Fitch Affirms Pasco County, FL's IDR and Revenue Bond Ratings at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following ratings on Pasco County, Florida:

--$33 million half-cent sales tax revenue bonds, series 2013A and 2013B at 'AA';

--$24 million guaranteed entitlement refunding revenue bonds, series 2013 at 'AA';

--Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are payable from a first lien on the county's share of the local government half-cent sales tax revenues. The guaranteed entitlement revenue bonds are payable from the county's share of a fixed payment from certain revenue sharing trust funds of the state of Florida pursuant to Chapter 218, Part II, Florida Statutes.

KEY RATING DRIVERS

The 'AA' guaranteed entitlement revenue bond rating reflects the strength of the sales tax revenue stream supporting the guaranteed entitlement distributions to counties. Under existing state law the county receives a fixed monthly distribution from the revenue sharing trust fund for counties that is sufficient to pay debt service on the bonds. The principal funding source for the trust fund are sales and use tax proceeds recorded in the state's general revenue fund. Fitch does not believe a dedicated tax bond analysis is relevant for this security.

Issuing Entity Exposure: Fitch believes the ratings on the half-cent sales tax revenue bonds and the guaranteed entitlement revenue bonds are capped by the IDR on the county, as the respective pledged revenues do not constitute special revenues under Chapter 9 of the U.S. Bankruptcy Code.

Pasco County's 'AA' IDR reflects the strength of its inherent budget flexibility and consistently maintained reserves that comfortably mitigate risks associated with revenue volatility through economic cycles. Actual financial outcomes routinely exceed forecasts and serve as evidence of the county's sound budget management. A low long-term liability burden is an additional positive credit consideration as are the county's solid but not strong revenue growth prospects.

Economic Resource Base

Pasco County is located on Florida's west coast and includes the cities of New Port Richey and Zephyrhills. The county is bordered on the west by the Gulf of Mexico and its major population centers lie roughly 35 miles northwest of Tampa, the second largest employment market in the state. The county's population has experienced steady growth and currently approximates 500,000 residents.

Revenue Framework: 'aa' factor assessment

Fitch believes the county's demographic and economic profile and availability of developable land will continue to support a solid level of natural revenue growth in excess of inflation going forward. Independent legal revenue raising authority is high largely driven by the county's capacity within the statutory 10-mill ad valorem tax cap.

Expenditure Framework: 'aa' factor assessment

Fitch anticipates a continuation of a pattern of spending growth that is generally aligned with changes in revenue. The county has a solid level of expenditure flexibility underscored by a low cost of funding for debt service and retiree benefits, an adequate practical capacity to lower spending through potential reductions in non-essential services or capital investment, and good legal flexibility on labor agreements.

Long-Term Liability Burden: 'aaa' factor assessment

The burden of long-term liabilities on the county's resource base is considered low and expected to remain stable given expectations for population growth, an absence of additional borrowing plans, reasonably affordable future capital needs, and the adequately funded position of the state pension plan the county is a participant in.

Operating Performance: 'aaa' factor assessment

The county's inherent revenue and expenditure flexibility and strong reserves position it to withstand the challenges of a typical economic downturn exceptionally well.

RATING SENSITIVITIES

IDR Credit Factors: Shifts in the economy that support an expectation for higher revenue growth in the long term could support improvement in the county's general credit quality and IDR. Conversely, a shift in management practices that result in a weakening of the county's operating performance and financial resilience could be a negative rating factor.

Sales Tax Bonds: The rating on the half-cent sales tax revenue bonds is sensitive to maintenance of a sound coverage cushion against cyclical downturns and therefore changes in pledged revenue performance and/or the incurrence of additional new money parity indebtedness. The rating on the bonds is capped at the county's IDR.

State and County Credit Quality: The rating on the guaranteed entitlement revenue bonds is sensitive to changes in the long-term credit quality of the county and the state of Florida. Although viewed as highly unlikely the rating could also become sensitive to changes in state law that would negatively impact the level of funding available for the revenue sharing trust fund for counties.

CREDIT PROFILE

Pasco County's economy is service oriented and anchored by the construction, government, tourism, and healthcare sectors. Population growth is driven by the county's proximity to Tampa and desirable location along the Gulf of Mexico. The Bureau of Economic and Business Research forecasts a 20% increase in the county's population to roughly 595,000 residents by 2020. Negative credit considerations center on the comparatively low wages supported by local employment relative to regional and state norms, and the susceptibility of county labor and housing markets to periods of high volatility (for example, annual unemployment reached 11.9% in both 2009 and 2010 and the county's tax base fell roughly 35% cumulatively between fiscal 2008 and 2013).

Sales Tax Exhibits Exceptional Resilience to Scenario Declines

Audited fiscal 2015 half-cent sales tax revenue of $26.8 million covers maximum annual debt service (MADS) of $2.7 million by 9.9x. Fitch measures the distance between current MADS coverage and coverage of 1.0x, or the coverage cushion, against scenario-estimated revenue changes and the largest actual cumulative decline in the time series of data reviewed by Fitch (fiscal 2004-2015). FAST estimates a 3% decline in half-cent sales tax revenue from a 1% decline in U.S. GDP. The worst historical cumulative loss was a 14% drop experienced between fiscal years 2006-2009.

At the current level of MADS Fitch estimates the structure could tolerate a 90% loss in revenue before coverage falls to 1.0x which is equivalent to 28x the FAST modeled revenue loss in the 1% U.S. GDP downturn scenario and 6x the largest cumulative revenue decline in the review period. In both cases, Fitch views the level of coverage cushion as consistent with a 'aaa' level of financial resilience.

Fitch's analysis also considers risk to additional leverage by adjusting MADS to the minimum level of coverage permitted under the provisions of the ABT in the bond resolution (1.3x MADS). The results of the second test are considerably weaker, consistent with a 'bbb' level of financial resilience. The county has indicated it does not expect to issue additional parity indebtedness. However, Fitch estimates the coverage cushion would remain comfortably within the 'aa' level for financial resilience following more than a threefold increase of outstanding half-cent sales tax revenue debt. The county has sufficient alternative financing vehicles other than the half-cent sales tax revenue bonds that it could issue to meet its long-term capital needs, if necessary or preferable at some point in the future.

Leverage risk if further tempered by the dependence on half-cent sales tax revenue to fund general operations. Pasco County's share of the half-cent sales tax remaining after the payment of debt service is estimated at roughly 11% of the budgeted general fund revenue in fiscal 2017 (excluding fund balance appropriation).

Revenue Framework

The county's revenue framework is viewed favorably marked by the ample legal ability to increase revenue relative to potential revenue volatility. Florida local governments are subject to a non-voted property tax cap of 10 mills. The county adopted a tax rate of 7.6076 mills for fiscal 2017. An increase to the 10-mill maximum rate would generate more than $50 million in revenue or roughly 6x the FAST-modeled revenue loss 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. The county also has the ability to increase various license and permit revenues and service charges that make up a smaller but still notable portion of its revenue base.

General fund property tax revenues are budgeted at $166 million in fiscal 2017 accounting for close to 70% of all recurring revenue sources (excluding fund balance that is appropriated as per state law). State shared revenues approximate 18% of recurring revenues, the principal component of which is the county's share of the local government half-cent sales tax (LGST). LGST revenues are collected within the county by the state and distributed to the county and eligible incorporated municipalities within the county pursuant to a population-based formula.

General fund revenues increased at a compound annual growth rate (CAGR) of 2.6% from fiscal 2004-2014 slightly exceeding the pace of inflation over the same period. Fitch believes the historical CAGR is somewhat tempered by tax policy actions at the state and county level, evidenced in part by the higher 3.6% CAGR for the county's taxable assessed value (TAV) over the same period. Fitch anticipates a similar trend in general fund revenue going forward based in part on expectations for continued population and economic growth, but cautions revenue performance will likely remain subject to periods of significant volatility reflecting certain limitations in the county's economy and housing market.

Solid Sales Tax Growth Prospects

As a general sales and use tax Fitch believes the performance of the half-cent sales tax should generally align with changes in the population, employment, and income of Pasco County and the broader Tampa-St. Petersburg MSA. Fitch estimates the 10-year revenue CAGR (fiscal 2005-2015) for the half-cent sales tax revenue stream at only 2% but recent growth has been much stronger averaging 6% per year from fiscal 2010-2015. Unaudited fiscal 2016 sales tax revenue was up nearly 10% on the year. Over time, Fitch believes the pace of revenue growth will be somewhat more moderate but remain well above the rate of inflation.

Expenditure Framework

Fitch believes the county has a solid level of expenditure flexibility highlighted by the very low cost of funding debt service and retiree benefits which were equal to 6% of governmental fund spending in fiscal 2015. The county has a history of spending 95%-97% of the budget (excluding amounts appropriated as a reserve for contingency). Expenditure savings typically materialize due to personnel departures and retirements during the year.

Wages and benefits are collectively bargained for a large portion of the county's workforce including teamsters, police and firefighters. All contracts are current and there are no known labor disputes or litigation. Under Florida law a bargaining impasse is ultimately resolved by action of the governing body of the local government following the conclusion of a non-binding mediation process.

State law provisions provide somewhat less flexibility with respect to the operating and capital budget of the county sheriff. As an elected constitutional officer the sheriff has the ability to appeal the budget approved by the county to the administration commission which consists of the governor and members of the cabinet. The administration commission shall have the authority to amend, modify, and approve the sheriff's budget as final.

Fitch believes the county has an adequate practical capacity to lower spending if necessary as the size of the county workforce (including constitutional offices) has increased about 10% over the prior four years and is roughly equivalent to pre-recession levels suggesting some capacity to make cuts going forward, if necessary. While growth in county personnel has not been perfectly aligned with the changes in the county population, management is of the opinion that a good balance exists between service level provision and headcount.

Lastly, a total of $2.7 million or roughly 1% of the fiscal 2017 general fund budget is dedicated to funding the county's capital improvement plan (CIP) - similar amounts have been appropriated for this purpose in prior years providing an additional slim level of expenditure flexibility, if needed.

Pasco County's general fund budget is responsible for the provision of various governmental services including the operation of the county sheriff which accounts for approximately 43% of fiscal 2017 budgeted appropriations (excluding reserves). Fire and rescue operations consume an additional 8% of spending with the remainder of the budget largely driven by a combination of human services, facilities management, parks and recreation, and transfers out for debt service, capital investment, and transportation.

Expected growth in the county's population will likely pressure service provision and spending but also contribute to higher taxable values and other consumption-based revenues. As such, Fitch believes the natural pace of general fund spending will generally align with changes in revenue in a fashion consistent with recent history. Fixed costs associated with debt and retiree benefits are expected to remain stable and employee wage and benefit studies have been incorporated in recent budgets.

Long-Term Liability Burden

Fitch estimates the county's long-term liability burden at a low 5% of personal income. The county has very little direct debt outstanding - $66 million in governmental debt in fiscal 2015 which is the equivalent of 0.4% of personal income. Overlapping obligations of the Pasco County School Board account for the bulk of the estimated long-term liability burden. Recently disclosed borrowing plans for the school board are not expected to be meaningful. The county's capital improvement plan (CIP) for fiscal 2017-2021 totals $672 million (or 4% of personal income). Road improvements are the largest single category of project in the CIP. The county plans to fund the CIP on a pay-as-you-go basis from a combination of fuel taxes, tourism taxes, sales taxes, tax increment revenues, impact fees, and grants.

Sales tax revenues dedicated to the CIP include the Penny for Pasco - a half-cent sales tax originally approved by county voters at an election in 2004 and reauthorized in 2012. The renewal levy is in effect through Dec. 31, 2024, with proceeds available to fund land acquisition, infrastructure improvements, public safety and economic development, among other initiatives. Proceeds are shared between the county, the county school board and incorporated municipalities within the county. The Penny for Pasco fund has accumulated reserves totaling nearly $78 million in fiscal 2016 with annual revenue from the sales tax budgeted at close to $26 million for fiscal 2017.

The remainder of the county's long-term liability metric is derived from the county's proportionate share of the net pension liability of the Florida Retirement System (FRS). FRS has a reported ratio of assets to liabilities of 92% which Fitch has adjusted to approximately 86% assuming a lower 7% investment rate of return. 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.

Operating Performance

Pasco County is expected to maintain a high level of financial flexibility and a minimum reserve cushion through economic cycles that is consistent with a 'aaa' financial resilience assessment. Fitch believes the county has the necessary budgetary tools and commitment to maintain compliance with a formal reserve policy equal to 9.7% of budgeted expenditures. The county's stated reserve policy is more than 2x the FAST scenario-estimated change in revenue in a moderate economic downturn absent any policy action.

The county's budget management track record is very sound. During the Great Recession, the county carefully managed spending growth and implemented a series of millage rate increases to preserve a strong financial position with unrestricted reserves maintained at 20% of spending or higher. In the recovery that has followed the county has taken several steps to restore park and recreation service levels and increase headcount in public safety to accommodate a growing population and service demands.

As is common for Florida counties the general fund balance is appropriated as both a revenue and expenditure line item in the proposed fiscal 2017 budget, with the structural gap or the difference between the fund balance shown as a cash inflow and outflow roughly $16 million or 5% of the $307 million general fund budget. The budget gaps are typically reduced from revenue collections above budget, as state law mandates counties budget only 95% of the total receipts reasonably anticipated from all sources. Actual general fund revenues have exceeded the budget 6% on average from fiscal 2011-2015.

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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com