales tax revenue bonds series 2015.

The bonds are scheduled for sale on a negotiated basis on Feb. 11. Proceeds will be used to finance the construction and equipment of the Florida Advanced Manufacturing Research Center.

In addition, Fitch affirms the ratings on the following bonds:

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

--$80.7 million sales tax revenue bonds at 'AA-';

--$122.3 outstanding million capital improvement revenue bonds at 'AA-';

--$84.3 million infrastructure sales surtax (ISS) revenue bonds at 'AA-';

--$12.2 million taxable tourist development tax (5th cent) revenue bonds series 2012 (Rida Conference Center Phase One Project) at 'A-'.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are secured by the county's portion of the local government half-cent sales tax levied by the state (sales tax).

The capital improvement revenue bonds are secured by a combination of the communications services tax (CST) and the public service tax (PST) levied by the county.

The ISS bonds are secured by the county's share of a voter-approved one-cent sales tax dedicated to infrastructure purposes levied by the county.

The taxable tourist development tax bonds (TDT Bonds) are secured by the fifth cent tourist development tax (5th cent TDT) levied by the county. The bonds are further secured by special assessments imposed upon hotel properties located adjacent to the expanded conference center and a cash-funded debt service reserve fund (DSRF).

KEY RATING DRIVERS

ELEVATED RESERVES OFFSET REVENUE VOLATILITY: The county has been proactive in adjusting revenues and expenditures in order to maintain above average reserve levels, mitigating the risk of potentially large cyclical fluctuations in county revenues.

STRENGTHENING ECONOMIC RECOVERY: The tourist-based area economy, hard hit by the recession, is expanding rapidly as indicated by sustained gains in employment and housing prices.

MODERATE LONG-TERM LIABILITIES: Debt levels are moderate and expected to remain so given manageable capital needs. Pension and other post-employment obligations are affordable.

IMPLIED ULTGO RATING CAP: The ULTGO rating serves as the cap for the county's special tax bond ratings.

ACCELERATING SALES TAX GROWTH/GOOD COVERAGE: Following a precipitous decline in fiscal 2009, sales tax collections have been rebounding at an accelerating pace. Coverage of pro forma debt service, while reduced, remains solid.

WIDE ISS BOND COVERAGE: ISS revenues for fiscal 2014 cover ISS bond maximum annual debt service (MADS) by an ample 2.4x.

RECENT GROWTH OF CST AND PST: Pledged CST and PST revenues have both grown over the past two fiscal years pushing coverage of capital improvement bond MADS to nearly 1.9x.

TDT VOLATILITY: The 'A-' rating for the TDT bonds incorporates TDT volatility combined with a weak 1.2x MADS additional bonds test, despite stronger projected debt service coverage due to the canceling of a TDT-financed project.

RATING SENSITIVITIES

FINANCIAL POSITION: Significant reduction in the county's reserve balances or liquidity levels could pressure the rating. Upward movement in the rating due to financial performance is unlikely given the economic fundamentals dependent on tourism.

REVENUE BOND COVERAGE: A substantial fall-off in one or more pledged revenues or additional leveraging leading to narrowed coverage of revenue bonds could result in negative rating action. Improved coverage by itself would have no impact on the sales tax, CIR, or ISS bonds as they are already at the GO cap.

ULTGO RATING CHANGE: A positive change in the ULTGO rating or Outlook could result in a change in special tax bond ratings except for the TDT bond rating. A negative change would cause a corresponding decline in the sales tax, CIR, or ISS bond ratings.

CREDIT PROFILE

Osceola County is located in central Florida, roughly 14 miles south of Orlando and adjacent to Disney World. The county is the sixth largest in the state by land area, covering 1,506 square miles.

TOURISM DRIVES ECONOMIC RECOVERY

Proximity to Disney World, Universal Studios and other local attractions fosters the county's tourist and service-based economy. Within the county are numerous hotels and resorts providing more affordable lodging than in neighboring Orange County for theme park guests. Leading employers include the county school district, Disney World (a small portion of which is within the county), Wal-Mart and the Osceola County government.

Local economic activity was hit hard by the recession with the county's employment base declining by 8% over 2009 and 2010 while the unemployment rate topped 12%. Beginning in 2011, a burgeoning tourist sector has been driving the area's economic recovery as demonstrated by TDT collections, which increased by over 32% between fiscals 2010 and 2014 after falling 16% between fiscals 2008 and 2010.

Employment levels within the county have increased steadily since 2010 with annual growth averaging over 3.9%. This expansion has continued well into 2014. County employment for September 2014 shows a very healthy year over year increase of 5.3% on a gain of more than 7,000 jobs. Consequently, unemployment rates have dipped from 12.4% during 2010 to 6.3% as of September, 2014, slightly above state and national rates.

The housing market continues to improve with November 2014 home prices up 15.6% year over year according to Zillow.com. The housing uplift has boosted the tax base by about 10% over fiscals 2014 and 2015, following a decrease of nearly 40% between fiscals 2009 and 2013. Fitch expects upward momentum to be maintained in the near term as housing valuations continue to rise.

PRUDENT FINANCIAL MANAGEMENT

Finances are well managed, with high levels of reserves and robust liquidity. Despite two consecutive years of drawdowns, fiscal 2013 unrestricted general fund balance totaled $74 million or an elevated 37.2% of general fund expenditures and transfers out. The county's policy is to maintain budgeted reserves in a range of 20% to 25% of revenues, including a stabilization fund currently funded at $3.3 million.

Management also maintains sizable cash balances in keeping with its policy of unrestricted cash equal to at least two months of spending. Given the inherent volatility of the local economy, Fitch regards the county's reserve practices to be prudent.

CONSERVATIVE BUDGETING

The county reported a modest $1 million net deficit for fiscal 2013, a significant improvement over the revised budgeted drawdown of $12 million. The county typically budgets very conservatively. Total expenditures were $18.5 million or 9.7% below budget due primarily to cost reduction measures although operating expenditures were 4.2% above fiscal 2012 spending.

An $11.7 million deficit was budgeted for fiscal 2014. Revenues were bolstered by an increase in property taxes emanating from the substantial bump in taxable values. The higher revenues partially offset increased retirement contributions, a cost of living adjustment (COLA) and hiring of additional staff. Officials project a $5.8 million surplus enlarging unrestricted fund balance by $4 million (5.7% of the balance).

The fiscal 2015 general fund budget includes a 2.5% COLA for all employees and provides for 10 additional full-time positions. The fiscal 2015 budgeted drawdown is $24 million Fitch expects actual results to be considerably better.

MANAGEABLE LONG-TERM OBLIGATIONS

The debt burden is moderate at 4.2% of MV and is expected to remain manageable given limited bonding plans of the county. Principal amortization is average at 45% within ten years. Capital needs primarily involve transportation projects funded either through toll revenues for the county's toll road projects or with residual ISS revenues on a pay-go basis.

All employees of the county participate in the well-funded Florida Retirement System (FRS). Retired county employees are eligible to participate in the county's medical/prescription, dental and life insurance plans at their own cost, although the county provides a subsidy on a pay-go basis to retired employees of the sheriff's office. Total fiscal 2013 carrying costs of the county's long term liabilities including debt, pensions and OPEB contributions are moderate at 15% of fiscal 2013 governmental spending.

SALES TAX BOND COVERAGE REMAINS SATISFACTORY DESPITE REDUCTION

Sales tax revenues have demonstrated substantial and sustained growth after experiencing a sizable 10.6% decline in fiscal 2009. Since then, collections have increased an aggregate 22%. Fiscal 2014 unaudited sales tax receipts showed the largest annual increase during this period of 7.1%, indicative of an accelerating trend.

The new issue enlarges annual debt service by almost 50%. Maximum annual debt service (MADS) coverage including the new issue based on fiscal 2014 receipts is adequate at 1.54x, down from over 2.0x in fiscal 2012 (based on debt outstanding at that time). Pledged revenues would have to drop by 35% in order to reach 1.0x coverage, about three times the sales tax decline during the past recession. Fitch considers the 1.35x ABT to be weak.

STRONG ISS REVENUE BOND DEBT SERVICE COVERAGE

Infrastructure sales surtaxes received by the county have exhibited five consecutive years of growth since a large decline in fiscal 2008. More recently, the pace of growth has accelerated with annual increases of 5.7% and 8.6% in fiscals 2013 and 2014, respectively. Coverage of MADS based on fiscal 2014 receipts is strong at 2.4x. The ISS expires in September 2025 while final maturity of the bonds is scheduled for October 2024.

Legal provisions are lenient including a 1.3x MADS ABT. A surety fulfills the DSRF requirement for the outstanding series 2007 bonds, however, no provision for a DSRF was made for the series 2011 ISS bonds.

CAPITAL IMPROVEMENT REVENUE BOND COVERAGE

Both CST and PST revenues posted gains in fiscals 2013 and 2014, increasing revenue pledged to the capital improvement bonds by 10%. About two thirds of the growth is attributable to increased electric PST revenues. MADS coverage remains healthy at 1.85x.

A cash-funded DSRF buttresses security although the 1.35x MADS is weak. The need for pledged revenues for general operations serves as something of a restraint against excessive issuance.

TDT BOND RATING INCORPORATES TDT VOLATILITY AND LOW ABT

TDT collections fell by 16.2% between fiscals 2008 and 2010 as the recession severely hampered tourist activity. Collections since have rebounded with fiscals 2013 and 2014 collections growing by a robust 10% and 8%, respectively. In addition to increased collections, projected debt service coverage has widened considerably due to significant downsizing of the convention center expansion project. Last year, one of the two participants in the project pulled out, which reduced the county's commitment from $120 million to $40 million.

Planned issuance now consists of $21.5 million, down from over $80 million, in 2015. No other debt is currently planned. Projected coverage of MADS on the series 2012 and estimated debt service on the 2015 bonds based on fiscal 2014 TDT collections is approximately 3.0x. Pledged special assessments only marginally raise coverage and are only levied currently on one property, minimizing the credit Fitch affords them in its rating. Despite the improved coverage prospects, a very weak 1.2x MADS ABT and the possibility of extensive leveraging in the future constrain upwards rating migration.

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=968915

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1 212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rupali Mahida
Analyst
+1 212-908-0770
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1 212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rupali Mahida
Analyst
+1 212-908-0770
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com