Fitch Affirms North Port, FL's Transp Improv Assessment Bonds at 'A'; Outlook Revised to Positive
OREANDA-NEWS. Fitch Ratings has affirmed the city of North Port, Florida (the city) bonds as follows:
--$37 million transportation improvement assessment bonds, series 2013 (the assessment bonds) at 'A'.
In addition, Fitch affirms the 'A+' rating on the city's implied unlimited tax general obligation (ULTGO).
The Rating Outlook has been revised to Positive from Stable.
The bonds are secured by special assessments levied upon real property within the North Port Road and Drainage District (the district) which is coterminous with the city with the exception of a few parcels of land.
The city covenants to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, if special assessment revenues are insufficient, from legally available non-ad valorem revenues (NAV) sufficient with other pledged funds to pay debt service on the bonds. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on NAV revenues. Such a covenant shall be cumulative to the extent not paid, and shall continue until all required amounts payable under the indenture have been paid.
KEY RATING DRIVERS
FAVORABLE FINANCIAL TRAJECTORY: The revision of the Rating Outlook to Positive reflects the city's apparent return to structurally balanced operations. This follows several years of operating deficits and capital spending which reduced its previously large fund balances, although to still solid levels. Unaudited results for fiscal 2015 point towards growth in general fund balance, and the adopted fiscal 2016 budget is structurally balanced.
RATING BASED ON CB&A PLEDGE: The 'A' rating assigned to the assessment bonds is based on the city's CB&A back-up pledge to pay debt service. Fitch considers both the CB&A and the special assessments as providing sound credit quality. However, the NAV pledge incorporates a greater diversity of available revenues and wider levels of debt service coverage. The CB&A rating is one notch below the implied GO rating as the issuer cannot be legally compelled to raise NAV revenues, and payment of assessment bond debt service is subject to the prior payment of essential government services.
GROWING LOCAL ECONOMY: The city's economy, supported by retail trade, health care and education, is experiencing consistent job growth and increasing housing values. Taxable values increased strongly in fiscals 2014 and 2015.
MODERATE DEBT LEVELS: City debt consists solely of the bonds, a small lease obligation, and a loan from the state infrastructure bank. Overall debt burden is moderate due to extensive overlapping debt while capital needs are manageable. Carrying costs of debt, pension and other post-employment benefits (OPEB) are low.
FINANCIAL STABILITY: Maintenance of structural balance and solid reserve levels would likely result in an upgrade in the next year or two.
The city is located in Sarasota County in southeastern Florida between the cities of Sarasota and Fort Myers and 12 miles inland from the Gulf of Mexico. The current population is estimated at 60,380.
SPECIAL ASSESSMENTS CONTAIN STRONG SECURITY FEATURES
The special assessments securing the bonds are levied on a per-parcel basis on all taxable parcels in the district and carry an equal lien with property taxes, ahead of all other liens. The assessments are sized to narrowly cover debt service requirements and discounts for early payment and collection fees. Delinquent taxes are subject to Florida's rigorous tax collection process in which tax certificates are sold to provide sufficient cash flow to meet annual debt service obligations.
DIVERSE NAV REVENUE BASE
Available NAV revenues represent a broad and diversified set of revenue streams accounting for about 52% of total governmental revenues. Charges for services represent about 44% of fiscal 2014 NAV revenues, infrastructure sales surtax dedicated to capital projects 18%, and the half-cent sales tax 11%. Overall NAV revenues increased 4% in fiscal 2014 versus the prior year.
STRONG COVERAGE, WEAK LEGAL PROTECTIONS
Fiscal 2014 NAV revenues provided very strong coverage of maximum annual debt service (MADS) of over 7x, even after netting out a proportionate share of essential service expenditures (general government and public safety). The infrastructure sales surtax expires in fiscal 2024, well before final maturity of the bonds in fiscal 2039. However, coverage remains strong at over 5.0x excluding the infrastructure sales surtax revenues. Legal provisions are weak as the bonds do not include an anti-dilution test or a debt service reserve fund (DSRF). However, the city's ongoing need of NAV revenues to fund operating and capital costs should limit additional NAV-secured debt. The absence of a DSRF is mitigated by ample NAV debt service coverage and liquidity.
IMPROVED FINANCIAL OPERATIONS DRIVES OUTLOOK REVISION
The Outlook revision to Positive reflects Fitch's views of the city's improved operating stability after seven straight years of general fund operating deficits. These deficits resulted from a deliberate decision of city management to tap the city's exceptionally large reserve balances, over 92% of total spending in fiscal 2006, to offset the precipitous decline in taxable values and resulting property tax revenues during the recession. Other measures taken include periodic modest property tax rate increases and spending cuts.
The fiscal 2015 adopted budget showed a $922,905 use of general fund balance, the vast majority allocated for one-time expenditures. Because of positive budgetary variances - which include, among others, utility, electric franchise fees and half-cent sales tax revenue coming in approximately $467,000 higher than projected, and a $250,000 expenditure line item for legal services which was not used - management anticipates adding up to $300,000 to fund balance based on unaudited results. The projected ending unrestricted general fund balance in fiscal 2015 is $10.5 million, equaling a sizeable 34% of budgeted fiscal 2015 expenditures.
The fiscal 2016 adopted budget is structurally balanced. The budget, which includes a 3.6 millage rate (flat over the prior year and well below the statutory 10-mill cap) and a 3% employee wage increase (equal to $506,095) includes a minimal use of fund balance for one-time capital needs in the amount of $351,120 (less than 2% of spending). Fitch notes positively that the city has a long history of performing favorably compared to budget.
The city's service-based economy incorporates significant health care, governmental and educational sectors. Retail trade is also important as the city serves as a commercial center for tourist-based communities along the coast. A small manufacturing component includes companies such as PGT industries (custom windows and doors - 1,761 employees) and Tervis Tumbler (cups and tumblers - 668 employees).
After losing about 13% of its employment base between 2007 and 2009, employment within the city has experienced moderate but continuous growth, although growth slowed in 2015 to 0.2%, which mirrors the state average but is below the rate for the U.S. Unemployment continues to improve, and the July 2015 rate of 5.7% approximates that of the state and U.S. averages. Leading employers include the Sarasota County School Board, the county, Sarasota Memorial Hospital and PGT Industries.
TAX BASE TRENDS MIRROR HOUSING MARKET DEVELOPMENTS
Housing values plummeted between 2006 and mid-2011, falling by 60% according to Zillow.com. Home prices are in the recovery stage, increasing by 8.7% year over year as of September 2015, but remain well below pre-recession highs. Taxable value trends have closely mirrored those of the local housing market. Valuations fell a precipitous 60% between fiscals 2008 and 2012. The 9.7% taxable value increase in fiscal 2015 follows growth of 6.8% the prior year, reflecting the improved economic environment. Wealth indices are generally below the state and national norms.
MODERATE DEBT BURDEN
The city's moderate debt burden of 3.6% of market value is mainly attributable to overlapping debt of the Sarasota County and Sarasota County School Board. Capital needs are manageable and no additional debt is planned for the near term. The city's fiscal 2014 cost of carry of combined debt service, pension contributions and OPEB contributions is below average at 7.7% of general government spending.
RETIREMENT COSTS ARE MANAGEABLE
Pension costs are manageable. The city administers separate defined benefit pension plans for police and firefighters while general employees participate in the relatively well-funded state-run Florida Retirement System (FRS). Funding levels for the municipal firefighters plan and the municipal police officers plan are strong at 93.9% and 83.4%, respectively (approximately 84.6% and 77.1% under Fitch's more conservative assumed 7% discount rate). The new police contract closes the municipal police officers plan to new hires who will now participate in FRS. The city anticipates the same agreement with the firefighters union. This change should generate some savings for the city over the longer term
For OPEB, the city offers an implicit subsidy for retiree health care as required by state law. The city's fiscal 2014 contribution towards OPEB costs was approximately $78,138 or less than 0.1% of spending.