Fitch Rates Hillsborough County, FL's Sales Tax Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA+' rating to the following Hillsborough County, Florida sales tax revenue bonds:

--$19,670,000 capital improvement program refunding revenue bonds, series 2016.

The bonds are scheduled to sell competitively on June 23. Proceeds will be used to refund the outstanding capital improvement program refunding revenue bonds, series 2006.

In addition, Fitch has affirmed the 'AA+' rating on $80 million outstanding capital improvement program refunding revenue bonds, the 'AAA' rating on $63.7 million outstanding general obligation bonds (GOs) and the county's 'AAA' Long-Term Issuer-Default Rating (IDR).

The Rating Outlook is Stable

SECURITY

The capital improvement bonds (sales tax bonds) are secured by the county's share of the proceeds of the local government half-cent sales tax on parity with outstanding series 2012 bonds.

The GO bonds are secured by the county's full faith, credit and taxing power.

KEY RATING DRIVERS

The 'AA+' rating on the sales tax bonds reflects exceptionally strong debt service coverage which serves to mitigate high pledged sales tax volatility. While the ABT of 1.35x MADS is weak given the volatility, in Fitch's opinion the county's need of half cent sales tax revenues after debt service to fund operations makes it unlikely that this revenue source will be extensively leveraged. Lack of a reserve fund is not a concern given the magnitude of coverage.

The county's 'AAA' Long-Term IDR reflects a low long-term liability burden and strong financial performance, characterized by the ability to maintain strong levels of reserves despite large declines in revenues. This was accomplished mostly through the county's ability to adjust spending to conform to the reduced revenue base. Management is expected to utilize its spending flexibility and conservative budgeting practices to maintain future spending within the framework of anticipated strong revenue growth.

Economic Resource Base

The county along with its largest city, Tampa, serves as the economic center for Florida's Gulf Coast with major sectors of business services, government, health care, education and tourism. MacDill Air Force Base and the Tampa Port are major economic engines. Following a severe recession, the county has been experiencing a sustained and vigorous recovery, characterized by strong and consistent job growth since 2010, a rebound in housing and the resumption of tax base growth in fiscal 2014.

Revenue Framework: 'aaa' factor assessment

Revenue growth is projected to be solid given rapid population growth and vigorous economic activity. The county has the legal ability to raise substantial additional revenues, although political considerations act as constraints upon revenue generation.

Expenditure Framework: 'aa' factor assessment

Expenditure needs are expected to expand generally in line with revenues as rising population drives additional service demands. The county's ability to control headcount and actual modest fixed costs of carry provide ample flexibility to control expenditures.

Long-Term Liability Burden: 'aaa' factor assessment

The county's modest liability burden of debt and pensions is expected to remain low given limited bond issuance plans of the county and its participation in an adequately funded state pension plan.

Operating Performance: 'aaa' factor assessment

Management's ability to curtail spending and budget conservatively enabled it to effectively respond to revenue declines following the onset of the recession, which was particularly severe in Florida. The county has maintained sizable reserves and liquidity which Fitch expects it to maintain even in times of economic downturn, offsetting economic and revenue volatility.

RATING SENSITIVITIES

SALES TAX BONDS: The rating on the revenue bonds assumes continued limited leveraging and maintenance of coverage at a level well above what the ABT would permit. The rating is capped by the county's GO rating,

BUDGET MANAGEMENT: The rating assumes the county's strong management of expenditure demands and maintenance of solid reserve margins to offset a volatile revenue base.

CREDIT PROFILE

The county is located along the western coast of Florida with a population of 1.35 million. Following a severe recession, the county's employment base is now in its seventh consecutive year of growth. Employment levels now far exceed peak levels achieved in 2007. The steady increase in employment has pushed down the county's unemployment rate to below the state and national rates.

The housing market continues to thrive after the period of sharp declines, with values up 7% over the past 12 months, according to Zillow Group. Since the low in November 2011, housing values have grown by over 50%. The recovery in housing has boosted the county's tax base, which experienced considerable losses during the recession. Taxable values reversed the downward trend in fiscal 2014, growing by 5.4%. Growth has subsequently continued with increases of over 7% in fiscals 2015 and 2016.

Projects such as the planned expansion of insurer USAA which is projected to add 1,200 new jobs, a large upgrade at Tampa International Airport, a new Amazon distribution facility in the county and a proposed $1 billion waterfront mixed use development project in Tampa are expected to further bolster job growth. Fitch believes that underlying economic characteristics of the county point to favorable prospects for continued tax base expansion and the continuation of brisk employment growth.

Revenue Framework

Property taxes are the county's largest revenue source constituting about 64% of fiscal 2015 general fund revenues and transfers in, net of internal transfers within the general fund. Property taxes fell sharply beginning in fiscal 2008 as taxable values declined, although some tax rate increases mitigated the overall drop. More recently, with recovery of taxable values, property tax revenues have correspondingly increased.

Despite the period of revenue base performance that was weaker than national GDP and CPI trends through the housing downturn, Fitch believes that future revenue growth prospects are solid. This is due to a combination of rapid population growth which is well above the state and national trends and the substantial economic activity both ongoing and planned which is expected to foster further expansion of taxable resources. This is already reflected in strengthening tax base growth as well as increased receipts of sales-based tax revenues.

The county's fiscal 2015 non-voted tax rate of 5.7 mills allows for substantial additional taxing flexibility under the 10 mill cap. This ability is enhanced by the county's sizable $68.4 billion tax base. The county also has the ability to raise fees and other service charges.

Management has identified approximately $9 billion in transportation needs and the county is considering placing a proposed half cent sales tax on the November ballot for voter approval. The sales tax is estimated to generate about $117 million annually. If the sales tax is not enacted, options include raising the gas tax or devoting some millage to transportation. However, alternative revenue sources would not provide the level of funding to be generated by the sales tax.

Expenditure Framework

Public safety spending, primarily police and fire operations, is the largest of the county's spending items. Fiscal 2015 public safety expenditures represented over 56% of total general fund expenditures and transfers out (net of general fund internal transfers). Since fiscal 2011, public safety costs have risen at a slower pace than overall spending. General government spending is the second largest spending category at 22% of the total.

The county's rapid population growth will put ongoing pressure upon management to expand services. These needs are expected to drive spending going forward. However, the increase in spending should be generally consistent with projected revenue growth.

The county retains relatively solid spending flexibility in part due to its control over labor, particularly headcount. Following the onset of the recession, the county cut its workforce by nearly 1,500 or 14% between fiscals 2008 and 2012. Since then, management has added back more than a quarter of the lost positions but county full-time equivalents remain well below pre-recession highs. Officials have indicated that during the initial period of an economic downturn, they would rely upon reserves which have been set aside for that purpose. As the downturn becomes extended, management would reduce positions and clamp down on discretionary spending.

The moderate level of the county's carrying costs of debt service, pension requirements and other post-employment benefits enhances expenditure flexibility. Fiscal 2015 carrying costs to spending of 10.9% are moderate. Moreover, these costs are overstated as over 40% of debt service includes refunded bond principal, a one-time item. Excluding the refunded principal, carrying costs would be a more modest 7.6%, consistent with the two prior years.

Long-Term Liability Burden

Overall debt and pension liabilities to personal income of 5% are a low burden on resources and expected to remain so given manageable bond issuance plans and an adequately funded pension plan.

The debt burden of $2 billion equals 2.3% of market value. More than two-thirds of the burden consists of overlapping debt of the school district and the City of Tampa. Potential debt plans total about $100 million including $27.6 million of tourist development tax bonds to fund improvements to George M. Steinbrenner Field, the spring training facility for the New York Yankees. Direct debt levels are expected to remain stable as amortization more than offsets current issuance plans.

The county participates in the Florida Retirement System (FRS), the state-administered multiple employer pension plan. As of fiscal 2015, the plan is funded at approximately 82%, utilizing Fitch's 7% discount rate adjustment. The county's fiscal 2015 share of the adjusted plan liability totals $739.4 million and represents slightly over 1% of personal income.

Operating Performance

In response to the significant and extended revenue declines of the downturn, the county implemented significant expenditure cuts in order to maintain robust reserves. In similar situations in the future, Fitch expects that the county would continue this approach and utilize its considerable expenditure flexibility to adjust spending to maintain fiscal vitality.

County management budgets very conservatively and has maintained unrestricted general fund reserves in the range of 20% of spending. The county is expected to maintain expenditure growth consistent with revenue expansion and not materially increase reserves from existing levels.

Sales Tax Bonds

The sales tax bonds are secured by the county's share of the proceeds of the local government half-cent sales tax. Fitch believes that projected rapid population growth and economic activity should generate significant expansion of revenues going forward. While sales tax revenues will demonstrate greater volatility than GDP trends, growth over the long run should trend at least in line with and likely above inflation. Fiscal 2015 half cent sales tax collections of $95.7 million are up for the fifth consecutive year and cover MADS by 10x.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the county's 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 5% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 22% decline from fiscal 2006-2010.

Based on current debt service coverage levels, which are well above what the ABT would allow, the structure could tolerate a 90% drop in revenues, 18x the scenario results and 4x the largest actual revenue decline in the review period. Both of these tests demonstrate a 'aaa' level of cushion. However, when the same scenarios are measured assuming leverage to the 1.35x ABT, the level of coverage margin declines to the 'a' level under the 1% GDP decline scenario and to the 'bbb' level when considering the largest historical decrease.

The county has indicated that it has no plans for additional issuance of half cent sales tax bonds at this time. In assigning the 'AA+' rating, Fitch assumes that actual coverage will remain well above what the ABT would allow because the county uses half cent sales tax revenues after debt service to fund general operations.

Fitch does not believe that the sales tax bond security would be insulated from the general operations of the county in the event of bankruptcy. As such, the rating on the sales tax bonds is capped at the county's IDR (currently above the sales tax bond rating and therefore not an operative cap).

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

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com