NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following bonds to be issued by Fort Myers, FL (the city):
--33,745,000 capital improvement and refunding revenue bonds, series 2015.
The bonds will be sold via negotiated sale on Oct. 6. Proceeds will be used to refund a portion of the city's outstanding series 2006 improvement and refunding revenue bonds and to finance various capital improvements.
Fitch also affirms the rating on the city's following bonds subject to a covenant to budget and appropriate:
--$38 million outstanding capital improvement and refunding revenue bonds, series 2014A and 2014B at 'A+'.
In addition, Fitch affirms the following ratings:
--$58.6 million outstanding improvement and refunding revenue bonds series 2006 and 2007 at 'AA-';
--Implied unlimited tax general obligation (ULTGO) at 'AA-'.
The Rating Outlook is revised to Stable from Negative.
The capital improvement and refunding revenue bonds are backed by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem revenues in amounts sufficient to pay debt service. Such covenant to budget and appropriate non-ad valorem revenue is subject to the availability of non-ad valorem revenues after satisfying obligations with a specific lien on such revenue and the funding of essential government services. The bonds have no debt service reserve.
The series 2006 and 2007 improvement and refunding revenue bonds are supported by a pledge of utilities tax, communication services tax, franchise fees, and occupational taxes imposed by the city, guaranteed entitlement revenues received from the state revenue sharing trust fund, and the city's share of local government half cent sales tax revenues collected within the county and shared with its municipalities pursuant to a population based formula. The bonds are also secured by a surety funded reserve account.
KEY RATING DRIVERS
IMPROVED BUDGET STABILIZATION: Revenue growth has been driven by the improved economy, a strengthening of the tax base and implementation of a new fire assessment fee helping reduce the reliance on reserves to support operations. The revision of the Rating Outlook to Stable reflects Fitch's opinion that budget stabilization will be achieved and reserves will be maintained at adequate levels.
COVENANT DEBT NOTCHING: A one-notch distinction in the rating on the CB&A revenue bonds from the implied ULTGO reflects the absence of a pledge of specific revenue and inability to compel the city to generate non-ad valorem revenue sufficient to pay bondholders.
PENSION REFORM CONTROL COSTS: Management has successfully negotiated reforms of pension benefits for its current employees helping to control current near term costs and future liabilities, although funded levels remain weak.
MODERATE DEBT LOAD: The city's pension burden is somewhat tempered by its moderate debt burden, average amortization of principal, and absence of significant future borrowing plans.
LIMITED TAX RATE MARGIN: The city's tax rate is relatively close to the statutory cap, limiting its revenue raising flexibility.
TOURISM DEPENDENT ECONOMY: Economic activity is mainly driven by tourism activity, retail, and real estate. The city therefore is exposed to variability of economic cycles over the long term.
STRONG REVENUE BOND COVERAGE: Pledged revenues supporting the series 2006 and 2007 improvement and refunding revenue bonds remains strong as revenues have improved due to a growing economy.
BUDGET STABILIZATION: Rating stability is predicated on continued improvement in achieving structural balance and maintaining adequate reserve levels.
DECLINES IN PLEDGED REVENUES: The rating on the improvement and refunding revenue bonds supported by pledged revenues is sensitive to changes in the levels of debt service coverage provided by such revenues. The rating is also sensitive to changes in the city's GO rating, which serves as the ceiling for the rating on these bonds.
Fort Myers is located along Florida's southern Gulf Coast in Lee County (implied GO rating 'AA', Stable Outlook) immediately east of Cape Coral and adjacent to Interstate 75. The city is a very popular tourist destination with a year-round population of approximately 69,000 residents.
REVENUE GROWTH HELPS STABILIZE BUDGET
A strengthening of the economy over the past three to four years has led to an improvement in both property and non-ad valorem tax revenues helping management make notable progress in restoring stability to financial operations. Reserves were used as a balancing measure during this period causing overall reserve levels to decline, but unassigned reserves are currently maintained at the city's minimum policy level of 10% of spending.
Revenue raising flexibility became constrained due to significant declines in the tax base during the recession. The city had raised its tax rate gradually during fiscal periods of 2009 through 2013 to its current level of 8.77 mills to support operations. The city's tax rate is viewed as high by Fitch and leaves only moderate capacity within the maximum statutory 10 mill limit. Recent tax base growth of 9% in fiscals 2015 and 2016 has resulted in over $6 million (6.7% of spending) in additional annual revenues. Consecutive years of growth in non-ad valorem revenues have also contributed to improved financial flexibility. Management approved a new fire assessment fee effective fiscal 2015 which resulted in new revenues of approximately $1.6 million and a projected $2.2 million in fiscal 2016.
FISCAL 2015 PROJECTIONS REFLECT MAINTENANCE OF RESERVE LEVELS
The original fiscal 2015 general fund budget of $88.5 million was an increase of 3.8% or $3.2 million over fiscal 2014. The tax base increase of 8.5% resulted in new revenues of $2.7 million. In addition to the new fire assessment fee, certain miscellaneous fees were moderately raised. Management approved partial salary restorations for all employees after years of no increases. Management was also successful in negotiating reform of pension benefits for current and future employees helping control the growth in future annual pension costs. Unrestricted fund balance is projected to decline modestly from prior year levels by $0.6 million to $15 million, or an adequate 17% of budgeted spending. Reserve levels, though, have declined over the past five fiscal years to current levels from $22.7 million in fiscal 2011.
FISCAL 2016 BUDGET APPROPRIATES ONLY MODEST LEVEL OF RESERVES
The fiscal 2016 general fund budget of $93.9 million maintains the millage rate at 8.77 for the third year in a row and includes new property tax revenues of $3.5 million due to a 9.5% increase in the tax base. Non-ad valorem revenues are conservatively budgeted and fire assessment fee revenues are budgeted at $2.2 million. Salary increases of approximately 3% and rising pension costs drive the budget. Pension contributions are up $1.8 million or 8% due to salary increases and a lowering of the investment rate of return. A modest use of assigned reserves equal to $0.76 million was included in the budget and it maintains unassigned general fund reserves at 10% of spending compliant with management's policy.
PENSION FUNDED LEVELS IMPROVED BUT STILL WEAK
The city administered firefighter, police, and general employee plans' funding levels (unadjusted) as of Oct. 1, 2014 were 60% funded on an aggregate basis or 54% using Fitch's 7% investment rate of return. The combined unadjusted unfunded actuarial accrued liability (UAAL) totaled $164 million (2.25% of market value) down from $175 million in 2013.
Recent pension reform efforts were achieved with all current employees participating in the plans, including more recently its firefighters. Negotiated changes include an increase in the retirement age, a limit on includable overtime hours and a downward reduction in the annual cost of living adjustment to 1.5% from 3%. These changes have helped control the future annual increases in contributions and growth in future long term liabilities.
The city continues to fully fund the actuarially required contribution (ARC). Pension contributions have more than doubled from $9.3 million in fiscal 2007 to $22 million in fiscal 2014. Despite recent reforms, Fitch expects pension related pressures to weigh on city finances for the foreseeable future.
Combined with debt service of $12.3 million and the modest cost of funding other post-employment benefits (OPEB), the city's long-term liabilities consumed a very high 32% of total governmental fund spending in fiscal 2014.
DIVERSE, STABLE NON-AD VALOREM REVENUES
Non-ad valorem revenues are diverse (comprising the majority of operating revenues) and were up 6% in fiscal 2014 compared to 2013. Portions of the non-ad valorem revenues are legally pledged to outstanding improvement revenue bonds which are not being refunded. Fiscal 2014 non-ad valorem revenues totals $40.5 million and aggregate estimated fiscal 2014 non ad valorem supported governmental debt service is $11.7 million.
The city has enterprise debt, primarily utility system state revolving loans that are secured by the utility revenues with a covenant to budget and appropriate non-ad valorem revenues if necessary. Fitch rates the senior utility system debt 'A+'/Stable Outlook, and system net revenues have provided adequate all in debt service coverage. Also outstanding is $3.7 million of yacht basin enterprise debt with a backup non-ad valorem covenant, and in fiscal 2014 the general fund provided $400,000 of support to the Yacht Basin Fund.
The city's ability to leverage its non-ad valorem revenues is limited by an anti-dilution test, which requires that the city's non-ad valorem revenues for the prior two fiscal periods shall not be less than 1.5x projected maximum annual debt service (MADS) and projected MADS shall not equal more than 20% of governmental fund revenues.
COVERAGE ON PLEDGED REVENUE BONDS REMAINS STRONG
Pledged revenues supporting the series 2006 and 2007 bonds have improved by 10.4% and 5.5% in fiscals 2014 and 2013, respectively, after experiencing modest declines in fiscals 2011 and 2012. Annual utility and sales tax growth have been the largest contributors to this growth. Coverage of pro forma fiscal 2016 debt service from fiscal 2014 pledged revenues is a strong 3.1 times. No additional leveraging is currently planned.
IMPROVED EMPLOYMENT AND TAX BASE PERFORMANCE
The economic base is dependent on tourism, and passenger traffic at Southwest Florida International Airport was up 4% in 2013 and 2014. The city has experienced modest job growth annually since 2010. Unemployment has shrunk from a peak of 12% during the summer of 2010 to 5.5% in June 2015. However, city wealth levels are low; the median household income is only 67% of the U.S. median, and the 2013 poverty rate is a high 28.6%.
The Fort Myers housing market and tax base have experienced growth the past few years. The city's housing market was hit exceptionally hard during the recession. The city's taxable assessed value had dropped 41% from fiscal years 2008-2013. As mentioned above, tax base growth of 9% was experienced the past two years following 3% growth in fiscal 2014. The Zillow home value index was up 8.1% through July 2015 year over year.
MODERATE DEBT METRICS
Debt levels are moderate at $2,384 per capita and 2.2% of fiscal 2016 market value. Management reports limited tax supported borrowing plans, and the pace of debt amortization is average.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
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