NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Orlando, Florida (the city) bonds:
--$95.3 million capital improvement revenue bonds, series 2014B, 2014C and 2014D (the bonds, or non-ad valorem bonds).
The bonds are expected to sell on October 16 via a negotiated sale. Bond proceeds will be used to fund capital projects including a new police headquarters and refund certain outstanding capital improvement bonds for debt service savings.
Fitch maintains the following ratings on other city obligations:
--Implied general obligation (GO) rating at 'AAA';
--$184.8 million outstanding capital improvement revenue bonds at 'AA+';
--$236.3 million contract tourist development tax (TDT) payments revenue bonds, series 2014 (contract TDT bonds) at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by the city's covenant to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, legally available non-ad valorem revenues (covenant revenues) sufficient with other pledged funds to pay debt service on the bonds. The availability of covenant revenues to pay debt service is subordinate to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant is cumulative to the extent not paid, and continues until all required amounts payable under the indenture have been paid.
The contract TDT bonds are secured by the first four cents of Orange County TDT collections net of the base year amount which escalates by 2% annually. The base year amount is then reduced by an amount equal to that year's collections of the fifth cent TDT. The contract TDT bonds are ultimately secured by the city's CB&A pledge to cure any deficiency in contract TDT revenues or dedicated reserves.
KEY RATING DRIVERS
CB&A CONSTITUTES STRONG SECURITY: The city's pledge to covenant to budget and appropriate is supported by a diverse and extensive covenant revenue base which provides ample coverage of maximum annual debt service (MADS). The 'AA+' rating on the contract TDT bonds is based on the city's CB&A deficiency make-up.
IMPLIED GO RATING: The city's 'AAA' implied GO rating reflects its solid finances, high but manageable debt levels, and an expanding and diversifying economic base.
WORLD-RENOWN TOURIST DESTINATION: The city and its environs include Disney World, Universal Theme Park and numerous other attractions making it one of the top tourist destinations in the world. Large and ongoing investments by Disney and Universal in their respective theme parks promote continued high levels of visitations.
STRONG CITY FINANCIAL PERFORMANCE: City finances are well-managed as demonstrated by strong reserves, ample liquidity, a diverse revenue base and conservative budgeting. Management increased the property tax rate in order to bolster the levy and instituted additional spending cuts to achieve a balanced budget for fiscal 2015.
STRENGTHENED AND DIVERSIFYING LOCAL ECONOMY: Local economic activity has surged over the past three years with the recovery in tourism. Significant health science-related development provides diversification away from the volatile tourist sector.
ELEVATED BUT MANAGEABLE DEBT: Debt per capita is elevated, but debt-to-taxable assessed value (TAV) is more moderate. Given no new debt planned and slow amortization, debt levels are expected to remain elevated for some time.
DETERIORATION OF FINANCIAL RESERVES: Significant operating deficits bringing general fund balance below the lower end of the city's fund balance target would be viewed unfavorably by Fitch.
NARROWED COVENANT DEBT COVERAGE: Reduced coverage of covenant debt, either through declines in covenant revenues and/or additional leverage could lead to negative rating action on the city's covenant bonds and the implied GO.
BROAD COVENANT REVENUE BASE
The city's CB&A is supported by an extensive and diverse base of non-ad valorem revenues from the city's two major unrestricted funds (the general fund and utility services tax fund). Covenant revenues totaled over $244 million in fiscal 2013. The largest source of covenant revenues consists of contributions to governmental operations from the Orlando Utilities Commission (OUC - revenue bonds rated 'AA' with a Stable Outlook).
OUC operates the city's electric and water utility. These contributions consist of a franchise equivalent fee, a dividend payment and OUC's portion of utilities services tax revenues totaling over $110 million or approximately 44% of budgeted fiscal 2015 covenant revenues. Other important covenant revenues include franchise fees and the city's share of state sales tax distributions. Covenant revenues have been generally consistent since fiscal 2009. A slight dip in covenant revenues is projected for fiscal 2014 while a more substantial 6.3% gain is budgeted for fiscal 2015, the result in part of a $4.6 million increase in OUC dividends.
SOLID COVERAGE OF COVENANT DEBT SERVICE
Approximately $600 million of city obligations are secured by covenant revenues, in addition to the new-money portion of the current offering. Coverage of MADS on all covenant debt including the proposed bonds is ample at 4.4x, conservatively assuming that no contract TDT revenues or dedicated bond reserves are available for contract TDT bond debt service. Coverage remains ample at 2.3x when taking essential expenditures (executive office expenditures, fire and police spending) into consideration.
The city's covenant bond ordinance limits issuance of additional debt by restricting covenant debt service to no more than 25% of covenant revenues if MADS falls within the first six years after issuance or 35% of covenant revenues if MADS occurs beyond the first six years following issuance. The proposed bonds comfortably meet the requirements of the additional bonds test.
HIGHLY VOLATILE CONTRACT TDT REVENUES
The city's CB&A deficiency pledge provides the ultimate security for the contract TDT bonds. Contract TDT revenues, the initial source of repayment, are generated from TDT collections net of a base year amount. As incremental revenues, the contract TDT is notably volatile given the nature of the revenue stream combined with a 2% annually escalating base. Despite a projected 55% increase in contract TDT revenues for fiscal 2014, additional growth in TDT collections is required in order for contract TDT revenues to cover debt service throughout the life of the bonds. A sizable amount of reserves are available to cover any deficiencies in contract TDT revenues. However, a prolonged fall-off in TDT collections would almost certainly lead to reserve depletion and reliance on covenant revenues.
STRONG FINANCIAL MANAGEMENT
City finances are well-maintained and characterized by sizable reserve levels, tight controls over spending and favorable actual performance to budget. The city reported four consecutive years of operating surpluses between fiscals 2009 and 2012 which grew the city's total general fund balance by nearly 80% to $129 million, or 37% of general fund spending. The positive results were a function of tight spending controls (since fiscal 2008 the city reduced its workforce by 300 positions and streamlined operations) and a one-time transfer of accumulated balances in the utility services tax fund to the general fund.
PLANNED DRAWDOWNS OF LARGE BALANCES
Officials decided to tap a portion of recently built-up general fund reserves in fiscals 2013 and 2014, budgeting a $29.5 million drawdown in each fiscal year. The fiscal 2013 budget provided a 3% salary increase to employees, the first in three fiscal years. Year-end results show a modestly better than budgeted $22 million year-end drawdown reducing overall fund balance to $107 million and unrestricted general fund balance to $103.8 million or a still ample 27.7% of spending. Fund balance remains above the city's target of 15% to 25% of next year's budget.
The fiscal 2014 general fund budget incorporated a modest increase in the property tax levy, the first in six years. Employees were granted a 2% wage rise and additional funding is provided for a land purchase. Even if the entire $29.5 million drawdown is realized, unrestricted balance would still be maintained within the reserve target at approximately 20% of expenditures. Actual results typically outperform the city's conservative budgets.
FISCAL 2015 BUDGET RESTORES STRUCTURAL BALANCE
The city's fiscal 2015 general fund budget is balanced benefiting from a 7.5% rise in TAVs and a one-mill increase in the property tax rate. The rate hike, the first in six years, represents a 17.7% increase in tax rates and combined with the tax base growth will generate an additional $26 million in property tax revenues. In addition, management implemented a 4.5% across-the-board spending reduction estimated to save approximately $15 million without reducing service levels. Fitch regards the city's return to structural balance as a positive credit development.
HIGH DEBT COSTS MITIGATED BY SUBSTANTIAL TDT-SECURED DEBT
City debt levels are moderate when compared with market value but high on a per capita basis at $6,880. Carrying costs of debt, pension contributions and post-employment benefits (OPEB) payments for fiscal 2013 were elevated at over 22% of general government spending and will further rise with the current issue. Some mitigation is provided by the fact that nearly half of outstanding direct debt is secured by TDT revenues which are mostly paid by visitors. Principal amortization of city debt is slow with only 30% of principal retired within the next 10 years. Capital needs are manageable with the fiscal 2014-2018 capital improvement plan totaling $238 million. There are no plans for additional debt at this time.
ADEQUATELY FUNDED PENSION OBLIGATIONS
The city maintains three separate single-employer defined benefit pension plans (police officers, firefighters and general employees). The general employees defined benefit plan was replaced with a defined contribution plan for employees hired after 1998. The city consistently funds 100% of the required contribution each year. All defined benefit plans are satisfactorily funded with funding ratios of 74%, 75% and 73% for the general employees, firefighters and police officers' plans, respectively, assuming Fitch's 7% discount rate.
For OPEBs, the city provides two single-employer plans; a defined benefit plan and a defined contribution retiree healthcare expense reimbursement option. General employees hired after 2006 are offered an implicit subsidy while fire and police employees hired after 2006 must participate in the defined contribution plan. The city established an OPEB trust and contributes 100% of cost each year. The funding ratio is low at 19% assuming the 7% discount rate but is higher than funding levels of many other municipalities.
CENTRAL FLORIDA ECONOMY STRENGTHENS
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 4.2% in July 2014 on a year-over-year basis. The city's July 2014 unemployment rate of 6% was lower than the state and national rates of 6.6% and 6.5%, respectively.
Taxable values gained 7.5% in fiscal 2015, the second consecutive increase after four years of decline, with about one third of the $1.3 billion growth attributable to new construction. Median September 2014 home values are up nearly 12% over the prior year according to Zillow.com, signaling future tax base growth.
The leisure and hospitality sector continues to be a major component of the local economy, making up about 21% of total employment. Disney is the dominant player, employing about 69,000 or over 10% of total county employment. Universal Orlando reports 17,300 employees while SeaWorld of Orlando's workforce consists of approximately 7,000. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
EVOLVING BIOTECH AND LIFE SCIENCE HUB
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master-planned mixed community within Orlando. Lake Nona is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are the recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near-term growth.
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, National Association of Realtors, Zillow.com.
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
U.S. Local Government Tax-Supported Rating Criteria