Fitch Rates Palm Beach County, FL's Non-Ad Valorem Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following revenue bonds for Palm Beach County, Florida (the county):

--$57.89 million revenue refunding bonds series 2015.

The public improvement bonds will be sold on a competitive basis on April 28, 2015. Proceeds will be used to fund the construction of the convention center parking garage and renovate a county office building.

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

--Approximately $159.6 million general obligation (GO) bonds at 'AAA';

--Approximately $511.3 million non-ad valorem revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The county's non-ad valorem revenue bonds are special obligations of the county, payable from its covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem (NAV) revenues. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant shall be cumulative to the extent not paid, and shall continue until all required amounts payable under the indenture have been paid.

GO bonds constitute general obligations of the county, for which its full faith, credit, and unlimited taxing power are irrevocably pledged for the payment of principal and interest.

KEY RATING DRIVERS

'AAA' RATED CREDIT STRENGTH: The county's 'AAA' GO rating is supported by an extensive and robust economy, satisfactory financial condition and manageable debt and retirement liabilities.

CB&A DEBT ONE NOTCH OFF GO: CB&A debt is rated one notch below the county's GO bonds due to the absence of a specific pledge and the inability to compel the county to generate NAV revenues sufficient to pay debt service.

AMPLE NAV REVENUE BASE: NAV revenues represent a broad and diverse set of revenue streams which in aggregate provide adequate coverage of CB&A debt service requirements.

ADEQUATE BUT DIMINISHED FINANCES: Finances have declined in recent years with fiscal 2014 results bringing reserves down near the minimum range of 15% to 20% of spending under the county's financial policies. Management expects to achieve balanced operations in either the current fiscal year or fiscal 2016.

SUSTAINED ECONOMIC RECOVERY: The area economy is experiencing a prolonged post-recession recovery which is now in its fourth year. Ongoing job growth and a rebounding housing market is expected to further boost tax base growth over the next two or three years.

MODERATE DEBT LEVELS: The county's debt burden is generally modest with direct debt rapidly amortized. Fitch expects debt levels to remain manageable given limited capital needs and bonding plans.

RATING SENSITIVITIES

STRUCTURALLY BALANCED OPERATIONS: Fitch views the county's return to structural balance in 2015 or 2016 to be important to rating stability.

CREDIT PROFILE

The county, located along the southeast coast of Florida, is the largest county in the state, encompassing 2,228 square miles. With a population of nearly 1.4 million, the county contains 38 municipalities including the cities of West Palm Beach and Boca Raton.

EXTENSIVE AND DIVERSE NAV BASE

The county's NAV revenues include a broad mix of special taxes, license and permit revenues, fee income, and service charge revenues. While most NAV tax revenues are levied at the maximum or set rate, the large component of service charges and fees afford the county some flexibility in the ability to raise additional revenues. Overall NAV revenues have fluctuated over the past five years but were solidly up in fiscal 2014 and are projected to be static or slightly ahead in fiscal 2015.

Fiscal 2014 NAV revenues totaling $392 million are sufficient to cover NAV-secured maximum annual debt service, even when essential services consisting of general government and public safety expenditures are taken into account. Coverage is expected to improve considerably as annual NAV debt service costs decline sharply after fiscal 2015.

DIVERSE ECONOMIC UNDERPINNINGS

The county's economy is supported by its traditional underpinnings of agriculture, tourism, government, healthcare, and aerospace supplemented by growing bioscience and higher education sectors. Leading employers include the Palm Beach County School Board, the county government, Tenet Healthcare Corporation, and Florida Power and Light. Florida Atlantic University (FAU) enrolls over 20,000 students on campuses within the county.

County employment fell by over 9% between 2007 and 2010 as a result of the recession but has consistently gained jobs since then. Employment growth in 2013 was 2.8% and an additional 3.3% in 2014. January 2015 jobs were up a hefty 7.7% year over year, dropping the unemployment rate down to 5.2%, below the state and national unemployment rates.

The county is experiencing a wave of new development, including office buildings and mixed use projects in the downtown urban areas and large residential projects in the suburbs. Other indicators of economic growth include building permit values which increased by 30% in fiscal 2013. Permit valuations fell moderately in fiscal 2014 but were still higher than in any other post-recession year besides fiscal 2013. Permit activity is strong year to date in fiscal 2015. Tourism continues to expand with annual gains of tourist development tax collections up of 6% and 11% in fiscals 2013 and 2014, respectively.

EMERGING BIOSCIENCE CLUSTER

The formation of a bioscience cluster in the northern part of the county has also attracted smaller bio-science firms to the area. Scripps Research Institute, a biomedical research firm, and Max Planck Florida Institute, in connection with FAU, are driving such growth. Scripps is proposing to partner with nearby Tenet Healthcare to open a teaching hospital while Cancer Treatment Centers relocated to Boca Raton from Illinois in February 2014.

TAX BASE GROWTH ACCELERATES

An improved housing market has propped up the county's tax base. Following a 27% drop between fiscal years 2008 and 2012, taxable values stabilized in fiscal 2013. Valuations grew by 4% in fiscal 2014 and an additional 7% in fiscal 2015. Officials are projecting assessed values to expand by 6% in fiscal 2016.

REDUCED BUT SATISFACTORY FINANCIAL POSITION

Officials have been challenged since 2008 by sizable declines in taxable values which generate property taxes, the county's largest source of general fund revenues, and other economically sensitive revenues against its goal of maintaining government services. Management has responded by raising tax rates three times during this period, reducing the number of employees and other costs and tapping reserves.

Modest, planned general fund operating deficits have been reported in four of the past six fiscal years. While reserve levels are diminished, they remain adequate although approaching the bottom of the county's target range of 15% to 20% of general fund expenditures and transfers out. Fitch believes that further deterioration of financial margins on a sustained basis would raise potential rating concerns.

FISCAL 2014 DEFICIT REDUCES BALANCE TO MINIMUM TARGET

The county reported a general fund drawdown of $15.8 million for fiscal 2014 (1.5% of spending); a better result than the budgeted $36 million drawdown. An uplift in property tax revenues plus growth in sales tax, utility tax and other major revenue sources provided partial funding for an across the board salary increase of 3% for most employees, higher costs for public safety operations and rising pension contributions.

The drawdown reduced fiscal 2014 unrestricted (all unassigned) fund balance by $17.5 million to $158 million or close to 15% of spending. As such, reserves are at the low end of the county's fund balance target.

The fiscal 2015 budget benefits from a 7% increase in the tax base generating an additional $44 million in property tax revenues. Other major revenue sources such as sales and gas taxes are also trending above prior year receipts pushing overall revenues up by $60 million. Spending incorporates another 3% wage rise as well as some additional staffing. Management projects fiscal 2015 operations to be at or near breakeven with no change in total unrestricted general fund balance. In fiscal 2016, the county intends to restore some reserves supported by further growth in property tax revenues combined with a significant reduction in debt service costs.

MODERATE DEBT LOAD

Debt levels are moderate with a debt burden of 1.8%, or $2,522 on a per capita basis. Over three-quarters of the county's direct debt consist of bonds secured by the county's NAV revenues. Amortization is relatively rapid, with 68% of principal retired within the next 10 years. The county's five-year capital improvement plan for fiscal years 2015-2019 identifies a modest $112 million of general government capital needs with most of those needs funded through bond issuances.

Debt levels are not expected to rise, as $389 million of outstanding principal is scheduled to mature over the next five years. Debt plans include a $130 million to be issued in late 2015 to finance the construction of a spring training facility for the Washington Nationals and Houston Astros in West Palm Beach. The bonds would be secured by a combination of tourist development tax revenues, state sales tax payments and lease payments from both teams.

RETIREMENT OBLIGATIONS NOT A COST PRESSURE

The county participates in three pension plans. Most employees are members of the state-administered Florida Retirement System (FRS), which is relatively well-funded. The other two plans are small defined benefit and defined contribution plans: a plan covering firefighters from the Town of Lantana employed by the county (Lantana Plan) and the Palm Tran pension plan for members of the Amalgamated Transit Union (ATU) members.

The Lantana Plan is adequately funded but the Palm Tran plan has historically been underfunded as contribution rates, established through negotiations with the ATU have not met actual funding requirements. A 2013 agreement between the county and the ATU required the county to fund up the plan but reduced benefits for new employees with the county afforded the ability to determine benefits going forward. These changes are expected to improve future funding.

Funding for Palm Tran according to a January 2014 valuation increased to 75.3% from 65.8% in the previous year or 67.8% from 59.3% under Fitch's 7% return assumptions. The UAAL for the relatively small Palm Tran plan is $24.2 million. Overall pension costs are not a cost pressure, accounting for just over 6% of general government spending.

OPEBs are offered to retirees as an implicit subsidy with the exception of retirees from the Sheriff and Fire Rescue Union, who receive direct subsidies from the county. Consequently over 90% of the county's aggregate OPEB annually required contributions (ARC) derive from those two programs. Funding is on a pay-as-you-go basis and fiscal 2014 contributions constituted about 40% of the ARC requirements.

In addition, the county provides long-term disability benefits to retirees in fire rescue also funded on a pay-as-you-go basis. Combined unfunded actuarial accrued liability for the county's OPEB plans of $353 million represents a modest 0.2% of fiscal 2014 market value. Carrying costs, including debt service, pension contributions, and the OPEB contribution are manageable at less than 15% of general government 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, Zillow.com.

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=983249

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew Hoffman, +1-212-908-0527
Associate Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew Hoffman, +1-212-908-0527
Associate Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com