Fitch Rates Coral Springs, FL's Special Obligation Bonds 'AA+'; Outlook Stable
--$19,565,000 special obligation bonds, series 2016A (municipal complex project);
--$3,750,000 special obligation bonds, federally taxable series 2016B (municipal complex project).
The bonds will be offered competitively on or about August 23rd. Proceeds will finance a portion of the cost of a new city hall structure, parking garage, and related site and infrastructure improvements.
Fitch has also affirmed the following ratings:
--Issuer Default Rating (IDR) at 'AAA';
--General obligation (GO) refunding bonds, series 2005B at 'AAA';
--Capital revenue refunding bonds, series 2008 at 'AA+'.
The Rating Outlook is Stable.
The special obligation bonds are backed by the city's covenant to budget and appropriate non-ad valorem (NAV) revenues sufficient to pay debt service. The NAV covenant shall be cumulative to the extent not paid and shall continue until such non-ad valorem revenues or other legally available funds are sufficient to make all such required payments under the bond resolution.
KEY RATING DRIVERS
Coral Springs' 'AAA' IDR and GO ratings reflect Fitch's view of the city's exceptional financial capacity to address challenges associated with typical cyclical economic fluctuations and a low long-term liability burden. The 'AA+' rating on the special obligation bonds and capital revenue refunding bonds is one notch below the IDR as the bonds are not general obligations but viewed as an ongoing and enforceable obligation of the city payable from a broad base of resources.
Economic Resource Base
Coral Springs is an affluent residential community of about 129,000 in northwest Broward County. Coral Springs' economic profile benefits from a labor force that exhibits high educational attainment and personal income relative to the state and U. S. and its proximity to south Florida tourist attractions and the larger Fort Lauderdale economy. Redevelopment opportunities are the focal point of efforts to develop the tax base as the city nears full build out. Housing market fluctuations represent a credit risk tempered by various policy actions during the last recession.
Revenue Framework: 'aa' factor assessment
Revenue raising authority is high relative to potential volatility in a moderate economic downturn. Long-term revenue growth is expected to be slow and closely approximate inflation on account of the city's mature development status.
Expenditure Framework: 'aa' factor assessment
The city maintains a solid level of expenditure flexibility centered on manageable fixed charges associated with debt and retiree benefits, strong legal controls on employee wages and benefits, and adequate practical ability to make spending cuts or deferrals in a downturn if needed.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term liabilities are low relative to personal income and not expected to change materially based on the city's modest capital and issuance needs and the funded status of pension plans.
Operating Performance: 'aaa' factor assessment
Unrestricted balances adhere to formal policies which Fitch believes establishes a more than adequate cushion against risk to economic downturns when considered in conjunction with the city's inherent revenue and expenditure flexibility.
Management Practices: Fitch expects the ratings to remain stable in the absence of a shift in management practices and/or policy and resultant weakening of the city's long-term operating profile.
Coral Springs' economic resource base is supported by a fairly affluent population with resident per capita personal income measuring 117% and 108% of the Florida and U. S. benchmarks, respectively. Residents exhibit a higher standard of educational attainment relative to the regional, state, and national norms and the city's proximity to employment centers throughout the Miami-Fort Lauderdale-West Palm Beach core based statistical area (CBSA) contributes to a somewhat lower incidence of unemployment throughout economic cycles.
The city and its operations are exposed to fluctuations in the housing market typical of many Florida localities. The city's taxable assessed valuation (TAV) fell a significant 28% from fiscal 2009-2012. The city's tax base has posted five consecutive years of growth since but fiscal 2017's preliminary TAV of $9.1 billion still remains about 12% below the pre-recession peak. Future performance of the tax base will rely heavily on appreciation and redevelopment opportunities as the city's tax base is largely built-out. Several large residential and mixed-use projects should support continued growth in the near-to-intermediate term. The Zillow median home value for Coral Springs is $311,100 or 145% of the Broward County median.
The city has a diverse revenue base featuring a blend of ad valorem taxes (36% of fiscal 2016 budgeted general fund revenue) that tend to shift more slowly in response to economic cycles and service charges (13%), utility taxes (11%), franchise fees (10%) and sales tax (8%) that more closely track conditions in the prevailing economy.
The 10-year general fund revenue CAGR of 2.8% exceeds the rate of inflation over the same period but it incorporates a series of large millage rate increases approved by the city in response to the housing market collapse of the Great Recession and resultant decline in citywide taxable values. Going forward Fitch would expect the long-term performance of general fund revenue to generally track inflation absent similar management actions. The city is nearing full development; as such, the trajectory of growth related to new construction activity will likely subside. Furthermore, close to 60% of the city's property tax base consists of residential properties protected by the Save Our Homes (SOH) cap, a Florida law that limits the increase on homesteaded property values to the lesser of the rate of inflation or 3% (value adjustments on these properties have been less than 1% in recent years).
The city has ample legal revenue raising authority. The adopted operating millage rate for fiscal 2016 was 4.8 mills compared to a statutory property tax cap of 10 mills. Fitch estimates the city could generate more than $42 million in additional revenue through an increase in the property tax rate to the maximum legal rate. This legal property tax raising capacity is considerable in relation to the city's general fund operating budget of $108 million for fiscal 2016 and is equal to more than 11 times the potential revenue decline in a moderate economic downturn depicted by the Fitch Analytical Sensitivity Tool (FAST).
The city has demonstrated willingness to increase its tax rate to help stabilize its financial position. The city adopted consecutive increases in its millage rate in fiscal years 2010-2013 aggregating close to 36%. Despite these adjustments the city's current millage rate remains very competitive with other municipalities located in Broward County.
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 provision is ultimately subject to override by the city. The city 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.
Growth in the city's tax base has slowly accelerated since the depth of the recession. TAV increases have ranged between 4% and 7% per annum from fiscal 2014-2017 despite the constraint of the SOH provision noted earlier due to various redevelopment opportunities and the appreciation of non-homestead and commercial properties. The city is forecasting 4%-4.5% TAV growth through fiscal 2021 which Fitch considers reasonable.
Coral Springs provides a full range of municipal services including public safety, streets, sanitation, public improvements, general administrative services, and education through operation of its Coral Springs Charter School. Departmental spending is largely driven by police (43% of fiscal 2016 budgeted general fund spending), parks and recreation (14%), emergency medical services (8%), community development (6%) and public works (4%).
Fitch expects general fund spending demands to remain consistent with historical performance and generally remain aligned with revenue growth.
Employee wages and benefits are the key expense driver of the operating budget accounting for roughly 70% of annual spending. Wages and benefits are contractually bargained for police and fire - general employees are not represented. Police and fire contracts are in place through September 2018 and January 2017, respectively. 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.
The city was able to navigate through the challenges of the recession without layoffs or furloughs and today's staffing levels exceed those prior to the downturn, suggesting some practical capacity to reduce services and costs if necessary. The city routinely budgets a small contingency (less than 1% of spending) and funds about $4 million to $5 million annually in various equipment or vehicle purchases on a pay-go basis via chargebacks to applicable departments that it could probably defer in a given year if needed.
The operating budget is not constrained by fixed charges associated with debt service and retiree benefits which accounted for a moderate 13% of governmental spending in fiscal 2015. Pension is the largest component of this metric at 9% of governmental spending, but the city's actuarial pension contribution has declined more than $3 million or 19% since fiscal 2012 and the enactment of several key reforms to the police pension plan.
Long-Term Liability Burden
Fitch estimates the city's long-term liability burden at less than $280 million or a low 4% of personal income following the current issuance. Overlapping debt of Broward County and Broward County Schools account for close to 50% of the city's long-term liability burden - Fitch does not believe the additional issuance plans of either entity will materially influence the city's metric.
Other potential debt financed projects in the city's five-year capital plan total roughly $16 million, which Fitch views as manageable. The city may explore other capital investment opportunities and the issuance of debt pending the outcome of a referendum on a new countywide 1/2-cent infrastructure sales tax in November. Proceeds of the tax would be allocated between the incorporated municipalities within the county on the basis of population - the city estimates its share at roughly $11 million in the first year of collection.
Pension benefits for city employees are offered via single-employer defined benefit plans for police, fire, and general employees. The general employee plan was closed to new entrants in 1986 and has a small Fitch-adjusted total pension liability (TPL) of just $2.5 million. The fire plan is overfunded and the police plan's TPL has been reduced nearly 50% since the enactment of pension reforms in 2012 that resulted in a lower COLA and benefit multiplier and extended eligibility requirements.
Fitch believes the city's broad revenue raising and spending control powers establish a solid foundation for managing the challenges of a moderate economic downturn and that it will continue to take actions necessary to maintain compliance with formal reserve policies. The city has established a stabilization account within the general fund equal to no less than 17% of budgeted general fund expenditures which Fitch views as more than sufficient in a downturn for a 'aaa' operating performance assessment.
The city relied on various revenue and expenditure actions in combination with a planned use of reserves during the last recession with unrestricted general fund balances never falling below a still high 19% of spending. The city has since recorded consecutive operating surpluses from fiscal 2013-2015 as unrestricted reserves climbed above 23% of spending. An additional surplus is forecast for fiscal 2016 totaling $1.7 million (1.6% of spending). The city has not published the fiscal 2017 budget proposal but management has indicated the general fund budget will be balanced with no use of existing reserves and no change in the millage rate.