Fitch Affirms Port Orange, FL's GOs at 'AA-'; Outlook Stable
--\$14.4 million general obligation (GO) bonds, series 2006 at 'AA-'.
The Rating Outlook is Stable.
The bonds are a general obligation of the city payable from unlimited ad valorem taxes levied on all taxable property within the city.
KEY RATING DRIVERS
STRONG RESERVE LEVELS: Prudent financial management through the economic downturn has resulted in strong general fund reserves which provide the city with a high degree of financial flexibility.
LIMITED LOCAL ECONOMY: The local economy is somewhat limited with a concentration in tourism and is subject to economic cyclicality.
WEAK PENSION FUNDED RATIOS: The city's pension funded ratios are weak, although recent modifications to the plans along with greater than required contributions have led to some improvement over the last few years.
HIGH CARRYING COSTS: Carrying costs for the city are elevated, largely driven by pension spending, as debt obligations are manageable.
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The city is located in eastern Volusia County (implied ULTGO rating of 'AA', Stable Outlook) on Florida's central Atlantic Coast approximately six miles south of Daytona Beach. The city encompasses 27.6 square miles and had an estimated population of 57,203 in 2013.
CONSISTENTLY POSITIVE OPERATING RESULTS
The city has consistently achieved positive operating results despite some revenue pressures due to declines in taxable assessed values (TAV). Fiscal 2013 ended with a general fund operating surplus after transfers of \$1.4 million (or 4.9% of spending), increasing the already strong unrestricted general fund balance to \$14.9 million or a robust 51.3% of expenditures.
The city remains in compliance with its policy to maintain an unreserved fund balance of 15% of spending. Fitch believes that reserves will be maintained at or near the current level given the city's history of conservative budgeting and proactive fiscal measures. While there has been a significant amount of management turnover over the last year, primarily among senior staff, Fitch believes that the city's institutionalized financial management practices will be maintained. Significant deviation from these historically strong practices would be a negative credit factor.
The fiscal 2014 budget was balanced with a \$1.2 million fund balance appropriation but preliminary projections for both revenues and expenditures appear to be positive. Unaudited fiscal 2014 results indicate a general fund surplus of approximately \$1.5 million.
The fiscal 2015 budget was balanced utilizing \$1.2 million of fund balance. Year-to-date results appear to be tracking well when compared to budget.
ASSESSED VALUE SHOWING SIGNS OF RECOVERY
Like much of the state, Port Orange has experienced severe TAV declines since 2008 (38.2% decrease from 2008-2013). The city's TAV has begun to show signs of recovery with 2.5% growth in fiscal 2014 and 6.7% in fiscal 2015. The operating millage rate was rolled back to remain revenue neutral in both years. The operating millage rate of 4.5 mills per \$1,000 of TAV remains well below the state's 10 mill statutory restriction.
LIMITED LOCAL ECONOMY
Primarily a residential community, the city's economy is somewhat limited and caters to tourism in nearby Daytona Beach. Given the location, the majority of local employment opportunities are generally focused in lower-wage tourism and retail with some diversification provided by the healthcare industry. Florida Healthcare is the city's largest employer with 1,200 employees.
Despite the limits of the economy, the city's unemployment rate (4.6% as of December 2014) is consistently below that of the state (5.6%) and the nation (5.5%). City wealth levels are slightly below average with median household income and per capita money income representing 86.1% and 95.5% of the nation, respectively. The individual poverty rate of 11.2% is below both the state average of 16.3% and the national average of 15.4%.
PENSION CHALLENGES REMAIN
The city maintains separate single-employer defined benefit pension plans for firefighters, police officers and general employees. Funding levels for the police and firefighter's plans remain weak at 54.8% and 51%, respectively (using Fitch's conservative 7% rate of return). Negotiated benefit changes over the last few years along with the city consistently funding more than the actuarial required contributions have led to some improvement in funded ratios. Funding for the general employee plan was better at 78.8%, when adjusted by Fitch to a 7% rate of return.
Along with weak funding levels, combined pension actuarially required contributions for the three plans represented an elevated 16.3% of governmental spending in fiscal 2013. In an effort to contain the increasing pension costs, management negotiated with its bargaining units to achieve savings through increased employee contributions and a decrease in employee retirement benefits and wages. Fitch expects these plan changes to positively affect funding levels over the medium and long terms.
Other post-employment benefits (OPEB) are offered to retirees at an implicit rate subsidy, giving retirees the ability to purchase health insurance at the group rate. The city does not otherwise pre-fund retiree health insurance. The OPEB unfunded liability of \$4.2 million represents a low 0.1% of market value.
ELEVATED CARRYING COSTS
The city's overall debt levels are affordable at \$1,662 per capita and 2.6% of market value. There are currently no plans for issuing additional debt.
Total carrying costs including debt service, pension, and OPEB were a high 25.5% of governmental expenditures in fiscal 2013, despite slow principal amortization of 32% within 10 years.