Fitch Affirms Broward County, FL's Half-Cent Sales Tax Revs at 'AA+'; Outlook Stable
--$82,620,000 outstanding half-cent sales tax revenue bonds (main courthouse project), series 2010A;
--$69,950,000 outstanding half-cent sales tax revenue bonds (main courthouse project), series 2010B (federally taxable - Build America Bonds - direct payment);
--$48,780,000 outstanding half-cent sales tax revenue bonds (main courthouse project), series 2010C (federally taxable - recovery zone economic development bonds - direct payment).
The Rating Outlook is Stable.
The bonds are backed by a first lien on the county's share of the local government half-cent sales tax revenues.
KEY RATING DRIVERS
Exceptional Financial Resilience: Current pledged revenues can tolerate significant stress when viewed in the context of historical revenue declines and modeled revenue losses in a moderate economic downturn via the Fitch Analytical Sensitivity Tool (FAST).
Low Leverage Risk: Significantly lower levels of stress tolerance are evident when maximum annual debt service (MADS) is elevated to the 1.5x threshold of the additional bonds test (ABT). However, Fitch's rating reflects a low expectation for additional parity debt based on the county's dependence on surplus half-cent sales tax revenue for operations and the availability of alternative bond programs, if necessary, to finance a manageable multi-year general government capital plan.
Economic Resource Base: Pledged revenues are expected to rise at a pace that approximates inflation over the long term based on expectations for continued moderate growth in population and economic activity within the Miami-Fort Lauderdale-West Palm Beach MSA.
Rating Capped at IDR: Fitch does not believe that the half-cent sales tax revenues would be considered special revenues in a bankruptcy of the county under Chapter 9 of the U. S. Bankruptcy Code. As such, the rating on the sales tax revenue bonds is capped by the Issuer Default Rating (IDR) on the county (currently 'AAA' with a Stable Outlook).
Sales Tax Revenue Bonds: The rating is sensitive to shifts in the performance of the area economy and generation of pledged half-cent sales tax revenue.
Additional Leverage: Fitch would expect rating pressure to materialize if additional parity indebtedness were issued in proximity to the maximum legal limit outlined in the ABT.
County IDR: The rating on the sales tax revenue bonds may become sensitive to changes in the general credit quality and the IDR on Broward County.
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.
Pledged Revenue Overview
Half-cent sales tax revenues are received by the county from the local government half-cent sales tax clearing trust fund pursuant to Florida statutes. The local government half-cent sales tax program distributes a portion of sales tax revenue from the state's general revenue fund to counties and municipalities. Half-cent sales tax revenue collected within a county and deposited in the trust fund is distributed among such county and eligible municipalities pursuant to a population-based distribution formula (the county has received roughly 40-42% of the half-cent sales tax collected within the county with the remainder being distributed to the municipalities). Half-cent sales tax revenues are distributed on a monthly basis to the county. The bond resolution establishes a standard flow of funds featuring 1/12th and 1/6th fill-up of the principal and interest accounts on a monthly basis. Surplus revenues are available for any lawful purpose of the county.
Debt Service Coverage Exhibits Exceptional Resilience
Half-cent sales tax revenue of $77.1 million in fiscal 2015 covers MADS of $16.3 million by 4.7x. Fitch measures the resilience of the coverage cushion (the distance between current MADS coverage and coverage of 1.0x) against scenario-estimated revenue changes and the largest actual cumulative decline in the time series of data reviewed by Fitch (fiscal 1999-2015). FAST estimates a decline in half-cent sales tax revenue of 6.4% from a 1% decline in the national GDP. The worst historical cumulative loss was the 20% drop experienced from fiscal 2007-2010.
At the current level of MADS Fitch estimates the structure could tolerate a 79% loss in revenue before coverage falls to 1.0x which is equivalent to 12x the FAST modeled revenue loss in the 1% U. S. GDP downturn scenario and 4x 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 leveraging by adjusting MADS to the minimum level of coverage permitted under the provisions of the ABT in the bond resolution. The results of the second test are considerably weaker, consistent with a level of financial resilience between the 'bbb' and 'a' level.
Risk to leverage of the half-cent sales tax revenue for most Florida local governments is tempered by the dependence on this revenue stream as a source of funding for operations. However, Broward County's share of the half-cent sales tax accounted for a relatively low 6% of general fund revenue in fiscal 2015 as the county is more dependent on property taxes for operations than many other local governments in the state.
That said, Fitch believes the county will not issue additional parity indebtedness in a manner that dilutes the level of coverage cushion or financial resilience necessary to support the current rating on the sales tax revenue bonds. The county has indicated it does not expect to issue additional parity indebtedness. Fitch estimates the structure could tolerate the issuance of roughly $250 million in additional parity debt and the resultant coverage cushion would remain at the high end of the 'aa' level of financial resilience. The entire current five-year general government capital plan is estimated at only $330 million and is expected to be financed largely from operating resources. Fitch believes the county has sufficient alternative financing vehicles other than the half-cent sales tax revenue bonds that is could issue to meet its long-term capital needs, if necessary.
Pledged Revenues Subject to Volatility
Fitch calculates the half-cent sales tax 10-year CAGR at 0.9% through fiscal 2014 which is significantly below the level of U. S. inflation and GDP growth over the same period. The impact on half-cent sales tax revenue from the recession was both severe and prolonged with four consecutive years of annual declines from fiscal years 2007-2010 aggregating to a 20% drop in revenue. Revenues have rebounded a strong 24% since reaching $77.1 million in fiscal 2015 or 104% of the pre-recession peak. The county is estimating fiscal 2016 revenue at $80.2 million or a 4% increase year-over-year.