NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of the city of Boca Raton, Florida (the city):
--$19 million outstanding general obligation (GO) bonds at 'AAA';
--$10 million outstanding (Visions 90 Project) special assessment improvement bonds at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's full faith, credit and taxing power and are payable from unlimited ad valorem taxes levied on all taxable property in the city.
The special assessment bonds are secured by the proceeds of special assessments to be levied against the real property within the Downtown Special Assessment District specially benefited by the project.
Secondarily, the special assessment bonds are secured by the city's covenant to budget and appropriate (CB&A) non-ad valorem revenues, by amendment if necessary. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. The issuer's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid.
KEY RATING DRIVERS
VERY STRONG FINANCIAL MANAGEMENT: Boca Raton's sound operating results and solid reserve levels are the result of its strong financial management, prudent fiscal policies and conservative budgeting practices.
ABOVE-AVERAGE SOCIOECONOMIC INDICATORS: The city's economy is diverse and positive economic indicators include very high income levels and below-average unemployment rates. Tax base growth has been positive over the last four years as a result of new development and increases in property values.
MANAGEABLE LONG-TERM LIABILITIES: Debt levels are low to moderate and are expected to remain so as there are no immediate debt plans and par amortization rates are strong. Funded levels for the city's pension plans have improved due to recent benefit reforms and increased employee contributions. The aggregate unfunded liability is considered manageable by Fitch.
CB&A PLEDGE PROVIDES WIDE COVERAGE: The 'AA+' rating on the special assessment bonds is based on the CB&A pledge including diverse sources of available non-ad valorem revenues. Coverage of CB&A-secured debt service is strong, even when essential government expenditures are taken into account.
CHANGE IN FINANCIAL PROFILE: Significant drawdowns of reserves primarily from future budget imbalances could pressure the rating.
Boca Raton is located in Palm Beach County approximately 40 miles north of Miami along the Atlantic Ocean. The city encompasses 28 square miles with a population of approximately 89,407 as of 2013.
BROAD AND DIVERSIFIED ECONOMIC BASE
The city's economy is broad-based and diverse encompassing a significant education and healthcare network along with its traditional underpinnings of tourism, agriculture, and related service industries. A regional employment center, the city hosts a number of Fortune 500 companies, including Office Depot and IBM, as well as several business parks. Florida Atlantic University (FAU), the leading employer, enrolls about 20,000 students within the city with plans to further expand enrollment. Boca Raton Regional Hospital, the second top employer, operates 400 inpatient beds and employs approximately 2,250.
STRONG SOCIOECONOMIC PROFILE
Recent economic development and increases in property values has led to an increase in taxable values for each of the last four years. Taxable values increased 7.6% and 5.8% in fiscals 2016 and 2015 respectively. Since 2011, home prices have gained steadily and as of June 2015 are up nearly 9% year over year according to Zillow.com. Estimated market value per capita based on the fiscal 2016 taxable value of $19.6 billion is a very high $226,000.
The tax base is diverse with the 10 leading taxpayers accounting for 7% of assessed value.
Income and wealth levels are high with median family income at 133% and 151% of state and national levels respectively. Boca Raton's unemployment rate of 4.3% (May 2015) is lower than the state's 5.7% rate and an improvement from 4.8% a year ago.
STRONG MANAGEMENT PRACTICES; STRONG RESERVE LEVELS
City finances are prudently managed, characterized by conservative budgeting, maintenance of substantial reserve margins and a diverse revenue stream. Fiscal 2014 unrestricted general fund balance of $45.1 million represented a solid 36% of operating expenditures and transfers out (not including the one-time transfers discussed below). Management has set aside $10.6 million of the fiscal 2014 unrestricted balance for emergency/disaster preparedness and designated $29.1 million or 23% of spending as unassigned, well above the city's 10% minimum unassigned fund balance target.
The fiscal 2014 budget included the appropriation of $26.1 million of fund balance which included a transfer of $15 million to the internal service fund for pension sustainability and $5.6 million to its economic development fund. The actual net decline in fund balance was $13.3 million due to positive budget variances for both revenues and expenditures reflective of the conservative budget practices and growth in non-tax revenues. The pension sustainability fund will be maintained to help smooth future pension contributions and provide for budget stability. These funds were not deposited directly in any of the city's three pension trust funds.
DIVERSE REVENUE STREAM
The city's revenues are diverse with property taxes constituting less than 40% of general fund revenues, a below average share of the revenue stream when compared with most Florida local governments. Other important revenues include charges for service (18%), utility taxes (13%), and franchise fees (10%).
PROJECTED FISCAL 2015 RESULTS ARE POSITIVE
For fiscal 2015 the city's operating millage remained flat and the debt service millage declined modestly for a total millage of 3.7 mills. This amount is well below the statutory 10 mill limit, affording significant revenue flexibility. The budget included a small general fund drawdown of $3.01 million; however, officials are projecting a positive budget variance of $7.6 million as a result of increased building permit activity and lower than anticipated expenditures. Fund balance is projected to increase by $4.5 million or 3.3% of budget. The transfer of $1 million to the city's economic development fund was also included in the budget, and this contribution is expected to recur annually.
PROPOSED 2016 BUDGET BENEFITS FROM TAX BASE INCREASE
The proposed fiscal 2016 general fund budget is up 4.3% or $5.9 million from the prior year and reflects a slightly lower tax millage rate of 3.68 mills. It includes the addition of 70 positions citywide to meet the goals and priorities of the city council. Funding for these new positions as well as for increases in current salaries and benefits will be met through additional tax revenues derived in part from the 7.6% increase in the tax base and the appropriation of $2.5 million in fund balance. Management has continued to budget non-ad valorem revenues and expenditures conservatively.
The city's long range five year financial forecast assumes that spending increases will outstrip revenue growth. However, the projections are conservative and based on current levels of city services. The city has been proactive at addressing its budgetary shortfalls. Fitch believes that management will continue to take actions necessary to maintain adequate reserve levels.
MODEST DEBT WITH MANAGEABLE CAPITAL NEEDS
Overall debt levels are moderate at an estimated 1.6% of market value and $4,116 on a per capita basis. Most of the debt burden is attributable to the overlapping debt of the county and school district. Amortization is very rapid with 91% of principal scheduled to mature within the next 10 years. Management has no immediate plans for future debt.
PENSION FUNDING LEVELS IMPROVED
The city sponsors three defined benefit retirement plans: general employees, police and firefighters and executive employees. Funding levels for the three plans have improved as a result of numerous reforms of pension benefits and employee contribution levels as well as positive investment performance. The aggregate funded level for the plans as of Oct. 1, 2014 was 81%. Using Fitch's 7% investment rate of return the aggregate funded ratio of the three plans is an estimated 74%. The aggregate unfunded liability is a manageable $118 million (0.6% of tax base).
Other post-employment benefits (OPEB) are provided by the city through an implicit subsidy allowing retirees to participate in the city's health care plan at their own cost. The city funds this benefit on a pay-as-you-go basis.
The city's carrying costs for debt service, pension and OPEB contributions represented a manageable 19.6% of total fiscal 2014 governmental spending.
SPECIAL ASSESSMENT RATING BASED ON CB&A BACKUP
The 'AA+' rating on the special assessment bonds is based on the city's CB&A non ad valorem pledge. The city's diverse stream of available non-ad valorem revenues provides wide debt service coverage. Fiscal 2014 non-ad valorem revenues net of essential expenditures cover maximum annual debt service (MADS) on all CB&A-secured bonds by nearly 5.0x. The anti-dilution test requiring 2.0x MADS coverage of all non-ad valorem-secured debt is somewhat weak; however, the city's reliance upon these revenues for operations effectively limits additional issuance.
Despite the strong CB&A pledge the city has been repaying the special assessment bonds solely from special assessment revenues. Special assessments are determined annually in proportion to the benefits derived from projects among the properties in the district. Assessment collection rates have been satisfactory, and the strong collection method includes a timely foreclosure process. Potential use of covenant revenues presents minimal risk to the general fund given the modest debt service (less than 1% of general fund spending) and debt service coverage provided by special assessment revenues.
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.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form