Fitch Affirms Orlando, FL's Non-Ad Valorem Revs at 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the ratings on the following Orlando, Florida bonds:
--$222.3 million capital improvement revenue bonds, at 'AA+';
--$236.3 million contract tourist development tax (TDT) payments revenue bonds, series 2014 (contract TDT bonds) at 'AA+';
--Implied general obligation (GO) rating at 'AAA'.
The Rating Outlook is Stable.
The bonds are supported by the city's covenant to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, legally available non-ad valorem revenues (covenant revenues) sufficient with other pledged funds to pay debt service on the bonds. The availability of covenant revenues to pay debt service is subordinate to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant is cumulative to the extent not paid, and continues until all required amounts payable under the indenture have been paid.
The contract TDT bonds are payable from the first four cents of Orange County TDT collections net of the base year amount which escalates by 2% annually. The base year amount is then reduced by an amount equal to that year's collections of the fifth cent TDT. The contract TDT bonds are ultimately supported by the city's CB&A pledge to cure any deficiency in contract TDT revenues or dedicated reserves, which provides the basis for the rating.
KEY RATING DRIVERS
CB&A CONSTITUTES STRONG SECURITY: The city's pledged covenant to budget and appropriate is bolstered by a diverse and extensive covenant revenue base which provides ample coverage of maximum annual debt service (MADS). The 'AA+' rating on the contract TDT bonds is based on the city's CB&A deficiency make-up.
IMPLIED GO RATING: The city's 'AAA' implied GO rating reflects its solid finances, high but manageable debt levels, and an expanding and diversifying economic base.
WORLD-RENOWNED TOURIST DESTINATION: The city and its environs include Disney World, Universal Theme Park and numerous other attractions making it one of the top tourist destinations in the world. Large and ongoing investments by Disney and Universal in their respective theme parks promote continued high levels of visitations.
STRONG CITY FINANCIAL PERFORMANCE: City finances are well-managed as demonstrated by strong reserves, ample liquidity, a diverse revenue base and conservative budgeting. Management increased the property tax rate in order to boost the levy and instituted additional spending cuts to achieve balanced operations in fiscal 2015.
STRENGTHENED AND DIVERSIFYING LOCAL ECONOMY: Local economic activity has surged with the recovery in tourism. Significant health science-related development provides diversification away from the volatile tourist sector.
ELEVATED BUT MANAGEABLE DEBT: Debt per capita is elevated, but debt-to-market value is more moderate. Given no new debt planned and slow amortization, debt levels are expected to remain elevated for some time.
DETERIORATION OF FINANCIAL RESERVES: Significant operating deficits dropping general fund balance below the lower end of the city's fund balance target would be viewed unfavorably by Fitch.
IMPLIED GO RATING DECLINE: A downgrade of the city's implied GO rating would result in negative rating action on the non-ad valorem revenue bonds.
BROAD COVENANT REVENUE BASE
The city's CB&A is backed by an extensive and diverse base of non-ad valorem revenues from the city's two major unrestricted funds (the general fund and utility services tax fund). Covenant revenues totaled over $255 million in fiscal 2014. The largest source of covenant revenues are contributions to governmental operations from the Orlando Utilities Commission (OUC, revenue bonds rated 'AA' with a Stable Outlook).
OUC operates the city's electric and water utility. These contributions consist of a franchise equivalent fee, a dividend payment and OUC's portion of utilities services tax revenues totaling over $105 million or approximately 41% of fiscal 2014 covenant revenues. Other important covenant revenues include franchise fees and the city's share of state sales tax distributions. Covenant revenue trends since fiscal 2009 have been mixed, but the general trajectory has been upwards. Unaudited fiscal 2015 covenant revenues total $268 million or 5% above fiscal 2014 covenant revenues. The fiscal 2016 budget conservatively projects covenant revenues to match fiscal 2014 actuals.
SOLID COVERAGE OF COVENANT DEBT SERVICE
Almost $600 million of city obligations are supported by covenant revenues, including the contract TDT revenue bonds. Coverage of MADS on all covenant debt is ample at over 5x, conservatively assuming that no contract TDT revenues or dedicated bond reserves are available for contract TDT bond debt service. Coverage remains ample at 1.9x when taking essential expenditures (executive office expenditures, fire and police spending) into consideration.
The city's covenant bond ordinance limits issuance of additional debt by restricting covenant debt service to no more than 25% of covenant revenues if MADS falls within the first six years after issuance or 35% of covenant revenues if MADS occurs beyond the first six years following issuance. Current debt service comfortably meets the requirements of the additional bonds test.
HIGHLY VOLATILE CONTRACT TDT REVENUES
The city's CB&A deficiency pledge provides the ultimate security for the contract TDT bonds. Contract TDT revenues, the initial source of repayment, are generated from TDT collections net of a base year amount. As incremental revenues, the contract TDT is notably volatile given the nature of the revenue stream combined with a 2% annual escalating base. Strong growth in TDT revenues in fiscals 2014 and 2015 of 7.7% and 12.3%, respectively have boosted contract TDT revenues to $38.5 million, sufficient to cover contract TDT bond MADS by over 2.0x. In addition, sizable reserves are available to cover any deficiencies in contract TDT revenues. However, a prolonged fall-off in TDT collections would almost certainly lead to reserve depletion and reliance on covenant revenues.
STRONG FINANCIAL MANAGEMENT
City finances are well-maintained, characterized by sizable reserve levels, tight controls over spending and favorable actual performance to budget. The city reported four consecutive years of operating surpluses between fiscals 2009 and 2012 which grew the city's total general fund balance by nearly 80% to $129 million, or 36% of general fund spending. For fiscals 2013 and 2014, officials decided to tap a portion of recently built-up general fund reserves budgeting $29.5 million drawdowns in both fiscal years.
Following a $22 million general fund drawdown in fiscal 2013, the city reported a better than budgeted $18.8 million deficit for fiscal 2014. Charges for services came in above budget due to an increase in emergency medical transportation fees and the city gained $3.1 million from the sale of assets. Despite the successive deficits which trimmed fund balance by over $40 million or 32%, reserves remain robust. Fiscal 2014 general fund total and unrestricted general fund balances represent a healthy 23.1% and 21.6%, respectively, of general fund spending, well within the city's reserve target of 15% to 25% of expenditures. Liquidity remains ample with fiscal 2014 unrestricted general fund cash and investments equivalent to nearly two and one half months of operations.
FISCAL 2015 FINANCES RETURN TO BALANCE
Management balanced fiscal 2015 general fund operations, according to unaudited results, with the aid of a 7.5% rise in taxable assessed values (TAVs) and a one-mill increase in the property tax rate. The rate hike, the first in six years, represents a 17.7% increase in tax rates and combined with the tax base growth generated an additional $26 million in property tax revenues. A $4.6 million increase in OUC contributions to the general fund and gains in sales tax and interest income generated $34 million in additional year-over-year revenues. Spending included a 4.5% across-the-board cost reductions estimated to save approximately $15 million without reducing service levels. Preliminary results indicate a $6.3 million general fund surplus pushing unrestricted balance up to $90 million or 22.6% of spending.
The fiscal 2016 general fund budget maintains the fiscal 2015 operating property tax rate; however, property tax revenues are expected to gain $18 million or 14% due to another year of hefty TAV growth. Other revenues such as sales taxes and OUC contributions are also expected to expand. On the spending side, employee cost of living and step increases and higher pension and health care contribution requirements raise overall costs. The budget is balanced for the second straight year.
HIGH DEBT COSTS MITIGATED BY SUBSTANTIAL TDT-SECURED DEBT
City debt levels are moderate when compared with market value but high on a per capita basis at $6,235. Carrying costs of debt, pension contributions and post-employment benefits (OPEB) for fiscal 2014 are elevated at nearly 23% of general government spending. Some mitigation is provided by the fact that nearly half of outstanding direct debt is secured by TDT revenues which are mostly paid by visitors. Principal amortization of city debt is slow with only 36% of principal retired within the next 10 years. Capital needs are manageable with the fiscal 2015-2020 capital improvement plan totaling a modest $62 million for general capital projects and an additional $300 million of potential projects to be funded from gas taxes and impact fees as well as wastewater and stormwater revenues. There are no plans for additional debt at this time.
ADEQUATELY FUNDED PENSION OBLIGATIONS
The city maintains three separate single-employer defined benefit pension plans (police officers, firefighters and general employees). The general employees defined benefit plan was replaced with a defined contribution plan for employees hired after 1998. The city consistently funds 100% of the actuarially required contribution each year. Funding ratios for the plans as of fiscal 2014 are 78%, 77% and 76% for the general employees, firefighters and police officers' plans, respectively, assuming Fitch's 7% discount rate.
For OPEB, the city provides two single-employer plans; a defined benefit plan and a defined contribution retiree healthcare expense reimbursement option. General employees hired after 2006 are offered an implicit subsidy while fire and police employees hired after 2006 must participate in the defined contribution plan. The city established an OPEB trust and contributes 100% of cost each year. The funding ratio is low at 20% assuming the 7% discount rate but is higher than funding levels of many other municipalities.
CENTRAL FLORIDA ECONOMY STRENGTHENS
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 1.2% in October 2015 on a year-over-year basis. The city's October 2015 unemployment rate of 4.3% was lower than the state and national rates of 5.2% and 5%, respectively.
TAV experienced robust gains of 7.5% in fiscal 2015 and 14.2% in fiscal 2016. The fiscal 2016 tax base growth represented the third consecutive increase after four years of decline. Median January 2016 home values are up nearly 12% over the prior year according to the Zillow Group, signaling future tax base growth.
The leisure and hospitality sector continues to be a major component of the local economy, making up about 21% of total area employment. Disney is the dominant player, employing about 74,000 or over 10% of the total county workforce. Universal Orlando reports 19,000 employees while SeaWorld of Orlando's employment consists of approximately 6,000. Both Disney and Universal are making substantial investments in their parks including new Star Wars themed attractions at Disney and a new hotel and water park at Universal. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
EVOLVING BIOTECH AND LIFE SCIENCE HUB
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master-planned mixed community within Orlando. Lake Nona is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are the recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near-term growth.