NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'A+' to the following revenue bonds to be issued by Miami-Dade County, Florida:
--$350,000,000 subordinate special obligation refunding bonds, series 2016.
The series 2016 bonds are being issued to refund all of the outstanding special obligation and refunding bonds, series 1996B, all or a portion of the outstanding subordinate special obligation bonds, series 2005A and series 2005B for debt service savings, and fund a deposit to the debt service reserve fund.
Fitch also affirms the following ratings:
--Issuer Default Rating (IDR) at 'AA';
--Public facilities revenue bonds (Jackson Health System), at 'AA-';
--Special obligation bonds and subordinate special obligation bonds at 'A+'.
The Rating Outlook is Stable.
The bonds are payable from the net proceeds from a convention development tax (CDT), a 3% tax imposed by the county on the leasing or letting of transient rental accommodations within the county (other than the cities of Bal Harbour and Surfside). The bonds have a first lien on 1/3 of the CDT and a subordinate lien on 2/3 of the CDT. Upon the refunding of the series 1996B bonds there will be no bonds with a senior lien on the CDT revenue; the senior lien ordinance will be considered closed for so long as any CDT bonds remain outstanding. The lien on CDT revenues is further subordinate to certain prior contractual payments up to a maximum annual amount of $13.9 million. Certain tax increment revenues in an amount not to exceed $1.43 million are pledged to the repayment of the series 2012A bonds only.
The county has covenanted to apply its share of the statewide local government half-cent sales tax (LGST) to the payment of debt service on the bonds, to the extent necessary. The LGST is not pledged until deposited in the debt service fund. No senior sales tax bonds are permitted pursuant to the terms of the subordinate special obligation bond ordinance.
KEY RATING DRIVERS
The 'AA' IDR reflects the combination of the county's high revenue raising authority relative to potential revenue declines under a moderate economic downturn scenario, more moderate capacity to adjust spending from both a legal and practical perspective, and history of sound management that support an expectation for maintenance of an adequate financial position through economic cycles. Fitch also expects the county to maintain a long-term liability burden in the moderate range. The 'AA-' on the public facilities revenue bonds (Jackson Health System) reflects the county's covenant to budget and appropriate non-ad valorem revenues to pay debt service and is notched off the IDR.
The 'A+' rating on the special obligation bonds reflects the sufficiency of debt service coverage from pledged revenue under a moderate economic downtown after considering the potential for additional leverage within the constraints of a 1.5x additional bonds test (ABT). The rating also considers the solid growth prospects for pledged revenues, which are closely linked to the overall performance of the Miami-Dade economy.
Economic Resource Base
Miami-Dade is the seventh largest county in the U.S. by population and the anchor of the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA), the 11th largest economy in the U.S. as measured by gross metro product. Trade and transportation is the leading sector by employment reflecting the county's position as a gateway for trade with Latin American countries. Miami's tourism and real estate markets retain an international appeal that supports expectations for long-term growth but presents risk to volatility; other economic weaknesses include a high incidence of poverty.
Revenue Framework: 'aa' factor assessment
General fund revenue growth has trailed the rate of U.S. economic expansion and inflation over the 10 audited fiscal periods ending 2014. The relatively stagnant revenue performance reflects a combination of statewide property tax reform and exposure to a volatile real estate sector that resulted in significant contraction of property tax revenue, the single largest general fund revenue stream. However, Fitch believes growth prospects for the economy are solid over time which should translate to improved revenue performance. The county also retains considerable independent legal ability to raise revenue.
Expenditure Framework: 'a' factor assessment
Expected growth in the county's population and cost of service delivery should lead to a pace of spending growth that is more or less in line with to marginally above revenues over time. Expense pressures are driven by labor costs which are subject to collective bargaining, and contributions to health and transit operations derived from maintenance-of-effort formulas. The county demonstrated its ability to control spending through layoffs and other adjustments during the most recent economic downturn but those cuts will likely limit the existing level of expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
Fitch expects debt and pension liabilities to remain moderate taking into consideration future borrowings and the slow pay-out of existing debt.
Operating Performance: 'aa' factor assessment
General fund operating results have been variable over time and generally sensitive to broader economic conditions that affect its property and sales tax revenue streams. However, the county has consistently taken actions that have preserved an adequate level of reserves and financial flexibility in economic downturns.
Financial Flexibility: The IDR is sensitive to the county's ability to retain a level of financial flexibility commensurate with the level of risk inherent in a revenue stream that exhibits a fair amount of sensitivity to periods of economic and real estate decline.
Dedicated Tax Bonds: The rating on the special obligation bonds is sensitive to unremitting shifts in the collection of and growth prospects for the CDT and LGST revenue streams.
Miami-Dade continues to experience solid population and economic growth. The county's 2015 population is estimated at 2.7 million and is up from 2.3 million in 2000. County employment increased 1.4% in 2015 and 19% in aggregate since 2009 and the April 2016 unemployment rate improved to 5.4% from 6.2% a year earlier (unemployment continues to hover above the state level as has been the case historically). Total non-farm employment in the Miami-Fort Lauderdale-Miami Beach MSA exceeds 2.5 million and is forecast by IHS to increase at a compound annual growth rate (CAGR) of 1.4% through 2021. IHS's five-year forecasts for annual growth in housing starts (12.7%), gross metro product (4.8%), personal income (5.3%), and retail sales (4.7%) bode well for the county's revenue outlook and compare favorably to other large metro areas across the U.S.
The countywide estimated taxable value for fiscal 2017 is $250.3 billion - an 8.6% increase from the prior year which also surpasses the prior peak year value recorded in fiscal 2008. New construction is reported to have added $5 billion to the countywide tax base with the balance of growth derived from property appreciation. The median home value in Miami-Dade County was reported by Zillow Group at $250,800 in April 2016 - a one-year increase of 10.1% (the one-year forecast is essentially flat, however). The county owns and operates significant transportation assets, most notably the Port of Miami and Miami International Airport, which support its role as an international gateway, particularly to Latin America and the Caribbean. A desirable geographic location and abundance of recreational amenities position Miami as a significant destination for leisure travelers and retirees; the hospitality sector recorded record highs across several key metrics in 2015 based on data reported by the Greater Miami Convention & Visitors Bureau.
Property taxes fund roughly 50% of the general fund budget followed by various service charges and license and permits which combine to fund 20% of the budget. Approximately 13% of the general fund budget is funded from state revenue sharing funds including the county's portion of the LGST. The LGST is remitted to the state by sales tax dealers within the county and that sum (less a collection fee) is earmarked for distribution back to the county and each of its municipalities pursuant to a population-based formula.
General fund revenues have increased at a CAGR of 1.5% over the 10 fiscal years ending in 2014, trailing the rate of inflation and growth in the U.S. GDP. The low level of historical revenue growth reflects a period of dramatic decline in housing and taxable value in the county. The median value of homes in Miami-Dade County fell more than 50% from 2007-2011 based on information reported by Zillow Group, and the county's tax base declined 25% in fiscal years 2009-2012. General fund revenue performance was also negatively impacted by statewide property tax reforms in 2007 and 2008. Given the nature of these events coupled with forecasts for population, employment, and income growth in the Miami-Fort Lauderdale-West Palm Beach MSA, Fitch believes general fund revenues are likely to increase at a rate similar to inflation.
Property taxes represent an important source of legal revenue raising capacity for the county. The non-voted general operating millage rate adopted for fiscal 2016 was 7.37 mills compared to a statutory limit of 10 mills. Annual changes in the millage rate are determined using a rolled-back or revenue neutral rate adjusted for changes in the Florida per capita personal income; however, this limitation may be overridden by vote of the county governing body. The county also has a separate 10-mill limitation applicable to the unincorporated municipal service area (UMSA). Approximately 45% of the county's population resides within the UMSA; these residents pay a separate property tax for 'municipal' services provided by the county. Fitch estimates the county can generate approximately $575 million in additional property tax revenue under the countywide tax rate cap and $478 million within the UMSA tax rate cap (compared to general fund revenues of $2 billion in fiscal 2015).
The general fund supports a broad range of governmental activities including general administration and oversight, police and fire rescue, recreation, transportation, and public health, among other functions. Public safety is the largest single expense category consuming roughly 45% of total general fund spending.
Spending levels are expected to track changes in population and inflation and expand at a pace that is in line with to marginally above the pace of revenue change over time in the absence of policy actions.
The county retains an adequate to solid capacity to adjust spending levels throughout the economic cycle. Employee wages and benefits are subject to collective bargaining. The county is in the process of negotiating new contracts with several of its larger labor groups including police and fire and has included funding in the preliminary fiscal 2017 budget for COLA's in addition to merit and longevity bonuses. The county has experienced mixed success achieving employee concessions in the past, most recently imposing, then retracting, higher contribution amounts for healthcare coverage.
The county retains control to adjust the size of the workforce which it amply demonstrated during the last recession achieving considerable cost savings through workforce reduction. Recent budgets have increased funding allocations for a variety of services and programs that were reduced in prior years.
Funding commitments for the operation of the Miami-Dade Transportation Department (MDT) and Jackson Memorial Hospital (JMH) are subject to separate maintenance-of-effort (MOE) formulas- the fiscal 2016 general fund budget appropriates $174 million for MDT and $161 million for JMH which collectively represents almost 20% of spending (the healthcare MOE is based on a percentage of general fund revenues and the transit escalates at 3.5% annually). The cost of funding debt service and retiree pension and health benefits are moderate, estimated by Fitch at less than 20% of total spending but with MOEs the fixed-cost burden is fairly high.
Long-Term Liability Burden
Long-term liabilities associated with direct and overlapping debt and retiree pension benefits are estimated by Fitch at a moderate 11.5% of personal income. Direct debt is the main driver of the county's long-term liability burden accounting for close to 50% of the metric. The long-term liability metric is expected to increase in the intermediate term as the county continues to advance a sizable capital improvement plan and repay its outstanding debt at a slow pace. However, Fitch believes the metric will remain comfortably within the 20% benchmark established for an 'aa' key rating factor assessment. General government capital needs identified through 2021 total $4.4 billion (excluding aviation, water and sewer, and other enterprise supported activities).
Retiree pension benefits represent about 30% of the long-term liability metric and are largely derived from the county's estimated proportionate share of the net pension liability (NPL) of the state administered Florida Retirement System (FRS). The county makes an actuarially-based required contribution to FRS as established by the state legislature. The county administers a separate single employer defined benefit plan for employees of the Public Health Trust (PHT) (Jackson Memorial Hospital) which has a Fitch-adjusted ratio of fiduciary net position to NPL of 98.3% in 2014.
In a moderate economic downturn Fitch believes the county would use a combination of existing reserves and other sources of budgetary flexibility to maintain an adequate financial cushion, consistent with historical practice. As noted earlier, the county has ample capacity within the 10-mill property tax cap to offset declines in the tax base or other revenue streams, and a moderate to strong level of control over personnel headcount and wages.
The county has effectively realigned spending in prior periods of revenue decline - for example, from fiscal 2008-2012 the county lowered spending by 14.5% in response to a 13.5% decline in general fund revenues.
The county annually updates a five-year financial plan which is balanced without the inclusion of any one-time revenues, and includes planned contributions to the emergency contingency reserve that is recorded within the unassigned fund balance. Per county code the emergency contingency reserve shall continue to accumulate until it is equivalent to 7% of the general fund budget; the current balance is at 4.4% and the county plans to meet the stated goal by fiscal 2020. Fitch believes the county's commitment to funding the emergency contingency reserve at its policy level is an important factor in the evaluation of the county's overall financial flexibility.
Audited general fund financial statements for fiscal 2015 depict a $27.2 million (1.4% of spending) operating surplus after transfers after three consecutive modest operating deficits. General fund revenues were about $55 million above the original budget and increased more than $110 million or 5.9% on the year - the second consecutive year of revenue growth following six straight years of decline. The unrestricted fund balance was reported at $224.7 million or 11.3% of spending. The unassigned portion of the unrestricted fund balance was $80 million; the remaining portion of the unrestricted fund balance is typically allocated for subsequent year spending (this reserve classification reflects, in part, Florida law which stipulates that counties budget only 95% of expected revenue in each year).
CDT and LGST Analysis
The LGST accounts for approximately 65% of total revenues available to bondholders with the CDT accounting for the bulk of remaining resources. The LGST and CDT have increased at respective CAGRs of 2.8% and 6.7% from fiscal 2005-2015. Both revenue streams have recovered strongly from sharp recession-period declines. Growth prospects are solid reflecting expectations for continued growth in both the general economy and tourism sector which in 2015 recorded growth. Certain metrics saw record setting highs based on data prepared by the Greater Miami Convention & Visitors Bureau.
Unaudited fiscal 2015 revenues available for bondholder repayment exceed $230 million or 1.8x the sum of maximum annual debt service (MADS) and the maximum amount of contractual prior payments. To evaluate the sensitivity of the LGST and CDT to cyclical decline Fitch considers both the revenue sensitivity results (using the same 1% decline in U.S. GDP that supports assessments in the IDR framework), which yields a 7% decline, and the largest actual decline over the period covered by the sensitivity analysis, a 14.6% drop in fiscal 2009.
Conservatively assuming issuance up to the 1.5x additional bonds test (ABT), the structure could tolerate a 33% decline in revenues before coverage would fall below 1.0x - or a decline equal to 2.3x the largest actual decline in the 10-year review period or 4.8x the revenue sensitivity results. Fitch believes that these results are consistent with the 'A+' rating. The county does not anticipate issuing additional parity indebtedness, and Fitch believes there are practical constraints to doing so based on the reliance of the LGST revenue stream to fund operations. Application of surplus CDT revenues is restricted to tourism related expenses and capital investment.
Taxes related to transient rental accommodations or hotel stays, such as the CDT, are clearly defined as 'special revenues' in Chapter 9 of the bankruptcy code. However, the CDT accounts for roughly one-third of the total revenues available to support bondholder repayment - coverage of MADS from the CDT alone is well below 1.0x. General sales tax revenues, including the LGST, are specifically excluded from the definition of 'special revenues' under the bankruptcy code. As such, the rating on the special obligation bonds is capped at the IDR on Miami-Dade County.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form