NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the following Gainesville, Florida (the city) bonds:
--$31.9 million capital improvement revenue bonds series 2010 and 2014;
--$75.8 million pension obligation bonds series 2003A and 2003B.
Fitch also affirms is 'AA' rating on the city's implied unlimited tax general obligation (ULTGO) rating.
The Rating Outlook is Stable.
All bonds are payable by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, from non-ad valorem revenues amounts sufficient to pay debt service. The covenant is cumulative and continues until all required payments have been budgeted, appropriated, and actually paid. The bonds do not have debt service reserve accounts.
KEY RATING DRIVERS
COVENANT DEBT NOTCHING: A one-notch distinction in the rating on the revenue bonds from the implied ULTGO reflects the absence of a pledge of specific revenue and inability to compel the city to generate non-ad valorem revenue sufficient to pay bondholders.
DIVERSE, STABLE ECONOMY: The city's economy is anchored by the University of Florida, supplemented by a strong presence of health care and local government. Historically low income metrics are partly driven by the large student population. Unemployment trends lower than state and national averages.
SOLID FINANCIAL PERFORMANCE: General fund reserve levels are sufficient and operations balanced, aided by a significant transfer from the utility system. A transfer agreement locks in modest year-over-year growth through fiscal 2019, providing stability.
MANAGEABLE DEBT AND LONG-TERM LIABILITIES: Overall debt is moderate and capital needs are manageable.
BALANCED OPERATIONS: The rating is sensitive to the city's ability to continue balanced operations and maintain fund balance in compliance with policy.
The city is located in north central Florida and encompasses approximately 63 square miles of land. With an estimated 2014 population of 128,500, the city is the most populous city in Alachua County and serves as the county seat. Population growth has been average since 2010, growing a cumulative 3.2%.
DIVERSE, STABLE ECONOMY ANCHORED BY UNIVERSITY
Gainesville is the home to the main campus of the University of Florida (UF), the flagship institution in the state's public university system. UF enrollment exceeds 50,000 and the university remains the largest employer in the county with more than 27,500 employees.
The regional economy is dominated by the government, educational, and health services sectors. The largest healthcare enterprises are UF Health (12,705 employees) and the Veterans Affairs Medical Center (6,127 employees). UF Health includes two major teaching hospitals, Shands Children's Hospital and Shands Cancer Hospital and currently constructing a new $415 million specialty hospital.
The city has a history of low unemployment relative to the state and nation. The January 2016 unemployment rate of 4.8% was below the national averages of 5.3% but above the county (4.5%) and the state (4.7%). Wealth levels are well below average given the city's large student population while educational attainment levels, as to be expected in a university-oriented community, substantially exceed the national profile.
TAX BASE GROWTH AND LOW TAX RATES
City taxable assessed value (TAV) grew modestly (2.5%) in fiscal 2016, following a 9.1% jump in fiscal 2015, driven largely by the addition of a 100 megawatt biomass electricity generation facility. The previous four years were either negligible growth or declines. The city's proposed fiscal 2017 budget will include a 4.8% growth in TAV, based upon the state's assessment for Alachua County. Management expects TAV growth rates similar to fiscal 2017 estimates in the near term due to ongoing and planned development.
The city's proposed fiscal 2017 millage rate of $4.5079 per $1,000 TAV, last changed in fiscal 2014, remains well below the statutory cap of $10.00 per $1,000 TAV, providing the city with some revenue raising flexibility. The biomass plant moderately concentrates the formerly diverse tax base, accounting for 6.1% of TAV.
SOLID FINANCIAL POSITION
The city's financial profile is characterized by diverse non-ad-valorem revenues, tight expenditure controls, and solid reserves. Fiscal 2015 added $3.1 million to general fund balance or 3% of spending. The year ended with $19.4 million in unrestricted fund balance, which equals 18.6% of spending and transfers out, well above the city's policy of 10%.
Fiscal 2016 is trending positively to budget with sales tax and state revenue sharing figures exceeding budget. Expenditures are performing favorably due to unexpected turnover and vacancies as well as lower than budgeted fuel costs. Management expects to end the fiscal year with an approximately $1 million operating surplus.
The city's hiring and travel freeze implemented in November 2013 has been lifted, providing the city with a future expenditure control measure if necessary. The city also maintains expenditure flexibility through pay as you go funding for capital improvements such as road repair, equipment replacement, and facility maintenance, which could be scaled back.
SIGNIFICANT NON-AD VALOREM REVENUE BASE
Non-ad valorem revenues make up approximately 84% of general fund sources for the city and include utility and communications taxes, intergovernmental, charges for services, and a sizable transfer from the utility system. Fiscal 2015 total non-ad valorem revenues ($89.9 million) have grown 8% since fiscal 2011 and are more than sufficient to cover maximum annual debt service of $14.3 million for debt payable from these revenues.
UTILITY TRANSFER DEPENDENCE
The transfer from the city-owned and -operated Gainesville Regional Utilities (GRU), an electric, natural gas, water, wastewater, and telecommunications enterprise system (revenue bonds rated 'AA-' with a Stable Outlook by Fitch) traditionally accounts for roughly one-third of general fund sources. The transfers allow the city to collect some revenue indirectly from tax-exempt properties (over one-half of the city's property is tax-exempt) and provides the city a diverse revenue base.
The transfer amount was historically based on a formula that attempted to capture what the city would receive if the utility were privately owned plus a variable component based on consumption and operating results. This formula was altered for fiscals 2011-2014 to a fixed dollar amount to hedge against weakened profitability. Utility transfers totaled $36.7 million and $37.7 million in fiscals 2013 and 2014, respectively, or about 35% of general fund sources.
Effective fiscal 2015 - 2019, a new transfer formula reset the base transfer to a lower level and grows that base by 1.5% per year, net a deduction of property tax revenues from the biomass facility. The city received a transfer of $34.6 million in fiscal 2015 (32.2% of general fund sources), a 6.2% decline from the previous year, mainly driven by the reduction for biomass facility property tax revenue. The fiscal 2016 transfer will equal $35.2 million. Fitch expects future transfer agreements to not materially vary from current levels.
MODERATE DEBT AND OTHER LONG-TERM LIABILITIES
Overall debt is low at $1,528 per capita and 1.4% of market value and amortization of direct debt is above average with 70% of debt retired in 10 years. Due to the issuance of the OPEB bonds, the city's OPEB plan is 89% funded, an exceptionally high level of funding compared with most local governments. Capital needs are manageable with no certain borrowing plans in the near term.
The city implemented pension reform with each of its seven unions in fiscal 2014, modifying plans for both new and existing employees. Reforms include changes to the normal retirement period, reduced cost of living increases for retirees and maximum over-time limits, with aggregate present value savings for all three plans estimated at $238 million over the next 30 years. The city sponsors and administers two single-employer defined retirement plans, having rolled the general disability plan into the general pension fund. As of the September 2015, the combined ratio of assets to liabilities of the plans is a satisfactory 77% but a lower 67% when adjusted for Fitch's more conservative 7% investment return assumption.
Fiscal 2015 carrying costs, including debt service, pension actuarially required contribution, and OPEB actual contribution totaled a moderately high 25.8% of governmental spending but is expected to remain manageable going forward due to recent pension reforms and limited capital needs.
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, dated Feb. 2, 2016). 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 beginning of the second 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 Fitch's applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form