Fitch Rates Osceola County, FL's Tourist Development Tax Bonds 'A-'; Upgrades IDR to 'AA'
--\\$23,240,000 taxable tourist development tax (TDT) (fifth cent) revenue bonds, series 2016 (Rida conference center phase II project).
The bonds are expected to be sold via negotiation on or about May 26. Proceeds will fund the expansion of a conference center and associated facilities at the Omni Orlando Resort Hotel at ChampionsGate and will fund a deposit to the debt service reserve fund (DSRF).
Fitch has also affirmed the 'A-' rating on the taxable TDT revenue bonds, series 2012 (Rida conference center phase I project) and upgraded the county's Issuer Default Rating (IDR) to 'AA' from 'AA-'.
The Rating Outlook on the IDR and TDT revenue bonds is Stable.
The bonds are secured by the fifth cent TDT levied by the county. There is no expiration date as to the levy of the fifth cent TDT. The bonds are further secured by special assessments imposed upon hotel properties located adjacent to the expanded conference center which are payable by Rida Associates Limited Partnership (not rated by Fitch).
KEY RATING DRIVERS
Analytical Conclusion: The upgrade of Osceola County's IDR to 'AA' from 'AA-' reflects its consistent operating performance throughout economic cycles as management has successfully aligned spending levels and fluctuating revenues to maintain a considerable financial cushion. Reserves adequately cushion the county against unexpected budgetary pressures and compliment the county's ample capacity under statutory tax caps. Long-term liabilities are expected to remain low, and the county should continue to benefit from the strong level of economic growth occurring within the Orlando metropolitan statistical area (MSA).
Fitch's 'A-' TDT rating considers the level of coverage cushion against Fitch's analytical scenario tool (FAST) output and historical revenue losses based on an expectation for additional TDT issuance over time given strict requirements for TDT spending on tourism related capital investment and promotion and the importance of the sector to the county economy. Coverage is currently strong at 3.1x maximum annual debt service (MADS).
Economic Resource Base: Osceola County is located in east central Florida within the Orlando MSA approximately 15-20 miles from Walt Disney World Resorts and Universal Studios. The Orlando economy is performing very well having ranked third among major U.S. metro areas for growth in non-farm employment and gross metro product in 2015 according to data compiled by IHS Connect. The leisure and hospitality sector remains the key driver of economic activity, but continued expansion within the fields of medical research and technology could serve as the gateway to a more diverse and higher wage economy.
Revenue Framework: 'aa' factor assessment
The county's population and tax base have expanded considerably over the prior decade fueling strong growth in general fund revenue. Revenue performance will likely remain strong given forecasts for economic growth but will remain exposed to risks associated with shifts in tourism and housing. Property taxes fund roughly 60% of the general fund budget. The county is subject to statutory limits on the property tax rate but its existing margin translates to a very high level of flexibility relative to potential revenue declines.
Expenditure Framework: 'aa' factor assessment
The county's pace of spending growth is expected to remain in-line with revenues given the broad nature of the county's spending responsibilities and demands from population gains. Fixed charges associated with debt and retiree benefits, currently 15% of governmental spending, are expected to remain moderate. Labor costs are the main driver of spending and while certain classes of employees' contract terms are collectively bargained. Fitch views the county's overall control of headcount, wages and benefits, and conflict resolution as moderate to strong.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term liabilities measure roughly 8% of total countywide personal income, the largest component of which is the county's direct debt, which should remain at a stable level given the pace of outstanding principal amortization and modest future capital needs. Pension benefits are provided through the county's participation in the Florida Retirement System (FRS).
Operating Performance: 'aaa' factor assessment
The county has proactively adjusted both revenues and spending to maintain a very high level of fiscal reserves over an extended period of time, mitigating the risk of cyclical fluctuations in revenue.
Industry Diversification: Improved economic diversity could lead to the consideration of an upgrade of the county's IDR.
Improved Revenue Stability: Fitch assumes a continued high level of revenue volatility; the prolonged moderation of this risk could lead to the consideration of an upgrade of the county's IDR.
TDT Shifts: Prolonged shifts in the level of TDT revenues and/or additional issuance that fully leverages revenue to the legal limits of the additional bonds test could lead to a reconsideration of the current TDT rating.
Proximity to Disney World, Universal Studios and other local attractions underpin the county's tourist and service-based economy. Within the county are numerous hotels and resorts providing more affordable lodging than in neighboring Orange County for theme park guests. The tourism sector continues to perform strongly; leisure and hospitality employment in the Orlando MSA increased 21.7% from fiscal years 2010-2015 and is up 5.4% on the year based on preliminary March data. The leisure and tourism sector accounts for 21% of nonfarm employment in the MSA. TDT collections, driven by room occupancy and rental charges, grew by 10% in fiscal 2015 (unaudited) and 46% in total dating back to fiscal 2010. Both Disney and Universal are making substantial investments in their parks including new Star Wars themed attractions at Disney and a new hotel and water park at Universal that should further boost these favorable trends.
The absence of a strong economic compliment to tourism is somewhat of a credit negative. Osceola County experienced steep declines in jobs, housing values, and building permit activity during the last recession. Resident per capita personal income is very low equivalent to 64% and 59% of the state and national averages, respectively. Incomes reflect the high concentration of jobs in the lower wage service sector which accounts for more than 40% of total employment in the county.
Efforts to diversify the economy and attract higher wage jobs are evident, including the county's collaboration with nearby higher education institutions and Florida's High Tech Corridor Council to build the Florida Advanced Manufacturing Research Center (FAMRC), intended to promote the research and development of smart sensors. Expansion of SunRail from Orange County through major population centers in Osceola County (including Kissimmee and Poinciana) could stimulate private sector investment and also stabilize home prices in areas previously underserved by transit. The current average home price in the county as reported by Zillow Group remains at less than 70% of the pre-recession peak following a 6% increase over the prior year. Prices are forecast to rise an additional 3.2% in the ensuing 12 months.
Pledged fifth cent TDT revenue for fiscal 2015 (unaudited) totaled \\$7.5 million compared to an estimated MADS of \\$2.4 million following issuance. Pledged TDT collections provide a strong coverage cushion against revenue sensitivity under a moderate 1% decline in U.S. GDP. The FAST revenue scenario output shows a 6% decline in TDT revenue in the downturn scenario, whereas current TDT revenues can decline by more than 11x the revenue sensitivity result (or roughly 65%) before MADS coverage falls below 1.0x. Alternatively, the current structure can withstand a 4x multiple of the largest actual revenue decline - a 16% loss across fiscal years 2008-2010. When the same scenarios are measured against current TDT revenues leveraged at or near the 1.2x ABT the level of coverage cushion becomes far less significant at 2.8x the revenue scenario output from FAST and 1x the largest actual revenue decline.
The county's capital improvement plan identifies \\$34 million in projects eligible for TDT funding. The county has stated it does not expect to issue additional debt backed by the fifth cent TDT pledged to bondholders. Adequate TDT resources exist to fund these projects on a pay-as-you-go basis. The adopted fiscal 2016 budget projects close to \\$42 million in total TDT revenue (including the fifth cent TDT) and the county's tourist development tax fund reported a total fund balance of \\$89 million in fiscal 2015 (unaudited). However, additional parity issuance may become more likely over time, given strict limitations imposed on its use by state law and the importance of tourism development and promotion to the county and its economy.
Property taxes are the largest funding source for the county representing approximately 60% of general fund revenue. Intergovernmental funds are the next largest source at 15% of revenue. Intergovernmental funds include distributions of the half-cent sales tax, which is remitted to the state by sales tax dealers within the county, and earmarked for distribution back to the county and each of its municipalities pursuant to a population-based formula.
Long-term revenue growth is expected to remain strong and above the level of national economic output in the absence of policy measures as the county benefits from the gains in population and a favorable employment forecast for the central Florida regional economy.
The county's general non-voted property tax rate is subject 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 adopted a millage rate of 7.9205 mills for fiscal 2016. Fitch estimates the county can generate over \\$40 million in additional revenue, more than a 20% of the fiscal 2016 budgeted operating revenue, through an increase in the property tax rate to the maximum legal millage rate and moderate adjustments to other local fees and charges. The new revenue would cover by 6x the 3.6% revenue decline in the 1% national GDP decline economic downturn scenario depicted in the Fitch analytical scenario tool (FAST).
The general fund supports a broad range of governmental activities including general administration and oversight, public safety and corrections, emergency management, and human services. The county funds key economic development and transportation initiatives in part from the levy and collection of voter approved hotel and fuel taxes recorded outside of the general fund.
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.
Fitch estimates a moderate 15% of the county's general fund budget is consumed by fixed debt service charges and retiree benefits. Capital needs are moderate and pension benefits are offered through the Florida Retirement System thus the long-term liability burden on the annual budget is expected to remain stable.
Wages and benefits are collectively bargained for fire personnel and corrections officers and the county is currently in negotiation with both unions. 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. Flexibility around personnel spending may be somewhat constrained from a practical point of view as the county has steadily lowered its employee count from fiscal 2007-2015 before funding a modest 1% increase (or 16 positions) in the fiscal 2016 budget. The general fund budget funds less than \\$4 million in capital outlay (less than 2% of overall spending) providing an additional slim level of expenditure flexibility, if needed.
Long-Term Liability Burden
The county's long-term liability burden is measured at a low 8.4% of personal income. Close to 60% of the long-term liability metric is derived from direct debt from which Fitch expects minimal change, with the bulk of the remainder coming from debt of overlapping jurisdictions.
The three-year scenario revenue estimate generated by FAST depicts a roughly 4% drop off in revenue in year one followed by a rapid recovery. The financial resilience assessment is informed by Fitch's view of the county's superior budgetary flexibility and capacity to respond to any such downturns, primarily evidenced through its strong revenue raising margin within statutory property tax caps and only moderate demands on the budget from fixed charges and other mandated spending.
The county's sound budget management is evidenced in its compliance with a conservative fund balance policy equal to two months of spending dating back more than a decade and two economic downturns. Financial flexibility has been maintained over the long term through controls on spending and moderate tax rate increases. The county appears to have taken only limited action to restore programs and spending to levels that existed prior to the last recession but neither has it resorted to the deferral of spending or liabilities. The fiscal 2016 budget appropriates similar levels of existing reserves to balance the budget as it did last year; unaudited fiscal 2015 results show a \\$4.6 million or 2.3% operating surplus after transfers. Management has not identified or reported any major deviations in revenue or expenditure performance relative to the fiscal 2016 budget based on year-to-date results.