NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms Hilton Head Island, SC's ratings as follows:
--$56 million outstanding GO bonds at 'AA+';
--$21 million
outstanding hospitality tax bonds at 'AA';
--$10 million
outstanding beach preservation bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable from an irrevocable pledge of the
full faith, credit, and taxing power and resources of the town.
The hospitality tax bonds are special obligations of the town, secured by the local hospitality tax (a 2% fee imposed by the town on the gross sales price of all prepared foods and beverages). The bonds are additionally secured by a cash funded debt service reserve fund (DSRF), which the town agrees to replenish in the event of a deficiency, subject to annual appropriation.
The beach preservation fee bonds are special obligations of the town, secured by the local accommodations tax (also known as the beach preservations tax, a 2% levy on the rental of sleeping accommodations). The bonds are additionally secured by a cash funded DSRF, which the town agrees to replenish in the event of a deficiency, subject to annual appropriation.
KEY RATING DRIVERS
STRONG FINANCIAL FLEXIBILITY: The 'AA+' GO rating is based on the town's significant financial flexibility which is underscored by consistently high reserve levels.
TOURISM BASED ECONOMY: Despite its tourism dependence, the town's economy has historically demonstrated resilience during periods of economic stress with minimal impact on financial operations. The recessionary impact on the tax base was moderate, which is notable given the discretionary nature of the economic activity.
STRONG SOCIOECONOMIC INDICATORS: Resident wealth indicators are very strong and educational attainment is high. Unemployment rates remained relatively low throughout the recession, bolstering wealth levels and enabling a persistently low poverty rate.
CARRYING COSTS ARE HIGH BUT MANAGEABLE: Carrying costs including debt service, pension and other post-employment benefits are high but are expected to remain manageable.
HOSPITALITY TAX PLEDGE: The affirmation of the 'AA' rating on the hospitality tax bonds reflects the strong 3.45 times (x) coverage of MADS from pledged hospitality taxes and absence of additional leveraging plans. Fitch considers the additional bonds test weak at 1.20x.
BEACH PRESERVATION FEE PLEDGE: The affirmation of the 'AA-' rating on the beach preservation fee bonds reflects the town's covenant to restore any deficiency in the DSRF, given the relatively weak credit characteristics of the beach preservation tax, a lodgings tax. As for the beach preservation fee bonds, the additional bonds test is weak at 1.20x.
RATING SENSITIVITIES
STABLE OUTLOOK: The GO and beach preservation bond ratings are sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and high level of financial flexibility. The hospitality tax bond rating is sensitive to changes in pledged revenue performance and resulting debt service coverage. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Hilton Head Island is the east coast's second
largest barrier island with approximately 34 square miles. The town is
located approximately 25 miles northeast of Savannah, Georgia and 60
miles southwest of Charleston, South Carolina. The town is a popular and
affluent resort community located in Beaufort County (rated 'AA',
Stable). The island has a year-round population of 39,412 and a monthly
peak summer population of 250,000. According to town estimates, there
are approximately 2.5 million visitors on an annual basis.
STRONG FINANCIAL RESERVES
The town's financial profile is enhanced
by management's ability to consistently maintain high reserve levels
over an extended period of time. Fiscal 2014 ended with an unrestricted
general fund balance of $18 million or a very robust 54% of spending
which is well in excess of the town's 25% to 30% operating reserve
policy. In addition, the town maintains reserves of approximately $12
million outside the general fund for disaster planning and recovery
efforts. Fitch views the town's high reserves as prudent, given risks
inherent in the town's barrier island location, and susceptibility of
key tourism-driven revenue streams to a downturn in economic conditions.
Property taxes fund approximately 34% of fiscal 2014 general fund
operations. South Carolina's Act 388 limits annual growth in property
taxes based on growth in the population and the consumer price index
(CPI). The town benefits from a diversity of revenue sources, aiding in
the town's ability to operate with margin under the tax limit.
Fiscal 2015 general fund expenditures are budgeted at $37.6 million, a 7.1% increase compared to the prior year's budget. The budget includes $1.3 million in capital outlay spending, largely for public safety. Collections from local accommodation taxes and business license revenue are expected to lead the increase in revenue growth. The property tax rate increased to 21.35 mills, a modest 3.2% increase. The district has available margin of .83 mills under the Act 388 cap; the margin represents approximately 6% of the operating levy. The fiscal 2015 budget is balanced with a moderate appropriation of $1 million of general fund reserves.
STABLE TOURISM-BASED LOCAL ECONOMY
The majority of local jobs are
tourism-related and aside from the school district, supermarket and
medical center, the top 10 employers are all tourism concerns. The two
biggest tourism events in the town are the Heritage, a PGA Tour cup
event and the high end Motoring Festival and Concours d'Elegance.
The town attracts very affluent visitors and second-home owners, as evidenced by an exceptionally high market value per capita of $444,000 and above average wealth and income levels. The strong wealth levels, the distinctive nature of the local environment and the prominent annual tourism events help moderate the impact of macro level declines in economic activity. Unemployment is consistently well below the national rate, and the town unemployment rate peaked at a relatively low 6.8% during the recession. As of December 2014 unemployment was 4.9%, above the previous year due to very strong annual growth in the labor force.
HIGH BUT MANAGEABLE CARRYING COSTS
Overall debt as a percent of
market value is low at 2% reflecting the high property values. Debt per
capita is high at $8,680 as a result of the seasonal population not
included in the town's permanent year-round count. Debt service
expenditures consume a high 25% of government spending, which reflects
an aggressive amortization of outstanding principal (approximately 72%
in 10 years) and the town's limited service obligations.
Additional debt plans are manageable. The town's long-term capital plan calls for periodic debt issuance to fund beach nourishment. The town plans to issue $20 million in parity beach preservation bonds in fall of this year. The outstanding bonds mature in 2019, and the preliminary debt service schedule for the new bonds indicates increasing amortization, beginning in 2017, which should allow for maintenance of adequate debt service coverage.
In addition the town anticipates issuing just under $14 million of general obligation bonds within the next year, with no impact to the debt millage. The town may also issue tax increment debt (TIF) to finance improvements for the new campus of University of South Carolina at Beaufort (USCB) through an approved TIF extension which dedicates revenues for an additional 10 years. The campus will feature a hospitality program.
General employee pensions are provided through a defined contribution plan administered by the International City/County management Association - Retirement Corporation. Public safety employees participate in the South Carolina Police Officers Retirement System (PORS), a state run cost sharing multiple-employer defined benefit plan. The town's required contribution to PORS is a low 1.6% of government spending. As of June 30, 2014 PORS was funded at 69%, or an estimated 66% using Fitch's more conservative 7% rate of return. Total town pension costs of $1.8 million are manageable.
The town annually contributes 100% of the value of the forfeited sick leave into individual investment accounts ($192,000 in fiscal 2014) to pay retiree medical expenses. The town has determined that it only has an implicit subsidy whose cost will be immaterial relative to the budget for at least the next several years.
SPECIAL OBLIGATIONS
The beach preservation tax bonds are secured by
the local accommodations tax (also known as the beach preservation tax)
which consists of a 2% fee imposed by the town on the gross proceeds
derived from the rental of sleeping accommodations. The rating for the
beach preservation bonds reflects the town's covenant to restore any
deficiency in the DSRF, given the relatively weak credit characteristics
of the beach preservation tax. Pledged revenues had a sizable 9.2%
decline in 2009, but have recovered and now exceed pre-recessionary
collections. Fiscal 2014 revenues showed strong 12% growth and now
provide 2.2x debt service coverage of MADS ($2.5 million).
Both the beach preservation tax bonds and the hospitality tax bonds benefit from cash funded DSRFs, sized at the standard three prong test. The trustee is required to provide the town written notice of any deficiency in the DSRF. The town covenants to pay, prior to the next semi-annual debt service payment date, an amount equal to such shortfall. The town's obligation to make such payment is subject to appropriation by the town council from funds lawfully available for such purpose. This obligation, rather than coverage from pledged revenue, provides the security on which the beach preservation bonds' rating is based.
The hospitality tax bonds are secured by the local hospitality tax, a 2% fee imposed by the town on the gross sales price of all prepared foods and beverages. Coverage has been historically robust and fiscal 2014 revenues of $5.6 million provide strong coverage of 3.4x MADS. The peak one year decline on the hospitality tax revenue was 7.8% in 2009. Revenues now exceed the pre-recessionary collections, and the fiscal 2014 growth rate was 7.3%.
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, and 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=984093
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