NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following West Palm Beach, Florida (the city) ratings:
--$8.2 million outstanding general obligation (GO) bonds, series 2005 at 'AA+';
--$43 million outstanding special obligation (CB&A) revenue bonds, series 2006 at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are supported by the full faith, credit and taxing power of the city.
The special obligation bonds are backed by a covenant to budget and appropriate (CB&A), by amendment if necessary, legally available non-ad valorem (NAV) revenues in an amount sufficient to meet debt service payments.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Finances are highlighted by continuing structural balance, conservative budgeting and ample reserve levels despite recent financial constraints.
SUSTAINED ECONOMIC RECOVERY: The city's local economy is experiencing a solid recovery as demonstrated by four years of rising employment, a rising housing market, and resumption of taxable value growth.
MODERATE DEBT LOAD: Debt levels are manageable although amortization rates are somewhat below average. The city's debt profile is not expected to change in the near term as debt plans are modest with few significant capital needs.
RETIREMENT COSTS MANAGEABLE: Pension funding for the city's three pension plans has improved recently although funding for one plan remains weak. The city prepaid the unfunded actuarial accrued liability (UAAL) of its closed general employees' pension plan in fiscal 2013 which should reduce future costs.
ONE-NOTCH RATING DIFFERENCE: The one-notch rating difference from the GO rating is attributable to the contractual nature of the obligation, the ability of the city to dilute coverage by issuing debt specifically secured by certain NAV revenues and the lack of a requirement to raise revenues to cover debt service.
RATING SENSITIVITIES
STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices and maintenance of ample reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
West Palm Beach is located along the Intracoastal Waterway in Palm Beach County (GO rated 'AAA'; Stable Outlook by Fitch). Serving as the county seat, the city is the government and commercial center for the county and surrounding areas.
SOLID FINANCES DESPITE REVENUE PRESSURES
Management has maintained a strong financial position since at least fiscal 2008 despite substantial recession-driven revenue losses. The city's response to the revenue downturn included cost-cutting measures such as personnel reductions, decreased capital spending, and service cutbacks reducing general fund operating expenditures by $11 million or over 8.1% between fiscals 2008 and 2011. As a result of the lower cost base, the city was able to reverse three years of deficits by reporting modest operating surpluses for fiscals 2011 and 2012.
TAX INCREASE HELPS PLUG FISCAL 2013 BUDGET GAP
The city initially faced a $6.2 million funding gap for fiscal 2013 due to a further contraction in taxable values combined with a $4.5 million increase in expenditures. The spending boost incorporated 2% to 3% step increases for police and fire personnel and higher pension costs.
Actions taken by management to reduce the gap included implementation of new fees, better collection of existing fees and an increase in the tax levy. The tax rate was raised by 3.3% to equal the rolled-back rate of 8.35 mills, generating an additional $2.1 million. The city's high tax rate relative to the statutory 10-mill cap constrains the city's ability to generate additional property taxes through rate increases. The city's revenue enhancements reduced the fiscal 2013 operating deficit after transfers to a modest $2.7 million. In a related action, the city used $7.4 million of unassigned fund balance to prefund the UAAL of its general employees' pension plan. As a result, fiscal 2013 unrestricted general fund balance was reduced by $8.1 million to $21.7 million, which represented a still-healthy 16% of spending.
POSITIVE RESULTS FOR FISCAL 2014
For fiscal 2014 the city budgeted a $2.5 million use of general fund balance with higher pension costs and step increases for police and fire personnel offset by a another boost in property tax revenues. Unaudited actual results outperformed the budget as the city reported a $755,000 operating surplus after transfers. Below-budget spending and the receipt of unbudgeted insurance premium tax revenues were important factors driving the positive outcome. Also supporting general fund operations are payments in lieu of taxes from the city's water, sewer and stormwater system (utility revenue bonds rated 'AA-'; Stable Outlook). In fiscal 2014, the utility fund contributed $8.7 million to general fund operations, constituting 6.2% of general fund revenues. The city limits utility payments to the general fund to a maximum 10% of utility revenues, the present level of transfers.
The fiscal 2015 budget posits balanced general fund operations benefitting from increased property taxes as a result of tax base growth as well as higher intergovernmental and utility tax revenues. The forecast growth in revenues was expected to fund 11 additional positions, a 3% pay raise for managerial employees, increased pension costs and step increases for police and fire fighters. Based on year-to-date actuals, officials are projecting a $1 million year-end surplus.
SOLID SERVICE-BASED ECONOMY
The city incorporates a population of about 100,000 which grew at a brisk average annual rate of 1.8% over the past decade. Leading employers include the Palm Beach County School Board, the county and state government, as well as several large healthcare enterprises. Top county economic drivers include expanding healthcare and education sectors supplemented by tourism and other service industries.
SUSTAINED JOBS RECOVERY
City employment has shown consistent strong growth since 2010 with annual gains ranging from 2.4% to 3.7%. As a result, employment levels are approaching their pre-recession high while unemployment rates have plummeted 50% since 2010. January 2015 jobs were up a brisk 8.5% year over year, nudging the unemployment rate down to 4.7%, below the state and national averages.
Between 2006 and 2012, city home values fell by over 50% according to the Zillow Group, reflective of the housing crisis in Florida. Since that time, values have been gradually recovering and, as of Jan. 31, 2015 were up 16.8% from last year.
The recuperating housing market has pushed up the city's taxable assessed values (TAV), after falling nearly 40% since fiscal 2008. TAV increased by 2.4% in fiscal 2014, the first increase in five years, and expanded by another 6.3% in fiscal 2015. The tax base is diverse with no one taxpayer accounting for more than 1.5% of TAV.
The city is experiencing significant development activity, including construction of two hotels, a number of large residential and office projects, and a planned $800 million mixed-use development near the marina. Plans to locate a new spring training facility within the city for Major League Baseball's Washington Nationals and Houston Astros, scheduled for completion in 2017, is expected to further boost tourist activity. The facility will be funded through contributions from the county, state, and each of the teams.
MIXED WEALTH INDICATORS
City wealth indices are mixed despite its location within affluent Palm Beach County. Per capita income levels exceed those of the state and nation while median household income sits well below both benchmarks. The large number of retirees residing within the city may partially explain this discrepancy. The city's poverty rate of 19.4% is 26% over the national average.
MODERATE DEBT LOAD
Debt levels are moderate with debt-to-market value of 3% and debt per capita at $3,112. Fiscal 2014 debt service constituted an average 10% of general government spending, with about 40% of debt service costs attributable to tax increment bonds of the city's two community redevelopment districts. Amortization is slow with only 39% of principal retired within the next 10 years. The city's five-year capital plan through fiscal 2019 proposes a modest $85 million of capital needs, of which over half is for utility operations. Besides a possible refunding of GO bonds in 2015, debt plans include a potential refunding of special obligation bonds combined with about $30 million of new money for various capital projects.
CITY-ADMINISTERED PENSION PLANS A MANAGEABLE BUDGET BURDEN
The city participates in four single-employer pension plans, three of which are defined benefit plans including those for general, police and fire employees. The fourth is a defined contribution plan. The general employees' defined benefit plan was closed to new members in 1997, and general employees hired after the cutoff date participate in the city's defined contribution plan. In fiscal 2013, management prepaid the $7 million UAAL for the general employees' plan, thereby reducing future costs to the city. Fiscal 2014 funding levels for the police plans are adequate at 70% assuming Fitch's 7% discount rate. The firefighters plan's funding level has improved recently but remains weak at 60%. Officials will be exploring measures to improve funding in negotiations with the police and firefighters unions. In fiscal 2014, the city's contribution to its pension plans totaled $17.7 million or 9.4% of general government spending. In addition, the city contributed $3.4 million to its defined contribution plan.
Other post-employment benefit (OPEB) obligations are minimal as retirees pay all health insurance costs. The city has established an OPEB trust fund which is very well-funded relative to most OPEB plans at 62%.
AMPLE NAV REVENUES TO SERVICE CB&A DEBT
For the special obligation bonds the city draws from a diverse mix of revenues to pay debt service. There are no bonds outstanding with a superior specific lien on NAV revenues although leveraging of individual revenue sources is possible under the bond indenture. Available NAV revenues amply cover debt service requirements even after netting out a proportionate share of essential services spending. Fiscal 2014 net NAV revenues cover maximum annual debt service (MADS) by over 5x. NAV revenues jumped by nearly 8% in fiscal 2014 due to strong growth in service charges and miscellaneous receipts, bolstered by the sales of property and an easement, after remaining relatively constant over the previous seven years.
Legal provisions require 1.5x MADS coverage to issue additional debt although the practical limit is much higher as revenues are used for general government operations. The debt service reserve requirement for the series 2006 bonds is fulfilled by a surety from MBIA. The bond documents do not require the city to cash fund the reserve.
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, Zillow Group.
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=981974
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