Fitch Affirms Sarasota, FL's GOs & IDR at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Sarasota, FL ratings:

--Long-Term Issuer Default Rating (IDR) at 'AA+';

--$35 million in general obligation bonds, series 2007 and series 2015 at 'AA+';

--$7 million in sales tax payments revenue bonds (federally taxable - Build America Bonds - recovery zone economic development bonds - direct subsidy) series 2010 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds constitute a full faith and credit obligation of the city, payable from the levy of ad valorem taxes, without limit as to rate or amount, on all property in the city.

The sales tax payments revenue bonds are limited obligations of the city, payable by a first lien on certain sales tax revenues distributed to the city from the state of Florida general revenue fund in connection with the city's share of construction costs for a project certified as a 'retained spring training facility' and by direct federal subsidy payments. If pledged revenues are not sufficient to cover debt service the city has covenant to budget and appropriate, by amendment if necessary, sufficient non-ad valorem (NAV) revenue to make up any shortfall. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on such revenue. The city's NAV covenant is cumulative and continues until the bonds have been fully paid.

KEY RATING DRIVERS

The 'AA+' IDR and GO rating reflect the city's slow revenue growth prospects, significant independent ability to raise revenues, adequate expenditure flexibility, moderately low long-term liability burden and strong operating performance throughout economic cycles. Carrying costs associated with debt service, pensions and other post employment benefits are elevated.

NAV Covenant Debt Notching: The one-notch distinction from the IDR reflects the link to the city's general credit quality and GO ratings. The rating also reflects the absence of a specific revenue pledge and the inability to compel the city to raise NAV revenues sufficient to pay debt service. NAV revenues are broad and diverse and are more than adequate for use toward the bonds' maximum annual debt service even after accounting for city debt with a prior claim on NAV revenues.

Economic Resource Base

Sarasota is located along the Gulf of Mexico on the southwest coast of Florida and is the largest city and county seat of Sarasota County (IDR AAA, Outlook Stable). Encompassing 24 square miles, the city is relatively mature with a 2015 census population of 55,118, up by nearly 6% since 2010.

Revenue Framework: 'aa' factor assessment

Revenue growth prospects are slow even considering development projects planned and underway. The city has substantial independent legal revenue-raising ability with current millage rates well below the 10 mill statutory limit.

Expenditure Framework: 'a' factor assessment

City expenditure growth is expected to remain in line with or marginally above revenue trends in the absence of policy action. The city benefits from adequate expenditure flexibility with its strong control of employee contracts, wages and benefits. Fixed carrying costs associated with debt, pension and OPEB liabilities are elevated but are expected to decline over time due to recent pension and OPEB reforms and limited debt plans.

Long-Term Liability Burden: 'aaa' factor assessment

The city's long term liability burden is equal to approximately 9% of personal income and expected to remain moderately low, given the city's limited debt plans and a reduction in certain retiree benefits and the closure of its general employee pension plan.

Operating Performance: 'aaa' factor assessment

Fitch believes that the city is well positioned to maintain financial flexibility throughout economic cycles, given its consistently high reserves, superior inherent budget flexibility despite slow economic growth prospects.

RATING SENSITIVITIES

FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial operations.

CREDIT PROFILE

The local economy includes health care, education, professional and business services, retail, and tourism sectors. The city employment base has continually grown since the recession; resulting in unemployment rates below the national and state averages. City home values endured steep declines during the recession and have notably recovered but remain below pre-recession levels. Assessed values experienced similar declines during the recession (down over 30% from 2008 through 2012) and recovery in recent years, with additional growth fueled by a solid pipeline of economic development projects planned and underway. Building permit activity has reached record highs, exceeding 8,000 in fiscal 2016. The city has over $1.6 billion in development projects, which are expected to boost revenues in the coming years. Wealth indices are below the state and nation, attributable to the service based economy. The city population nearly doubles to 100,000 in the winter season, reflecting the sizeable tourist presence. Tourism within the county reported strong performance in fiscal 2015 and fiscal 2016 with tourist development tax collections up nearly 13% and 5% respectively.

Revenue Framework

Property taxes are the largest general fund revenue source, equal to about 32% of total general fund revenues in fiscal 2015. The tax base declined by over 34% during the great recession, reflecting the impact of the housing market decline and state property tax reform. The city raised millage rates in 2012 and 2014 to offset the revenue decline. Utility excise taxes and intergovernmental revenues are also important contributors to the city's total general fund revenue base (17% and 12%, respectively).

General fund revenue growth trailed the rate of inflation over the past decade, reflecting the severe impact of the great recession and the housing market decline in Florida. Despite the millage rate increase, historical revenue growth has been tepid. Fitch believes future revenue growth will generally track the rate of inflation, fueled by continued population growth and economic development, in the absence of policy action.

The city has significant ability to raise revenues with the 2017 adopted millage rate of 3.1728 mills well below the statutory 10 mill rate cap.

Annual changes in the property tax levy are determined using a roll-back or revenue neutral rate, which is then adjusted for changes in Florida's per capita personal income. However, this limitation may be overridden by vote of the governing body. The city 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 city provides a wide range of municipal services that include public safety, recreation, public works, utilities and neighborhood development.

Fitch expects the pace of spending to generally be in line with or slightly exceed revenue trends going forward, absent policy action.

The city maintains adequate expenditure flexibility. Wages and benefits, a main expenditure driver, are collectively bargained. City employees are largely represented by two unions, with one contract in place through 2019 and the remaining contract in the process of being ratified for a three-year term. Under state law, if an impasse is declared, both parties are required to engage in a non-binding mediation process after which the city may impose contract terms for one year. During the Great Recession, the city reduced its workforce, enacted reforms to pension and other-post employment benefits (OPEBs), and controlled other costs in order to manage the budget. The city has actively increased positions in recent years, providing for additional flexibility in the event of a future downturn.

Fixed carrying charges for debt service, pension and OPEB comprised a high 32% of spending in fiscal 2015. Much of the fixed cost burden is attributable to its high pension costs, which include contributions for total city employees, as well as those for its enterprise operations. However, given the city's modification to pension and retiree health benefits, Fitch believes both pension and OPEB costs will moderate over the long term.

Long-Term Liability Burden

Overall debt and pension liabilities are equal to about 7% of personal income and are expected to remain low given the city's limited debt plans and pension reforms which will restrict the growth in pension costs. The liability burden may be slightly overstated as the city's pension liability include pension benefits for its enterprise operation employees.

The city maintains three defined benefit plans for its general, police and fire employees. In recent years, management has taken steps to limit its long term pension liability by lowering certain benefits in its defined benefit pension plan for general employees and closing the plan to new hires in fiscal 2011. New hires are enrolled in a defined contribution plan. The city's firefighter defined benefit pension plan was closed upon the consolidation of the city's fire and emergency services with the county in 1995. Firefighter pension plan benefits are funded by a combination of city and the county contributions, pursuant to an interlocal agreement .

Pension costs fluctuated in recent years, reflecting a revision to a more conservative investment rate of return assumption (to 7% for police and general employees and 7.25% for fire). The city's net pension liability was equal to $119 million in fiscal 2015 or 4% of personal income, using a Fitch adjusted 7% investment return assumption. However, approximately 27% of this liability is for the city's enterprise activities.

In 2014, the city revised its health care plan, which allowed the city to reduce OPEB spending yet still fund 100% of the ARC and reduce the UAAL by about 60% to $32 million (1% of personal income) in fiscal 2015. The city established an OPEB trust fund in 2006 and adopted a resolution to establish a minimum funding policy to the OPEB trust fund in fiscal 2015, equal to the actuarially determined cost. The city OPEB trust fund reported assets actuarially valued at $39 million, with a funded ratio of 54% as of the most recent valuation.

Fitch views the city's capital needs as manageable, given the city's $163 million 2017 to 2021 capital improvement plan which will mainly be funded through a combination of sales tax and excise tax revenues, tourist development taxes, grants and impact fees. The city plans to issue approximately $37 million debt in the near term for parking and water & sewer projects, to be payable from related user fees. The city's total direct debt of $64 million amortizes at a rate of 50% within 10 years.

Operating Performance

Fitch believes that the city is well positioned to maintain financial flexibility throughout economic cycles, given its consistently high reserves, high inherent budget flexibility and slow economic growth prospects. The city's high inherent budget flexibility provides it with the ability to maintain reserves consistently at least at a level Fitch assesses as equivalent to a 'aaa' financial resilience assessment.

Management has utilized reserves in conjunction with spending controls to offset sizable declines in the city's tax base and property tax revenues. Despite the use of reserves, the city has consistently maintained high reserve balances well in excess of its policy requirement (17%-25% of spending or two to three months of general fund expenditures).

The city also prudently established a revenue stabilization fund (RSF) in fiscal 2009 using unassigned fund balance reserves in order to minimize the impact of declining economic conditions and revenue decreases on the city budget; the RSF balance was $2 million (4% of spending) in fiscal 2015. City officials indicate that fiscal 2016 results are positive, with ending unassigned fund balance reserves to remain at similarly high levels and in excess of the city's policy requirement. The city's 2017 adopted budget represents a 4% increase over the prior adopted budget and maintains the current millage rate for the fourth consecutive year.

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

In addition to the sources of information identified in Fitch's 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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Contacts

Fitch Ratings, Inc.
Primary Analyst
Grace Wong
Director
+1-212-908-0652
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, Inc.
Primary Analyst
Grace Wong
Director
+1-212-908-0652
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