NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following revenue bonds of Sarasota County (the county):
--$37,510,000 infrastructure sales surtax revenue refunding bonds, series 2014A.
The infrastructure sales surtax bonds will be sold on a negotiated basis on September 18. Proceeds will be used to advance refund portions of outstanding infrastructure sales tax revenue bonds, series 2008B for level debt service savings.
In addition, Fitch affirms the following outstanding bonds:
--$105.8 million outstanding infrastructure sales tax bonds at 'AA+';
--$18.2 million outstanding capital improvement revenue bonds, series 2010A and series 2010B (sales tax bonds) taxable Build America Bonds (BABs) at 'AA+';
--$33.8 million outstanding communications services tax (CST) revenue bonds at 'AA+';
--$1.4 million outstanding five-cent local option fuel tax revenue (LOFT) bonds at 'AA+';
--Implied general obligation (GO) rating at 'AAA'.
The Rating Outlook is Stable.
The infrastructure sales tax revenue bonds are secured by the county's portion of a one-cent infrastructure sales surtax levied by the county. Twenty-five percent of the tax proceeds are distributed to the Sarasota County School Board with the remaining proceeds divided between the county and its incorporated municipalities in accordance with an interlocal agreement that allocates revenues based on population.
The sales tax bonds are secured by the county's receipts from the half-cent sales tax collected by the state and distributed to local governments based on the taxable sales within their counties. The county shares the proceeds with its incorporated municipalities according to a population-based formula.
The communications services tax (CST) revenue bonds are secured by revenues received by the county from the Local Communications Services Tax Clearing Trust Fund created with the Florida Department of Revenue pursuant to Section 202.193, Florida Statutes ("communication services tax revenues"). According to the statute, local governments are allowed to levy a tax on the sale of communications services within the entity.
The five-cent LOFT revenue bonds are secured by the county's portion of the 5-cents per gallon local option fuel tax levied in accordance with state statute and distributed to the county pursuant to an interlocal agreement. Collected revenues are divided between the county and its incorporated municipalities based on population.
KEY RATING DRIVERS
EXCELLENT CREDIT PROFILE: The implied unlimited tax GO (ULTGO) rating of 'AAA' reflects the county's superior financial management, generally modest debt structure and diverse and growing economic base.
VERY HEALTHY FINANCIAL POSITION: The county's finances are characterized by robust reserve levels, conservative budgeting practices and ample liquidity. Management has instituted financial policies designed to provide a strong base of reserves sufficient to maintain service levels after a natural disaster, economic downturn or after other unforeseen events.
ECONOMY CONTINUES ITS RECOVERY: Employment continues to expand at a healthy clip sustaining the positive trends which began in 2011. Other indicators such as sales tax growth and an uptick in home prices are also indicative of strengthening economic activity.
STRONG COVERAGE OFFSETS VOLATILITY: Infrastructure sales surtax collections continue to recover from precipitous recession-driven declines. Recent growth and lower debt service as a result of the proposed refunding boosts debt service coverage to a solid 2.2x maximum annual debt service (MADS).
HEALTHY REVENUE BOND COVERAGE: MADS coverage on county bonds secured by the half-cent sales tax, LOFT revenues and CST based on fiscal 2013 collections is robust at over 2.0x and above. High coverage levels have been maintained despite sizable declines in each of those revenue streams between fiscals 2008 and 2012.
SUBSTANTIAL RESERVE DRAWDOWNS: Large ongoing deficits which deplete financial reserves below a level consistent with the rating could result in negative rating action on the implied GO and revenue bonds.
NARROWED DEBT SERVICE COVERAGE: Pledged revenue declines which squeeze debt service coverage would be viewed as a negative credit development.
Sarasota County is located in southwest Florida, along the Gulf of Mexico. Encompassing 563 square miles, the county is 50 miles south of Tampa. Four municipalities are situated within the county, including the City of Sarasota, the largest city and county seat. Population growth was extremely rapid between 1950 and 2000 averaging over 2% annually. Since then, growth has levelled off but remains steady. The county's estimated 2013 population of 385,292 represents a 2.1% increase since 2010.
ECONOMIC INDICATORS POINT TO SUSTAINED RECOVERY
The county's service-oriented economy spans the health care, education, professional and business services, retail and tourism sectors. There is significant manufacturing as well. After being battered by the recession and its aftermath, the county's economy appears to be experiencing a sustained recovery.
Between 2006 and 2010, the county lost approximately 24,000 jobs or 14% of the employment base. Job growth resumed in 2011 and has since accelerated. Employment gains of 3.3% and 3.5% in 2012 and 2013, respectively, have attested to the increased pace of growth. The upward trend has extended in 2014 with June 2014 job numbers up 4.4% over June 2013 jobs data. The employment growth has nudged unemployment rates down from nearly 11% in 2011 to 5.7% this past June, below the state and national rates. Sizable increases in building permit activity and a substantial rise in sales tax collections are additional indicators of economic expansion. Tourism reported a very strong fiscal 2014 with tourist development tax collections up 14% over the prior year.
HOUSING AND TAXABLE VALUES MAKE A STRONG COMEBACK
Housing values declined by over 50% between 2006 and the end of 2011, according to Zillow.com. However, beginning in 2012, values have steadily increased and were up 11% year over year as of August 2014. Despite the gains, housing levels remain significantly below pre-recession highs. A number of substantial housing and commercial projects in development also attest to the expansive housing climate. The county's mostly residential tax base reflects the area housing collapse as well as its subsequent rise. Taxable valuations lost nearly 38% of value between fiscals 2008 and 2013. This pattern was reversed in fiscal 2014 with a 4% annual increase followed by a further 6.3% gain in fiscal 2015. Officials predict solid growth through fiscal 2020 based on state projections which Fitch believes is reasonable given the recent positive economic trends.
AFFLUENT AND OLDER POPULATION
County wealth indices are above the state and national averages, buttressed by a significant population of affluent retirees. According to the U.S. Census' American Community Survey, approximately 22% of county residents are over 65 years old compared to the Florida average of 17%. The county's population escalated rapidly during the early part of the past decade but growth has subsided more recently.
VERY STRONG FINANCIAL PROFILE
Financial operations are well-maintained as evidenced by abundant reserves, conservative budgeting practices and high levels of liquidity. Since fiscal 2007, the county experienced a 40% drop in property tax revenues attributable in part to severe tax base declines and the county's decision to modestly lower general government tax rates during this period. In response, management implemented cost saving measures to maintain structural balance, including workforce reductions, expenditure cuts and wage and hiring freezes. Since fiscal 2007, the county sliced full-time employee positions (FTEs) by over 700 or 18% of total FTEs. As a result, general fund operating expenditures and transfers out fell by $18 million or 8.3% of total spending between fiscals 2009 and 2012. County employment and expenditures increased modestly in fiscal 2013.
The county made a policy decision to utilize a portion of available fund balance to support operations, after building up reserves in fiscal 2009. However, the county typically budgets very conservatively and actual results invariably outperform the budget.
COUNTY EXPECTED TO MAINTAIN LARGE FINANCIAL CUSHION
The county budgeted a $23 million general fund net deficit for fiscal 2012 but registered a much smaller $9.2 million drawdown. The fiscal 2012 unrestricted general fund balance of $139 million represented nearly 60% of expenditures and transfers out.
The adopted fiscal 2013 general fund budget proposed a $32 million drawdown, which would have brought fund balance down to $107.5 million or over 40% of spending. Actual results improved upon budget with a $13.8 million drawdown. Sales tax revenues outperformed budget by $2 million while expenditures were $14.5 million under budget due to conservative budgeting. Fiscal 2013 unrestricted general fund balance totalled $125.7 million or a still robust 49% of spending. Liquidity remains solid with unrestricted cash and investments representing over six months recurring operating costs.
Another large drawdown was budgeted for fiscal 2014. As Fitch expected, projected results based on year-to-date actuals show a much smaller use of reserves. Year-end estimated general fund balance totals $108.1 million as a consequence of a $17.8 million projected operating deficit. Higher than budgeted property tax revenues and state revenue sharing combined with below-budget spending to narrow the deficit. Unrestricted year-end general fund balance is projected to represent a still healthy 45% of expenditures and transfers out. Management expects an additional $23 million deficit for fiscal 2015.
Fitch believes that the county will continue to maintain sizable reserve balances due to its conservative budgeting practices and prudent financial reserve policy. The policy requires the county to maintain a disaster recovery fund for natural disasters at a level equal to 75 days of operations and an economic uncertainty fund sufficient to cover 30-60 days of operations. Management indicates that the disaster fund is currently maintained at 75 days of operations, which serves as the county's informal minimum general fund balance. Monies from the economic uncertainty fund have been utilized over the past few years to cover operations, reducing available reserves to $12 million or 21 days of operations. Management expects to achieve balanced operations in fiscal 2016 after which it will need to raise tax rates or lower spending to prevent a further draw on reserves.
Debt levels are relatively modest with total debt to market value at 1.8% and debt per capita of $1,528. The county has no ULTGO bonds outstanding but relies upon limited ad valorem debt and revenue-secured bonds to fund its capital program. All bonds are fixed rate and amortization is above average with 69% of principal maturing within 10 years. Debt service carrying costs represent a modest 7.7% of government fund expenditures.
The county's five-year capital plan proposes an affordable $360 million of funded capital projects with most of the spending slated for transportation and utility projects. County debt plans over the next few years include about $81 million of financings. Significant projects include $16 million of utility fund revolving loans, $25 million for public safety communication upgrades and $11 million in beach improvements. Management intends to issue commercial paper to initially fund these projects, secured by non-ad valorem revenues, to be refinanced later into longer term debt.
RETIREMENT LIABILITIES DO NOT REPRESENT A COST PRESSURE
Retirement obligations are not considered to be a cost pressure. All employees except firefighters participate in the Florida Retirement System (FRS), a state-administered defined benefit pension plan. FRS is relatively well-funded with a funding ratio estimated at 79% as of June 30, 2013 using Fitch's more conservative 7% discount rate. The county and city of Sarasota's firefighting departments merged in 1996 and by agreement, the county funds a majority of the plan. As of fiscal 2013, the funding ratio for the firefighter's plan at the assumed 7% discount rate improved from 57% last year to 67% due mainly to sizable investment gains. The plan is closed with eight more years of amortization. County contributions to both plans in fiscal 2013 totalled $25.5 million or a moderate 5.6% of general government spending.
The county provides an implicit subsidy to its retirees for health benefits by allowing them to participate in the county's healthcare plan at the same cost applicable to current employees. In 2008, the county established an OPEB trust fund which is administered by the Florida League of Cities. As of October 2013, the OPEB plan was 64% funded. ARC requirements are minimal, representing less than 0.4% of fiscal 2013 general fund spending.
SOLID INFRASTRUCTURE SALES TAX DEBT SERVICE COVERAGE
Infrastructure sales tax revenues surged by over 7% in fiscal 2013 following two years of solid growth totalling nearly 10%. Collection trends have exhibited significant past volatility, declining 28% between fiscals 2006 and 2010. Despite the solid gains, infrastructure sales tax revenues are only at 85% of their pre-recession peak levels. Year-to-date 10-month actual collections for fiscal 2014 are up a sound 6.4% over same period collections in fiscal 2013.
Debt service coverage levels of infrastructure sales surtax bonds are strong. Based on fiscal 2013 collections, coverage of MADS approaches a healthy 2.2x. Fitch considers the 1.35x MADS additional bonds test thin but management has no immediate plans to significantly leverage that revenue stream. No debt service reserve fund (DSRF) is provided for this issue unlike the series 2008 infrastructure sales tax bonds, which have a dedicated cash-funded reserve.
HALF-CENT SALES TAX VOLATILITY
Following a cumulative decline of over 30% between fiscals 2006 and 2011, half-cent sales tax collections rebounded strongly in fiscals 2012 and 2013. Collections registered over 8% annual gains in both fiscal years, making up about half of the previous losses. Further growth is projected for fiscal 2014 with 10-month year-to-date collections up 7.6%. Coverage of debt service remains ample with fiscal 2013 collections at nearly 10x MADS. While the ABT is weak at 1.3x MADS, issuance is limited by the county's need of these funds for operations. Lack of a debt service reserve fund is not a concern given the high levels of coverage.
CST REVENUES COVER DEBT SERVICE COSTS BY COMFORTABLE MARGIN
CST revenue trends have been uneven over the past 10 years. Between fiscals 2007 and 2011, collections fell by aggregate 7%. The declines were attributable to a combination of factors including the recession, technological changes in communications which have increased the use of services which are not taxed under the CST, and falling prices for wireless services. Collections did rise modestly in fiscal 2012 while fiscal 2013 results registered a miniscule drop-off. Despite the volatility of the revenue stream, MADS coverage is still robust at 2.12x, based on fiscal 2013 collections. Break-even collections for fiscal 2014 are expected based on year-to-date actual results. CST collections can withstand considerable stress and still cover debt service. Revenues could decline by 53% and maintain MADS coverage at 1.0x.
LOFT BOND DEBT SERVICE COVERAGE REMAINS ROBUST
Before a 2.5% increase in fiscal 2013 collections, pledged LOFT revenues had decreased for six consecutive fiscal years, falling by over $900,000 or 18% during that period. The downward trend was primarily attributable to the weak economy and high gas prices. As the five-cent LOFT revenues are lightly leveraged and no further debt planned, MADS coverage from fiscal 2013 LOFT revenues continues to be sturdy at 3.9x. Year-to-date LOFT collections for 10 months of fiscal 2014 are a healthy 5.5% above equivalent period collections in the prior fiscal year.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2012.
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 16, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria