Fitch Affirms Lake County, FL's Capital Improv Bonds, Implied ULTGO Rtgs; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has affirmed the following ratings for Lake County (the county), Florida:

--$77.7 million capital improvement revenue bonds (CIRB), series 2007 at 'AA-';

--$24.2 million limited tax general obligation bonds (LTGO), series 2007 at 'A+'.

--Implied unlimited tax general obligation (ULTGO) at 'AA-'.

The Rating Outlook on the implied ULTGO and the CIRBs remains Negative. The Rating Outlook on the LTGOs is Stable.

SECURITY

The CIRBs are secured by the county's portion of the local government half-cent sales tax.

The LTGO bonds are secured by a voter-approved ad valorem tax not to exceed 1/3 of a mill on all taxable property within the county.

KEY RATING DRIVERS

GO CEILING: The ratings assigned to the LTGOs and CIRBs are capped by the county's implied ULTGO rating of 'AA-'. Because of this, the Negative Outlook maintained on the implied ULTGO rating also applies to the CIRBs.

SOUND CIRB COVERAGE: Maximum annual debt service coverage (MADS) on the CIRBs remains strong, at over 2.0x in fiscal 2013.

ADEQUATE LTGO DEBT COVERAGE: The 'A+' rating on the LTGO bonds reflects reduced but adequate debt service coverage based on the maximum permitted millage rate.

CONTINUED BUDGETARY PRESSURE: The maintenance of the Negative Outlook on the implied ULTGO and CIRBs reflects budgetary pressure as evidenced by general fund deficits in fiscals 2013 and 2014 and a corresponding weakening of reserves. An increase in the operating tax rate, in combination with reasonable growth in taxable assessed value (TAV), is expected to stabilize the budget in fiscal 2015.

LIMITED ECONOMY; RECENT ECONOMIC IMPROVEMENT: The county's economy is somewhat limited reflected in its largely residential base with a high retiree population and wealth levels slightly below state and national averages. Economic improvement is evident in an improving housing market and a declining unemployment rate.

MODEST DEBT BURDEN: The county's debt burden is low and should remain so given no plans for additional issuance. Carrying charges for debt, pension, and other-post employment benefits (OPEB) are very low, although partially offset by the slow amortization of outstanding debt.

RATING SENSITIVITIES:

DEBT SERVICE COVERAGE: The ratings on the LTGO and CIRBs are sensitive to shifts in debt service coverage.

CONTINUED EFFORT TOWARDS ACHIEVING STRUCTURAL BALANCE: The county increased the tax rate in fiscal 2015 which is expected to result in a balanced fiscal 2015 general fund budget. Continued effort towards financial stability may result in an Outlook revision to Stable. Conversely, continued structural imbalance and drawdowns on general fund reserves in fiscal 2015 would result in negative rating action.

CREDIT PROFILE

Lake County is located in central Florida. The county seat, Tavares, is about 34 miles from the city of Orlando. The county's 2013 population of 308,034 represents growth of over 40% since 2000.

STRONG CIRB DEBT SERVICE COVERAGE

After flat growth recorded in fiscal 2012, sales tax revenue showed strong growth in fiscal 2013, increasing 8% year-over-year. MADS (which occurred in fiscal 2013) coverage based on fiscal 2013 revenue was 2.1x. Growth in sales tax revenue is expected to continue in fiscal 2014, further improving MADS coverage. Bond legal provisions include a lenient 1.2x additional bonds test, however, Fitch views risk to additional leveraging as limited based on the county's capital needs and dependence on surplus pledged revenue to fund general government operations.

SUFFICIENT DEBT SERVICE COVERAGE FROM 1/3 MILL FOR LTGOs

The fiscal 2015 budget reduces the LTGO levy to 0.16 mills from 0.19 mills the year prior, offset by an increase in revenue from growth in TAV. Management estimates revenues will remain sufficient to cover debt service needs and allow for maintenance of a reserve of about $500,000 at the end of fiscal 2015 at the current mill levy. If the county were to levy the full 1/3 mill, MADS coverage would be 1.7x and 1.8x for fiscal years 2014 and 2015, respectively. The county's tax base could lose over 40% of its 2015 value and still provide 1.0x debt service coverage.

NEGATIVE OUTLOOK REFLECTS WEAKENED FINANCIAL OPERATIONS

The county's financial operations and fund balances, which had previously been viewed as a credit strength, have deteriorated significantly since fiscal 2008. This is largely due to the steep decline in property values during the recession that had a significant impact on the tax base and, as a result, operating revenues. Operating deficits after transfers were recorded in five of the six years from fiscal 2008-2013, and an additional reduction in reserves is expected for fiscal 2014 ended Sept. 30. The county's unreserved or unrestricted fund balance, which has generally ranged from 20%-30% of spending over the last decade, is forecast at about 11% for fiscal 2014 (or $13 million).

The county revised its reserve policy in 2012 to set a targeted fund balance range of 7% to 12% of the operating budget, down from the previous policy target of 15%. Maintenance of fund balance ranges close to the high end of the fund balance target range is a key factor in maintenance of the 'AA-' rating.

TAX INCREASE TO STABILIZE BUDGET

The fiscal 2015 budget, which was adopted on Sept. 23, 2014, totals $350 million and is essentially flat over the prior year's adopted budget. In order to help plug an estimated $15 million budget gap, the county increased the operating property tax rate to 5.39 mills from 4.73 mills (a 13.8% increase), still well below the state-imposed 10 mill cap. This increase, coupled with 4% growth in TAV, is expected to generate an additional $13.2 million in revenue in fiscal 2015. Property tax revenues are the largest source for the general fund, equal to about 70% of revenue. Management expects to keep the tax rate level over the next several years.

The fiscal 2015 budget includes a 3% raise for all employees (about $1 million), after five years of no salary adjustments, information technology and facilities upgrades ($700,000), $500,000 for a fuel remediation project, and a slight increase for pension funding ($100,000). The fund balance is expected to remain unchanged.

RECENT ECONOMIC IMPROVEMENT

The county is a largely residential community with a high retiree population. The largest employers are relatively diverse in industries such as government, healthcare, and retirement communities.

County employment continues its trend of healthy growth, increasing 3.6% in 2013 after 1.2% growth the previous year. The unemployment rate, which reached a peak of 12.3% in 2010, continues to improve, dropping to 6.9% in July 2014, slightly above state and national averages of 6.6% and 6.5%, respectively. Wealth levels remain slightly below regional, state and national averages.

The county experienced multiple years of sizable TAV declines, totaling about 34% from 2008 to 2013; however, fiscal 2014 TAV stabilized, increasing 0.7%, and growth began to accelerate in fiscal 2015, increasing 4%. The county expects additional modest growth over the near term which Fitch views as reasonable based on an improving housing market and development activity planned or underway. The tax base is not concentrated.

AFFORDABLE DEBT BURDEN

County overall debt levels are low at $1,449 per capita and 2.1% of market value. Debt service relative to total governmental fund spending is a modest 4.3%. Amortization is slow, with 42% of principal retiring within 10 years. However, capital needs are limited and no additional debt issuance is contemplated.

County employees participate in the Florida Retirement System (FRS). The FRS funded ratio as of June 30, 2013 was 88.9% or 78.9% using Fitch's more conservative 7% discount rate assumption. Total carrying costs, including debt service, OPEB payments, and the pension actuarially required contribution are manageable at 8.2% of total governmental spending.

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, IHS Global Insight, and the National Association of Realtors.

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=890034

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Contacts

Fitch Ratings
Primary Analyst
Nicole Wood, +1 212-908-0735
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
or
Committee Chairperson
Karen Krop, +1 212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood, +1 212-908-0735
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
or
Committee Chairperson
Karen Krop, +1 212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com