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

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

--$36.3 million sales tax revenue bonds, series 2016A.

The bonds are scheduled for sale on a negotiated basis on February 16. Proceeds will be used to refund most of the outstanding series 2009 sales tax revenue bonds for debt service savings.

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

--$135.6 million sales tax revenue bonds at 'AA-';

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

The Rating Outlook is Stable.

SECURITY

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

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.

CYCLICAL ECONOMIC TRENDS STRENGTHEN: The tourist-based area economy, hard hit by the recession, has been expanding rapidly as indicated by sustained gains in employment and housing prices.

MODERATE LONG-TERM LIABILITIES: Debt levels are expected to remain moderate 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.

RAPID SALES TAX GROWTH/GOOD COVERAGE: Following a precipitous decline in fiscal 2009, sales tax collections have rebounded at a very rapid pace and now exceed pre-recession peak collections. Coverage of pro forma debt service is ample.

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 pledged sales tax revenues or additional leveraging narrowing debt service coverage could result in negative rating action. Improved coverage by itself would have no impact on the sales tax bonds as they are already at the GO cap.

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. The county's population of 310,211 has experienced very rapid growth since at least 2000.

SALES TAX GROWTH WIDENS COVERAGE

Sales tax revenues continue to demonstrate substantial growth after experiencing a sizable 10.6% decline in fiscal 2009. Since then, collections have increased in each year for an aggregate 30% gain. Fiscal 2015 unaudited sales tax receipts increased 6.8% over fiscal 2014 collections and now exceed the pre-recession peak. Two-month collections for fiscal 2016 are up 11% over the same period in the last fiscal year.

Sales tax growth has pushed up fiscal 2015 coverage of maximum annual debt service (MADS) to a solid 1.73x. Pledged revenues would have to drop by 42% in order to reach 1x coverage, nearly four times the sales tax decline during the last recession. Fitch considers the 1.35x additional bonds test (ABT) to be weak; however, the county's use of excess sales tax revenues to fund operations tempers the risk of over issuance. No debt service reserve fund is provided for this issue, which Fitch does not view as a concern given the wide levels of coverage.

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, the Gaylord Palms Resort & Convention Center and the Osceola County government.

Reliance upon tourism adds significant cyclicality to economic activity. The county was hit hard by the recession with the employment base declining by 8% over 2009 and 2010 while the unemployment rate topped 12%. Between fiscals 2008 and 2009, tourist development tax (TDT) collections fell by $2.7 million or 15% while residential permit values dropped by 95% from fiscals 2007 to 2011. A precipitous recession-led decline in the housing market led to a 40% decrease in taxable assessed values (TAV).

Typical of areas dependent upon tourism, wealth indices are low. County per capita income is 70% of the state average and 64% of the national benchmarks. Over 19% of the county's population is below the poverty line compared with the state (16.6%) and national (15.5%) averages.

Beginning in 2011, the economy shifted to recovery mode driven by a burgeoning tourist sector as demonstrated by TDT collections, which increased by over 45% between fiscals 2010 and 2015 and over 10% during fiscal 2015. Employment levels within the county have increased steadily since 2010 with annual growth averaging 4.2%. This expansion has continued well into 2015. County employment for November 2015 is up 1.4% from 12 months before pushing down the unemployment rate to 5.1%, equivalent to the state average and national rates.

The housing market continues to improve with December 2015 home prices up 6.0% year over year according to the Zillow Group. The housing uplift has boosted fiscals 2014, 2015, and 2016 taxable assessed value (TAV) by 3.7% 6.6%, and 7.3% respectively. Fitch expects upward momentum to be maintained in the near term as housing valuations continue to rise.

Both Disney and Universal are making substantial investments in their parks including new Star Wars themed attractions at Disney and a new hotel and water park at Universal. In addition, two major hospitals within the county are undergoing significant expansion. County officials are also collaborating with nearby higher education institutions and Florida's High Tech Corridor Council to build the Florida Advanced Manufacturing Research Center (FAMRC), intended to promote the research and development of smart sensors. While these developments are expected to bolster future economic growth, the economy remains dependent upon the volatile tourist sector.

PRUDENT FINANCIAL MANAGEMENT

Finances are well managed, with high levels of reserves and robust liquidity. Fiscal 2014 unrestricted general fund balance totaled $78.1 million or an elevated 38.8% 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 $6.1 million.

Management also maintains sizable cash balances in keeping with its policy of unrestricted cash equal to at least two months of spending. Fiscal 2014 general fund cash and investments total $81.8 million, sufficient to fund nearly five months of operations. Given the inherent volatility of the local economy, Fitch regards the county's reserve practices to be prudent.

CONSERVATIVE BUDGETING

The county reported a $4.6 million surplus for fiscal 2014, a significant improvement over the originally budgeted $600,000 drawdown. Management budgets are typically conservative, especially in regard to spending. Fiscal 2014 general government expenditures were $5.3 million or 2.8% lower than budget, as spending is closely monitored. In addition, $3.9 million of unbudgeted revenue was attributable to reimbursement of a prior year expenditure.

The fiscal 2015 general fund budget included a 6.5% increase in property taxes due to tax base growth balanced against a 2.5% COLA for all employees and 10 additional full-time positions. Unaudited results indicate a net surplus of $9.3 million or 5% of spending. Operating expenditures came in $16.7 million or over 14% below the original budget. The fiscal year ending general fund balance of $90 million represents a hefty 48% of spending.

The fiscal 2016 budget benefits from a 7.5% increase in TAV as well as expected growth in economically sensitive revenues such as sales taxes and tourist development taxes. The additional revenues support employee salary increases and a boost in employees. County officials anticipate that year-end results will be favorable.

MANAGEABLE LONG-TERM OBLIGATIONS

The debt burden is moderate at 3.8% of market value and is expected to remain manageable given limited bonding plans. These plans include bonds in the approximate amount of $22 million as part of an ongoing county agreement to fund additional conference space at an area hotel. The bonds would be payable from TDT revenues. Principal amortization is average at 59% within 10 years. Capital needs primarily involve transportation projects funded either through mobility or impact fees or infrastructure sales surtax 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 2014 carrying costs of the county's long term liabilities including debt, pensions and OPEB contributions are moderate at 15% of 2014 governmental spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Zillow Group, CreditScope and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999540

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999540

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Michael Rinaldi
Senior director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
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
Michael Rinaldi
Senior director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com