Fitch Affirms Marco Island, FL's GOs and Sales Tax Bonds; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following ratings for Marco Island, FL (the city) bonds:

--$4.58 million general obligation (GO) bonds series 2004 at 'AA+';

--$3.36 million sales tax revenue bonds series 2005 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the city's full faith and credit and unlimited taxing power.

The sales tax bonds are secured by the proceeds of the local government half-cent sales tax, which is levied countywide, collected by the state, and distributed between the county and its incorporated municipalities based on a population-driven formula.

KEY RATING DRIVERS

AMPLE FINANCIAL FLEXIBILITY: The city maintains a sound level of reserves which combined with the city's lower than average property tax rate provides ample financial flexibility.

SOUND FISCAL MANAGEMENT: City management has demonstrated a history of prudent financial stewardship utilizing conservative budgeting and sound fiscal policies.

ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage on the sales tax bonds was strong at 3.1x in fiscal 2013. The city does not plan to issue additional sales tax bonds.

FAVORABLE DEBT PROFILE: Key debt ratios are generally moderate, and carrying costs including debt service, pension, and other post-employment benefits (OPEB) are manageable and not expected to increase materially in the near term given the city's very rapid debt amortization, absence of additional issuance plans, and pension plan funding levels.

LIMITED LOCAL ECONOMY: The local economy is based mainly on tourism; however, above-average economic indicators partially mitigate this concern.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

Marco Island is located off the southeastern coast of Florida in Collier County (implied GO rating of 'AA+' by Fitch). The city is a popular tourism destination with the peak season population roughly tripling the year-round population, which stands at 17,163 in 2013.

SALES TAX REVENUES INCREASING

After declining more than 12% in fiscal 2009, pledged sales tax revenues have shown strong annual gains. Fiscal 2013 revenues continued the trend with 7.5% growth. Coverage of maximum annual debt service (MADS) is favorable at 3.1x based on fiscal 2013 revenues of $1.7 million. Unaudited results for fiscal 2014 are for a strong 9.1% sales tax revenue growth.

Fitch expects revenues to demonstrate a degree of volatility going forward given the economy's dependence on tourism. The strong coverage and prospects for continued sales tax growth provide ample margin for fluctuations. The additional bonds test requires a somewhat lenient 1.35x MADS coverage to issue additional debt, though the city has no plans to further leverage the security. The debt service reserve account is cash funded.

AMPLE FINANCIAL FLEXIBILITY

Financial operations have historically been strong, highlighted by conservative budgeting policies and strong management. The city has a self-imposed spending cap, which limits all governmental funds spending to an annual increase of 3% plus a cost of living adjustment (COLA). City charter allows for an override of the cap for emergency spending. The city's fiscal policy establishes an emergency reserve equal to 25% of the general fund operating budget and operations have consistently exceeded this prudent benchmark.

General fund revenues have been well in excess of expenditures in each of the past six fiscal years, enabling large transfers to fund capital projects. The general fund fiscal 2013 unrestricted fund balance is strong at $8.7 million or 44% of operating expenditures and transfers out. In addition to general fund reserves, the city maintains substantial liquidity in the capital improvement fund with a fiscal 2013 balance of approximately $7.5 million.

Both under-budget expenditures and favorable revenue performance resulted in a $2 million fiscal 2013 operating surplus (10% of spending). Property taxes are the largest general fund revenue source (46%) and general fund spending is dominated by public safety (51%).

The fiscal 2014 budget was balanced without the use of general fund reserves and officials expect to close the year with a small operating surplus. The fiscal 2015 budget includes a modest tax rate increase which, with tax-base growth, contributes to a budgeted 8% increase in general fund revenues. On the expenditure side, the budget is $1.55 million below the spending cap and includes 1% wage increases as well as increases for health benefits.

LIMITED LOCAL ECONOMY

The local economy is heavily dependent on tourism and the top taxpayers include shopping centers, housing complexes and resort properties. There are no dominant taxpayers, as the top 10 account for less than 3% of the tax base. Wealth levels are above average with median household income at 148% of the state and 140% of the national levels. The unemployment rate, which is only available at the county level, was 6.6% in July 2014 which is comparable to the national rate. Unemployment hit a peak of 11.6% during the recession but strong employment gains have alleviated unemployment.

TAX-BASE SHOWING SOME RECOVERY

After a peak-to-trough assessed value (AV) decline of 36% from fiscal 2008 through 2013, the tax base posted gains of 1.9% and 5.6% in fiscal years 2014 and 2015. The total tax base is a sizable $8 billion and per capita property tax value is high at $464 thousand. The city's low property tax rate (2.05 mills) is well below the statewide cap of 10 mills, leaving ample revenue- raising flexibility.

MANAGEABLE CARRYING COSTS

Direct debt levels for the city are very low, as most total debt is overlapping debt. Overall debt, which includes the county and county school debt is high on a per capita basis ($6,832) but low as a percentage of AV (1.5%), reflecting both the seasonal nature of the city's population and its high home values. There are no plans for additional debt and amortization is rapid. All of the city's general obligation debt and sales tax debt matures in six years. The capital improvement plan for 2015 - 2019 totals just under $22 million and is funded pay-as-you-go, with no debt financing.

Overall carrying costs including debt, pension and OPEB liabilities were a moderate 13.5% of fiscal 2013 governmental expenditures. The city administers three single-employer pension plans, one each for firefighters, police, and general employees. Additionally, a very small number of employees participate in the state multi-employer retirement plan. The city's fire and police pension plans are defined benefit plans while the general employee plan is a defined contribution plan. The fire and police plans are funded at 82% and 54%, respectively, based on the Fitch-adjusted 7% investment rate of return. The low funded ratio for the police plan considers its recent formation in 2005. The city fully funds its actuarial required contribution, and the aggregate unfunded liability totals just $4.1 million or less than 0.1% of market value of the tax base.

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 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:

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=917335

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Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan
Director
+1 212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Mike 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
Primary Analyst
Patricia McGuigan
Director
+1 212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Mike 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