Correction: Fitch Affirms Various Jacksonville, FL Dedicated Tax Revs; Outlook Stable
Fitch Ratings affirms the following city of Jacksonville, FL revenue bonds:
--$92 million excise tax revenue bonds, taxable series 2006C, series 2007, series 2009A, series 2009B, and series 2009C at 'AA';
--$21 million local government sales tax revenue bonds, series 2001 at 'AA';
--$466 million transportation revenue bonds, series 2007, 2008A, 2012A, 2012B and 2015 at 'AA-';
--$574 million Better Jacksonville sales tax revenue bonds, series 2008, 2011, 2012, 2012A and 2016 at 'A+'.
The Rating Outlook is Stable.
The local government sales tax (LGST) revenue bonds are secured by distributions of the city's share of the state local government one-half cent sales tax. The state distribution to localities within Duval County is derived from a population based formula between consolidated and nonconsolidated municipalities.
The excise tax revenue bonds are secured by the utilities services tax and the occupational license tax imposed, collected, and received by the city.
The transportation revenue bonds are secured by a pledge of a discretionary 0.5% sales tax approved by voter referendum in March 1988 with no stated expiration date, and a 2-cent per gallon gas tax.
The Better Jacksonville sales tax revenue bonds are secured by a pledge of a voter approved 30-year discretionary 0.5% sales tax levy through Dec. 31, 2030. The surtax applies to all transactions in the city that are subject to the state sales tax imposed on sales, use, rentals, admissions, and other transactions. Proceeds are restricted for capital use and may not be used to fund city operations.
KEY RATING DRIVERS
The affirmation of the ratings on the city's various dedicated tax revenue bonds reflect the strong debt service coverage cushion during periods of economic decline relative to MADS. The rating also factors in limited risk to additional leverage of the pledged tax revenues.
SATISFACTORY COVERAGE: Fiscal 2015 revenues continued to provide sufficient coverage when evaluated against the worst year historical loss and the Fitch Analytical Sensitivity Tool (FAST) output in a moderate economic downturn.
LOW LEVERAGE RISK: The bond ordinance establishes a lenient additional bonds test (ABT) for each bond security. The city does not expect to issue additional parity indebtedness at this time, as it will meet its future debt-financed capital needs by issuing additional special revenue bonds backed by its covenant to budget and appropriate non-ad valorem revenue.
ECONOMIC RESOURCE BASE: Jacksonville is the most populous city in the northeast region of the state and the center of the Jacksonville Metropolitan Statistical Area. The city benefits from a diverse economy and employment that has expanded at a steady pace, providing sound growth prospects for pledged revenues.
SALES TAX COVERAGE: The ratings on the city's various dedicated tax revenue bonds reflect the solid debt service coverage from the pledged revenues. Fitch views the current level of cushion as strong when evaluated against the historical worst-year loss and the FAST output in a moderate economic downturn.
MATERIAL SHIFT IN REVENUE PERFORMANCE: The rating is sensitive to changes in the performance of the pledged revenue streams.
LIMITED LEVERAGE: The rating assumes limited additional leverage of pledged revenues, which could result in the dilution of MADS coverage. Borrowing outside of this expectation could pressure the rating.
RATING CAPPED BY CITY IDR: The rating on the bonds is limited by the city of Jacksonville's 'AA' Issuer Default Rating (IDR), as Fitch does not consider the pledged revenues as special revenues under section 902(2)(B) of the bankruptcy code, and would be subject to impairment in a bankruptcy situation.
The city's economy is supported by the trade, transportation and utilities sectors (21% of employment), education and healthcare (15%), professional and business services (15%), and leisure and hospitality (13%). The city also benefits from its central location with access to a broad transportation network. The presence of the Jacksonville Port Authority enhances economic growth prospects, providing a strategic gateway for trade on the east coast and access for the military, with the presence of three major naval bases. City unemployment has improved from its recessionary peak (11.1% in 2010) with June 2016 unemployment of 5%. Home values have grown 40% since the deep decline during the recession, with 4.1% year-over-year growth registered as of July 2016 by the Zillow Group. Resident incomes trail the state average due to the city's largely service-based economy.
Dedicated Tax Bond Analysis
To evaluate the sensitivity of the dedicated revenue streams to cyclical decline, Fitch considers both revenue sensitivity results (using the moderate economic downturn scenario generated by FAST that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.
Local Government Sales Tax
The local government sales tax revenue bonds continue to produce solid coverage with fiscal 2015 pledged receipts of $87 million equal to 11.2x MADS. Coverage has remained high in part due to the limited leverage, given with the single bond issuance (series 2001) and the city's reliance on available revenue after the payment of debt service to fund operations. The scheduled final maturity is Oct. 1, 2018.
Sales tax revenues are sensitive to economic cycles. Based on the 15-year revenue history, FAST generates a moderate 6.5% scenario decline in pledged revenues. The largest actual decline in historical revenue was equal to a steep 22% from fiscal 2007 to fiscal 2010, reflecting the outsized impact of the great recession on the Florida economy. Sales tax receipts have since notably improved, with current revenues surpassing pre-recession levels. Given current strong debt service coverage, the structure could tolerate a 91% drop in pledged revenue before MADS coverage falls to 1.0x. This level of tolerance is equivalent to nearly 15x the FAST results and 4x the largest actual revenue decline in the review period. Fitch considers these results to be consistent with the 'aaa' dedicated tax assessment.
Excise Tax Bonds
Coverage remains strong with fiscal 2015 pledged revenues equivalent to 6.2x MADS of $20 million. Pledged revenues are expected to remain fairly stable and risk to additional leveraging is considered remote. Furthermore, any parity debt issuance would likely dilute the availability of surplus excise tax revenues to meet the city's general spending needs; excise tax revenues represent 9% of the general fund budget. FAST generates a low 2% decline scenario, with pledged excise revenues sufficient to cover MADS by 40x. The largest cumulative decline (-3.7% in 2012) could occur 22x before reaching 1.0x MADS coverage. Fitch considers these results to be consistent with a 'aaa' assessment. A declining debt structure also enhances strong coverage and offers protection against unanticipated revenue weakness. Debt service declines from $20 million in the fiscal 2016 to $5 million by fiscal 2021 and continues to gradually reduce by final maturity in 2035.
Transportation Revenue Bonds
Fiscal 2015 pledged revenues of $88.4 million provides 1.9x MADS coverage. Pledged revenues increased over 7% over the prior year in fiscal 2015 and have risen at a solid 4.8% CAGR over the past five years. Sales tax revenues comprise 90% of total pledged revenue; they have been the main driver of this growth as gas tax receipts have generally remained flat over the same period. FAST generates a 3.6% decline scenario, which could be covered 13x before MADS coverage could reach 1.0x. The largest consecutive decline (16.4% between fiscal 2007-2010) could occur 3x and continue to cover MADS. Fitch considers these tests equal to a 'aa' assessment. The rating assumes limited additional leverage, as excess revenues support the Jacksonville Transit Authority, a component unit of the city.
Better Jacksonville Sales Tax Revenue Bonds
Pledged revenues have grown steadily at a 5.3% CAFR over the past five years, replenishing losses experienced during the recession. Pledged revenues of $77.6 million in fiscal 2015 were up 7.9% from the prior year, providing about 1.66x MADS coverage. The series 2012 bonds include a large term bond due in the final year of maturity (2030) that raises debt service to $85.2 million from $43.8 million in the year prior. The calculation of MADS utilized in Fitch's coverage analysis considers the release of amounts held in the DSRF, funded at MADS, as a credit against the final debt service payment.
The FAST generates a 3% decline which could be sustained 13.3x and still cover MADS. The largest cumulative year decline (-16.3% between fiscal 2007 and 2010) could occur 2.4x and pledged revenues would continue to cover MADS; both tests demonstrate 'a' results. Similar to the decline in the local government half-cent sales tax, Fitch does not expect this level of decline to occur in future economic downturns. The city does not plan to issue additional new money indebtedness, as its future capital needs are likely to be funded through the issuance of additional special revenue bonds backed by its covenant to budget and appropriate non-ad valorem revenue.
Issuing Entity Exposure
Fitch believes that the pledged revenues would not be insulated from the general operations of the city in the event of a bankruptcy filing. As such, the rating on the dedicated tax bonds are capped at the city's 'AA' IDR.