NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the ratings on the following Brevard County, FL obligations:
--Issuer Default Rating (IDR) to 'AA+' from 'AA';
--$48.4 million outstanding local option fuel tax (LOFT) revenue bonds, series 2007 to 'A+' from 'A'.
The Rating Outlook is Stable.
SECURITY
The LOFT revenue bonds are secured by a six-cent levy per gallon of motor and other fuels sold in the county. Revenues are collected by the state and distributed to each county and its incorporated municipalities based on a distribution formula formalized in an inter-local agreement.
KEY RATING DRIVERS
The upgrade of the county's IDR to 'AA+' from 'AA' reflects the application of Fitch's new 'U.S. Tax-Supported Rating Criteria' published on April 18, 2016 and specifically the county's strong operating performance including maintenance of high levels of reserves through the economic cycle supported by ample revenue and expenditure flexibility, and low combined liability burden of debt and pensions. Fitch expects the county's debt and pension liabilities to remain low going forward given limited debt plans, rapid amortization of existing debt, and participation in an adequately funded, state-administered pension plan.
The rating upgrade to 'A+' from 'A' on the LOFT bonds reflects improved debt service coverage, negligible expected growth prospects, volatility of the pledged revenue stream but strong resilience through a moderate downturn scenario. The rating also reflects Fitch's expectation that LOFT revenues will not be leveraged to the 1.25x additional bonds test.
Economic Resource Base
The local economy is based on a diverse mix of aerospace, manufacturing, agriculture and tourism. The Kennedy Space Center (KSC) serves as both an area employment anchor and a tourist attraction. The presence of KSC, despite termination of the space shuttle program in 2011, and the county's highly trained workforce has stimulated the location of numerous aerospace and other technologically--related firms within the county. The aerospace industry within the county has been growing and expansions at Northrop Grumman, Boeing and Embraer are either planned or underway.
Revenue Framework: 'aa' factor assessment
Fitch expects county revenues to grow in line with inflation which is consistent with its slowly growing population and employment base. The county retains the legal ability to generate substantial additional revenues under its 10 mill property tax cap.
Expenditure Framework: 'aa' factor assessment
County expenditures cover a wide array of government services. Overall spending patterns are expected to align with future revenue growth. Management has significant expenditure flexibility through its partial control of headcount and moderate carrying costs, despite having made large spending cuts during the past recession.
Long-Term Liability Burden: 'aaa' factor assessment
The county's long-term liability burden that includes debt and net pension liability is modest at 4.2% of personal income. Fitch expects this metric to remain low given limited debt plans, rapid amortization of direct debt and adequate funding of the state-run pension plan.
Operating Performance: 'aaa' factor assessment
Management, through its considerable revenue and expenditure flexibility, is expected to maintain available reserves within a healthy 10% to 15% of expenditures through the economic cycle.
RATING SENSITIVITIES
CONTINUING STRUCTURAL BALANCE: Fitch expects that the county will maintain balanced operations at or above a level consistent with the rating.
COVERAGE OF LOFT DEBT SERVICE: The rating on the LOFT bonds is sensitive to the level of debt service coverage provided by LOFT receipts.
CREDIT PROFILE
The county's economy was hit hard by the recession with employment falling by over 8% between 2006 and 2010 and unemployment rates topping 11% in 2011. Since 2011, economic activity has generally recovered but employment growth has been tepid, averaging 0.6% growth between 2010 and 2015. Factors which have hindered gains in employment include termination of the space shuttle in 2011, federal sequestration in 2013 and cutbacks in personnel in the county's schools, the largest employer. Unemployment rates have gradually declined since the 2011 peak and the May 2016 rate of 4.7% equaled those of the state and nation.
Housing values declined by over 50% between mid-2006 and January 2012 according to the Zillow Group. Values have slowly risen since and were up 9.7% over the past 12 months but remain well below the pre-recession peak. Zillow projects a 4.5% increase in home values over the next year. The housing recovery has boosted the county's mostly residential tax base with steady growth since fiscal 2013.
Revenue Framework
Property taxes comprise the major source of general fund revenues and represented about 55% of total revenues and transfers in. Property tax revenues had declined both during and immediately after the recession as taxable values fell but, with the recovery of the tax base, have been on the upswing in recent years. Since fiscal 2012, the county has been gradually lowering its tax rate, tempering the rise in property taxes each year. Other major sources of revenue include intergovernmental revenues (17%) consisting mainly of state revenue sharing and half cent sales tax distributions and charges for county services (14.5%).
Modest increases in county revenues are expected to continue going forward, in line with the county's slowly growing population and employment. This growth is anticipated to continue at a rate below U.S. GDP growth but consistent with inflation.
The county's current tax rate of 5.47 mills allows for generation of substantial additional revenues under the state 10 mill property tax cap. Fitch estimates that the county could generate approximately $128 million in additional revenues if it chose to utilize the remaining property tax margin or about 60% of the fiscal 2016 general fund budget.
Annual changes in the property tax rate are determined using a roll-back or revenue neutral rate, which is then adjusted for changes in the Florida per capita personal income. However, this limitation may be overridden by a super-majority or unanimous vote of the county board of commissioners. The county's charter limits the property tax levy such that budgeted revenues for the current fiscal year cannot increase by more than the lesser of 3% or CPI over budgeted revenues in the prior year. This limit can also be overridden by a supermajority vote of the commissioners but only on a finding of an emergency or critical need. Taxable property classified as new construction and other improvements are excluded from the calculation. The county also has the ability to increase various license and permit revenues and service charges that make up a smaller but still notable portion of its revenue base.
Expenditure Framework
The county provides a full array of government services to its citizens with the exception of primary education, which is provided by the county school board. Public safety represents the largest general fund expenditure item at 44% of the budget and includes policing activity and detention/correction operations. Fire rescue operations are reported in a separate emergency services fund. Public safety spending fell through fiscal 2012 but has since increased steadily through fiscal 2015.
Over the long term, county spending has generally been in line with revenue growth. This trend is expected to continue in the future as service needs continue to grow modestly.
During the recession, in response to significant revenue declines, county management scaled back spending utilizing layoffs, furlough days and across the board budgetary cuts. As a result, general fund spending fell by 20% between fiscals 2008 and 2012. Spending has since steadily increased by a cumulative 9% through fiscal 2015. The county retains significant cost cutting flexibility through its ability to temporarily control employee headcount and compensation. Officials have indicated that available measures to trim spending include layoffs, service level reductions, operating hour reductions and reducing employer contributions for health insurance. Carrying costs are moderate at about 12% of spending.
Long-Term Liability Burden
The county's long-term liability burden includes both debt and pension liabilities and is modest at 4.2% of personal income. This ratio is not expected to change substantially going forward given limited debt issuance plans and adequate pension funding levels.
Debt levels are generally modest with total debt to personal income of 3.3%. Outstanding bonds consist primarily of limited ad valorem tax bonds and revenue bonds, including sales tax and various gas tax-secured bonds. The county has no unlimited tax general obligation bonds outstanding. Amortization of direct debt is rapid with over 70% of principal retired within the next 10 years. The county's five year capital improvement plan includes a manageable $370 million of projects of which almost 70% are attributable to enterprise operations. There are no firm plans for additional bonds.
County employees participate in the Florida Retirement System (FRS), a statewide multiple employer cost sharing pension program. FRS is adequately funded with an 85.9% funding ratio as of June 30, 2015, based on Fitch's adjusted discount rate of 7%. The county's adjusted proportionate share of FRS net pension liability constitutes a modest 0.9% of personal income.
Operating Performance
County management has demonstrated its ability to adjust both revenues and spending when faced with economically driven downturns in revenues. To offset revenue declines experienced between fiscals 2010 and 2012, county officials trimmed spending by 15% while also raising tax rates and utilizing some fund balance to maintain operations. Fitch believes the county would continue to utilize its budgetary flexibility and solid reserves to offset the effects of a moderate recession-driven decline while maintaining reserves above the county's 10% minimum target.
The county is expected to maintain available reserves within the range of 10% to 15% of spending as has been the case in the recent past. Fiscal 2015 general fund operations reported a modest surplus of about $3 million, raising unrestricted fund balance to $29 million or a healthy 11.9% of spending. Fiscal 2016 operations are expected to result in a modest surplus of about $1.7 million.
LOFT Bonds Upgraded
The rating upgrade to 'A+' from 'A' on the LOFT bonds reflects improved debt service coverage, slow expected growth prospects, historic volatility of the pledged revenue stream and strong resilience through a moderate downturn scenario. The rating also reflects Fitch's expectation that LOFT revenues will not be leveraged to the 1.25x additional bonds test.
Pledged LOFT revenues consist of revenues received by the county from the first six cents of the local option fuel tax levied per net gallon on motor fuel sold within the county pursuant to Section 336.025(1)(a), Florida Statues. The state collects the LOFT and distributes it back to the county and its municipalities in accordance with an inter-local agreement between the county and municipalities within the county; however, the rating on the LOFT bonds is not tied to that of the county's IDR. Under the existing inter-local agreement, LOFT proceeds are allocated 50% based on population and 50% based on transportation expenditures made over the preceding five years. The county's share of LOFT distributions must be at least 47.14% of total county distributions. The inter-local agreement expires in 2037 coincident with the final maturity of the bonds.
LOFT collections increased by over 25% in fiscal 2012 due to the installation of 24 large (6.3 million gallons) diesel storage tanks at Port Canaveral. Revenues were essentially flat in fiscals 2013 and 2014 but grew by 6.2% in fiscal 2015. Year-to-date (YTD) collections were up 10% from last fiscal year although the difference at the end of the fiscal year may narrow as a large true-up payment in September 2015 may not be repeated in 2016. Fitch expects more modest growth in LOFT revenues in the future.
To evaluate the sensitivity of the LOFT to cyclical decline, Fitch considers both modeled 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 14-year pledged revenue history FAST generates a 5% scenario decline in pledged revenues and the largest actual cumulative decline in historical revenues is a 6.5% decline in fiscal year 2008.
Based on LOFT revenue of $9.5 million in fiscal 2015 which cover maximum annual debt service (MADS) by 1.63x, Fitch estimates the structure could tolerate a 38% drop in revenue which is 7.8x the scenario results and 6x the largest actual revenue decline in the review period. These results are consistent with an 'aa' level of coverage cushion. Assuming leverage to the 1.25x ABT, the scenario results are mixed. However, management has indicated that it has no intention of further leverage of the revenue stream. LOFT revenues in excess of debt service are used to fund pay-as-you-go road projects.
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/site/re/879478
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