Fitch Affirms Jacksonville, FL's Excise Tax Revs at 'AA+'; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has affirmed the 'AA+' rating on the following excise tax revenue bonds of the City of Jacksonville, Florida (the city):

--Approximately $194.3 million outstanding excise tax revenue bonds, series 2005A, refunding series 2006A, refunding series 2006B, taxable series 2006C, series 2007, series 2009A, refunding series 2009B, and refunding series 2009C.

The Rating Outlook remains Negative.

SECURITY

The excise tax revenue bonds are secured by the utilities services tax and the occupational license tax (collectively, the excise taxes) imposed, collected, and received by the city. The bonds are further secured by a debt service reserve fund equal to maximum annual debt service (MADS) and funded by a combination of cash and a bank letter of credit.

KEY RATING DRIVERS

STRONG COVERAGE: Fiscal 2013 pledged revenues provide 4.2x coverage of MADS. Fitch expects coverage will remain strong based on the current expectations for pledged revenue performance and steadily declining debt service requirements.

REMOTE LEVERAGING RISK: The bond ordinance establishes an additional bonds test (ABT) requiring an adequate 1.4x coverage of MADS as a condition precedent to the issuance of parity debt. Perhaps more importantly, the utilities services tax is a key funding source for the general fund operating budget - serving to limit the likelihood of its use for capital purposes. Management reports no plan to issue additional parity debt.

DIVERSE REVENUE STREAM: Pledged revenues are derived from the levy of a tax on the purchase of electricity, water, gas, fuel, and telecommunication services in addition to nearly all business, professions, and occupations in the city.

RATING CAPPED BY IMPLIED ULTGO: Fitch establishes a rating cap or ceiling on the excise tax revenue bonds and other special tax debt of the city equal to its implied ULTGO rating which is also 'AA+' but with a Negative Outlook. The rating cap reflects Fitch's view that the bulk of excise tax pledged revenues would not be viewed as special revenue under Chapter 9, and would thus be more susceptible to impairment in a bankruptcy situation.

RATING SENSITIVITIES

COVERAGE SENSITIVITY: The rating on the excise tax revenue bonds is strongly influenced by the coverage of MADS from pledged revenue. Fitch expects coverage will be relatively stable over the near term.

CHANGE IN GO RATING: Fitch anticipates resolving the Negative Outlook on the implied ULTGO rating of the city by the end of the calendar year. A downgrade of at least one notch is expected absent agreement on a pension deal that shows progress towards reducing the unfunded liability in a way that is affordable and preserves financial flexibility. A reversal of the city's long-standing stable financial performance, although not expected, could also pressure the rating.

CREDIT PROFILE

COVERAGE EXPECTED TO REMAIN STRONG

Coverage remains strong with fiscal 2013 pledged revenues equivalent to 4.2x MADS of $30 million. Pledged revenues are expected to remain fairly stable and risk to additional leveraging is considered remote. The city has stated it has no intent to issue additional parity excise tax revenue bonds. The city has recently migrated to a non-ad valorem bond program, absent a pledge of specific revenue to bondholders, to fund its capital needs. Furthermore, any parity debt issuance would likely dilute the availability of surplus excise tax revenues to meet the city's general spending needs; excise tax revenues represent close to 13% of budgeted general fund revenue in fiscal 2014.

A declining debt structure will also contribute to continued strong coverage and offers protection against unanticipated revenue weakness. Debt service declines from $30 million in the current year to $21 million by fiscal 2016 and continues to gradually step down through final maturity in 2034.

Pledged excise tax revenue increased a modest 0.4% in fiscal 2013 to $125.1 million and according to staff is up 0.8% on the year through June 2014 (the city's fiscal year ends on Sept. 30). The electric utility sales tax represents 55% of pledged revenue and was up 4.5% on the year following 1.5% growth in fiscal 2013. These revenues are derived from the operation of the JEA, one of the largest municipally-owned electric utilities in the United States. Fitch rates JEA's electric system revenue bonds 'AA' with a Stable Outlook.

After performing very well during the recession pledged revenue growth has moderated in recent years largely driven by declines in telecommunication taxes that account for roughly 25% of pledged revenues. Telecommunication taxes have declined four consecutive years and 13.6% in aggregate from fiscal 2009-2013, primarily driven by industry price competition. Fiscal 2013 receipts were down 1.4% and revenue contraction has accelerated in fiscal 2014 with receipts lower by 5.8% through June.

For information of the city's implied ULTGO rating please see, 'Fitch Affirms Various Jacksonville, FL Sales Tax Revs' dated March 4, 2014 at www.fitchratings.com.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=856074

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz, +1 212-908-9174
Director
or
Committee Chairperson
Steve Murray, +1 512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz, +1 212-908-9174
Director
or
Committee Chairperson
Steve Murray, +1 512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com