Fitch Upgrades Broward County, FL Prof'l Sports Facils Tax Rfdg Revs to 'AA+'; Outlook Stable

NEW YORK--()--Fitch has assigned a rating of 'AA+' to the following revenue bonds to be issued by Broward County, Florida:

--$73,065,000 professional sports facilities tax and revenue refunding bonds, series 2016 (Broward County civic arena project).

The bonds are expected to price via negotiation on September 22. Proceeds will be used to refund on a current basis all of the outstanding professional sports facilities tax and revenue refunding bonds, series 2006A (Broward County civic arena project) for debt service savings.

Fitch also upgrades to 'AA+ from 'AA' the rating on $88,635,000 professional sports facilities tax and revenue refunding bonds, series 2006A (pre-refunding) and $38,260,000 of professional sports facilities tax and revenue refunding bonds, series 2006B (taxable).

Fitch also affirms the rating on approximately $256 million of outstanding general obligation (GO) bonds and the Broward County Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The professional sports facilities tax and revenue refunding bonds are payable from a first lien on the county's fourth and fifth pennies of the tourist development tax (TDT), a payment of $2 million annually from state sales tax revenue (the sales tax rebate), and certain operating revenues (including rental payments) related to the BB&T Center, home of the National Hockey League (NHL) team, the Florida Panthers. In addition, the county covenants to budget and appropriate, by amendment if necessary, legally available non-ad valorem (NAV) revenues to satisfy any deficiency in the debt service reserve account (DSRA) which is sized at 50% of maximum annual debt service (MADS).

KEY RATING DRIVERS

The upgrade of the rating on the professional sports facilities tax and revenue refunding bonds to 'AA+' from 'AA' reflects the application of Fitch's new 'U.S. Tax-Supported Rating Criteria' published on April 18, 2016, specifically the enhanced sensitivity analysis of the pledged revenue stream to cyclical declines. The 'AA+' rating further reflects the absence of risk to additional leverage given the closed nature of the pledged revenue lien to new money indebtedness. The rating continues to reflect the concentrated nature of the economic base and activity against which pledged revenues are derived. The county's reserve account deficiency covenant could support the current rating in an environment of declining TDT performance than would otherwise be the case in its absence, but it is not a material consideration in the rating upgrade.

The 'AAA' IDR and GO ratings reflect the county's exceptional financial strength, superior budgetary flexibility, and history of prudent financial management. Debt and retiree benefit liabilities are very low relative to the county's economic resource base and expected to remain so going forward. The county's economic base has supported a low level of natural revenue growth historically that has been neutralized thus far by careful management and budgeting practices.

Economic Resource Base

Broward County is situated on Florida's Atlantic coast between Miami-Dade and Palm Beach counties. The county is home to 31 incorporated municipalities including Fort Lauderdale, Coral Springs, and Hollywood, and ranks as Florida's second largest county with a 2015 population of 1.9 million.

Revenue Framework: 'aa' factor assessment

The county has significant legal ability to increase revenues relative to potential declines in a moderate economic downturn. Fitch expects revenues to rise at a pace that slightly exceeds the slow rate of historical growth absent policy action or other non-recurring events. Constraints on new development opportunities and the susceptibility of the tax base to housing market pressures is a moderate rating concern.

Expenditure Framework: 'aaa' factor assessment

Fitch expects spending to increase at a pace that is marginally above the slow pace of revenue growth, but the overall flexibility of main spending items is considered solid highlighted by a low cost of servicing debt and retiree-related contributions.

Long-Term Liability Burden: 'aaa' factor assessment

The county's long-term liability burden is very low reflecting a minimal level of direct debt outstanding and well-funded position of the state pension plan the county participates in.

Operating Performance: 'aaa' factor assessment

The county's strong revenue raising powers and reserve levels underpin its capacity to manage through future economic downturns without impairing its fundamental financial flexibility.

RATING SENSITIVITIES

Weakening of Operating Performance: Although not anticipated, a change in the county's financial resilience as measured by a weakening of its reserves and/or revenue and spending flexibility could pressure the IDR and GO rating.

Professional Sports Bonds: The rating is sensitive to shifts in the performance of its tourism sector and generation of TDT revenue.

CREDIT PROFILE

Broward County's economic profile centers on its inclusion within the Miami-Fort Lauderdale-West Palm Beach MSA which accounts for 30% of Florida's population and is the 11th largest economy in the U.S. measured by gross metro product. Trade, transportation and utilities is the largest single employment sector owing to several key infrastructure assets owned and operated by the county including Fort Lauderdale International Airport and Port Everglades. Tourism and healthcare also figure prominently in the local economy. The county's tax base is fairly mature and predominantly residential in nature; as such, the success of various redevelopment opportunities is critical to future growth. Employment has grown at a solid pace in recent years and now closely approximates pre-recession levels after recession-period declines that exceeded the state and national experience. Taxable assessed values (TAV) have demonstrated a similar pattern of growth after a significant 28% decline from fiscal 2008-2012. According to the Zillow Group the county's housing market continues to prosper with home values up 10% over the past 12 months, outpacing both statewide and national home value gains. Resident income and educational metrics are roughly equivalent to state norms.

TDT Revenues Exhibit Solid Growth & High Volatility

TDT revenues have increased at a 10-year CAGR of 2.9% through fiscal 2014 exceeding the rate of inflation over the same period but trailing the pace of U.S. GDP growth. Broward County is an established destination for tourists given its favorable climate, convention space, cruise terminals, and proximity to the Atlantic shore and other attractions throughout south Florida. Inflationary pressure on room rates coupled with a considerable pipeline of new hotel/resort projects and room inventory further support Fitch's expectation that future TDT revenue growth will likely mirror historical results, at a minimum, over the long term.

However as the 10-year revenue history illustrates, TDT collections are subject to periods of volatility including a 17% drop in fiscal 2009 in response to the recession. Fitch anticipates future periods of revenue stress linked to shifts in the general economy (both domestic and international) and other factors that might negatively influence travel to the south Florida region. Of importance is the strength of the recovery since the last decline - six consecutive years of growth equal to 56% in the aggregate with fiscal 2015 TDT revenue registering $23.3 million or 136% of the pre-recession peak year value.

TDT Structure Features Exceptional Resilience to Potential Revenue Losses

Fitch's coverage analysis focuses on the combination of pledged TDT and sales tax rebate revenues. Fitch discounts the rent payments from the facility operator which have been deferred in full and in part in recent years.

To evaluate the sensitivity of the TDT and sales tax rebate revenues streams to cyclical decline, Fitch considers both modeled revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the 15-year pledged revenue history, Fitch's Analytical Sensitivity Tool (FAST) generates a 5% scenario decline in pledged revenues and the largest actual cumulative decline in historical revenues.

No additional bonds are permitted under the indenture other than for refunding purposes; as such, Fitch's coverage analysis focuses on MADS following issuance or an estimated $12.8 million. Based on TDT revenue of $23.3 million in fiscal 2015 and the sales tax rebate of $2 million Fitch estimates the structure could tolerate a 49% drop in revenue which is more than 12x the scenario results and 3.3x the largest actual revenue decline in the review period. These results are consistent with a 'aaa' level of coverage cushion.

Revenue Framework

Property taxes are the largest general fund source of revenues totaling $722.7 million or 71% of total revenues in fiscal 2015. Property taxes have been rising since fiscal 2012 corresponding to the start of the recovery of the county's taxable values. Other major revenues include charges for services (12%) and the local government one-half-cent sales tax (6%).

Fitch estimates the county's 10-year general fund revenue growth at roughly 1.5% adjusted for various accounting changes in fiscal years 2010 and 2011. This relatively low level of growth reflects the severe impact of the housing market collapse and statewide tax reforms on the county's property tax-dependent revenue base. In the absence of similar non-recurring events Fitch expects revenues to increase at a slightly higher pace approximating inflation due to projections for moderate gains in the county's population, the desirable nature of the county's housing stock, and the forecasted growth within the broader economy of the Miami-Fort Lauderdale-West Palm Beach MSA.

The county has ample legal revenue raising authority. The county is subject to a statutory property tax cap of 10 mills. The adopted tax rate for fiscal 2016 was 5.47 mills (excludes 0.25 mills for voted GO bonds not subject to the cap). Fitch estimates the county could generate roughly $595 million in additional property tax revenue through an increase in the tax rate to the maximum legal rate. This increase is equivalent to 20 times the revenue loss depicted by FAST in a moderate economic downturn. Annual changes in the property tax rate are determined using a roll-back or revenue neutral rate, which is then adjusted for changes in the Florida per capita personal income. However, this limitation may be overridden by vote of the county governing body. Management also has significant control over numerous service charges and fee income streams.

Expenditure Framework

The county provides a wide array of governmental services including police and fire protection, prison operations, parks, libraries, road and bridge maintenance and indigent health services. Law enforcement services are provided by the county on a contractual basis to many cities located within the county and reported in the sheriff contractual services fund. In addition, the county operates Fort Lauderdale-Hollywood International Airport and Port Everglades as public enterprises.

Spending demands are expected to grow at a pace that is in line with, to marginally above revenues, reflecting continued growth in the area of public safety, the largest general fund spending item, primarily due to compensation increases and higher pension and health insurance costs.

The fixed costs associated with the payment of debt service and retiree benefits was estimated by Fitch at a low 8% of spending in fiscal 2015 and underpins Fitch's view of the county's solid ability to control spending through an economic downturn. Management's legal ability to adjust headcount further enhances the county's spending flexibility to a certain degree. Fitch believes practical constraints exist given the high proportion of public safety spending; furthermore, governmental staffing levels have increased modestly in recent years but remain about 15% below the number of full-time equivalent positions recorded in 2007.

The county allocates a portion of its non-voted millage for capital investment totaling $19.5 million in the fiscal 2016 budget (about 2% of general fund spending) that it could probably defer in a given year if needed. The budget for libraries, parks, and cultural spending approximates $95 million annually - this spending area has been subject to cuts in the past and while important given the residential and tourism-driven nature of the economy it is not mandated by state law.

Wages and benefits for general and public safety employees, among other groups, are contractually bargained. Most groups have wage reopeners in fiscal 2017 with the exception of transit which is currently under negotiation. Under Florida law if an impasse is declared both parties are required to engage in a non-binding mediation process following which the local government may impose contract terms for the year. Furthermore, Florida law prohibits public employees from striking.

Long-Term Liability Burden

Fitch estimates the county's long-term liabilities at 4% of personal income, which is comfortably within the 'aaa' assessment. Approximately two-thirds of the metric is derived from the overlapping debt obligations of the Broward County School Board. Fitch expects additional school debt to be issued but not in a manner that would materially change the county's long-term liability metric. Amortization of county direct debt is fairly rapid with 68% scheduled to be repaid in 10 years, offering flexibility to meet future capital needs and/or free up resources for the operating budget. The current five-year general capital plan identifies about $330 million in projects largely financed from operating sources with the potential for a relatively modest issuance of new money indebtedness.

The county's proportionate share of the net pension liability of the Florida Retirement System (FRS) is equivalent to roughly 0.5% of personal income. FRS is well funded although deep recessionary losses ended a long period when retirement system assets far exceeded liabilities, with the state responding by implementing wide-ranging reforms to benefits and contributions. Although the funded ratio has stabilized since then, progress toward higher funded ratios has been limited in part due to a lack of full actuarial contributions during the fiscal 2011-2013 period. Pension contributions have matched the actuarial required level since fiscal 2014.

Operating Performance

Fitch believes that the county is positioned to manage the challenges associated with a moderate economic downturn while maintaining a high level of fundamental financial flexibility. Reserves are not established pursuant to fiscal policy but have exhibited good consistency over an extended period and compliment the county's high revenue-raising authority and more moderate but solid expenditure flexibility.

Following a $15.6 million operating surplus after transfers in fiscal 2015 the general fund unrestricted fund balance stood at $351.5 million or nearly 33% of spending. The county typically budgets a portion of its existing fund balance for use on the year; this partly reflects state law that stipulates counties budget only 95% of projected revenues. General fund actual-to-budget results have been favorable on both the revenue and expense side in recent history and the county has managed to produce operating surpluses and grow its fund balance position without material reliance on one-time actions or expense deferrals in five of the fiscal years 2009 through 2015.

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.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Hannah James, + 1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Hannah James, + 1-646-582-4947
hannah.james@fitchratings.com