NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following actions on Port St. Lucie, Florida's (the city) general obligation (GO) bonds:
--Approximately $84 million outstanding GO bonds affirmed at 'AA-'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The GO bonds are general obligations of the city backed by a pledge of the city's full faith and credit and ad valorem taxing authority without limit as to rate or amount.
KEY RATING DRIVERS
HIGH DEBT BURDEN; CITY'S BACK-UP CB&A PLEDGE INVOKED: The Negative Outlook reflects the potential for increased stress on city finances due to required general fund support of debt with a back-up pledge of the city's covenant to budget and appropriate (CB&A). The city has already been obliged to support certain such series of debt, and others are not fully covered by annual pledged revenue.
HIGH DEBT BURDEN: City debt levels should remain high as amortization is average and modest additional issuance is planned. Carrying costs for total governmental fund debt are exceptionally high.
STABLE FINANCES; SOLID RESERVES DESPITE PLANNED DRAWDOWNS: Following sizable general fund operating deficits in prior years, surplus operations added to reserves in fiscal years (FYs) 2011 and 2012 and are expected to do so in FY 2013. The city is budgeting a draw-down of fund balance for FY 2014, but reserve levels should remain solid.
TAX BASE IMPROVEMENT; BELOW-AVERAGE ECONOMIC INDICATORS: Taxable values fell by 40% between FY 2008 and 2012, but the pace of decline slowed, and values returned to growth (1.6%) in FY 2014. Following prior year declines, city employment has seen annual growth since 2010. Unemployment and income levels are weaker than national averages.
RATING SENSITIVITIES
The rating reflects Fitch's expectation that the city will work towards achieving structural balance in the near term. Maintenance of sizable reserves is an important credit strength given the general fund's exposure to the city's high debt-service needs. A significant increase in the city's debt load beyond the moderate amount currently planned, or substantial additional required general fund support of debt with a CB&A back-up could pressure the rating.
CREDIT PROFILE
Port St. Lucie is located in southeast Florida along the Atlantic coast and encompasses about 116 square miles. The city saw very strong growth in the mid-2000s, and the 2012 population of 168,716 represents growth of 90% compared to 2000.
STABLE FINANCES; SOLID RESERVES DESPITE PLANNED DRAWDOWNS
In recent years, the city's financial operations have been challenged by a weak area economy, with tax base deterioration leading to declines in property taxes, the largest source of general fund revenues (about 35%). Significant general fund operating deficits resulted in FYs 2009 and 2010. The city implemented cost cutting measures and property and other tax rate increases.
FY 2011 ended with an operating surplus, leading to an increase in the general fund unrestricted ending balance to $14.2 million (23.8% of spending) from $12.4 million (18.6%) a year prior. The unrestricted balance increased again to $18.6 million (31.3%) in FY 2012. A surplus is expected for FY 2013, with the unrestricted general fund budgetary basis ending balance at $19.8 million or about 30% of expenditures compared to 31% a year prior.
The city has budgeted a fund balance draw-down of about $4.2 million for FY 2014, which is largely related to general fund support of debt service originally intended to be paid from other sources. A large part of the city's debt service is related to various special assessment district debt with a city CB&A back-up pledge from non-ad valorem (NAV) revenue. Most of the special assessment debt remains self-supporting. However, debt related to the City Center Special Assessment District will need general fund support in FY 2014, as a major developer has ceased making assessment payments. In addition, the bankruptcy of a digital production studio whose lease payments supported 2010 lease revenue bonds will lead to the refunding of these bonds, with the new debt payable from the city's general fund. New general fund debt service needs for FY 2014 associated with support of these debt issuances total over $3 million.
With the budgeted draw-down of reserves, the FY 2014 general fund ending balance is projected at about $15.6 million or 23% of spending. Given the city's trend of actual results outperforming budgeted expectations, the draw-down may be less. Current projections indicate continued but lower budget imbalance ($2.8 million projected deficit) for FY 2015. The city is developing a plan to get back to budget balance by FY 2016 that may rely on an operating millage increase. In addition, management expects finances to benefit from continued growth in taxable values and continued improvement in building activity increasing impact fee revenues that would lessen the need for general fund spending on certain debt.
To partially offset prior year tax base reductions, the city raised the property tax rate in certain years, but the rate remains well below the statutory 10-mill cap. The FY 2014 general operating rate ($3.4897 per $1,000 of taxable value) and overall rate ($5.6289) are unchanged from FY 2013.
RECENT ECONOMIC IMPROVEMENT
A serious weakening in the city's housing sector over the past few years has negatively affected the tax base. Following strong growth in prior years, taxable values fell by 40% between FYs 2008 and 2012. However, the pace of decline has been slowing and values returned to growth (1.6%) in FY 2014. The city is projecting continued growth of about 3% annually based on increased construction activity and improved home prices. The tax base is diverse with the top taxpayer (Florida Power and Light) accounting for 1.4% of taxable value and the top 10 taxpayers (real estate, retail, communications, hotel, and healthcare sectors) at 6.5%.
Following prior year declines, city employment has seen annual growth since 2010. Unemployment has been decreasing, but remains above state and national levels. Unemployment in July 2013 (8.5%) declined from a year prior (10.1%) but remains higher than state (7.4%) and national (7.7%) rates. Major city employers include Walmart (the largest), medical groups, QVC, Publix, local government, including schools, Indian River State College, and Florida Power and Light.
The city has been attracting several health/ bio-tech firms, creating the potential for a more robust local economy, although the full impact remains to be seen. Martin Memorial Hospital System is expected to be completed by the end of the year and will result in about 400 new jobs. A nearby office complex will also be completed by year end and has already been leased to health-related businesses. The city also reports significant on-going residential development.
DEBT LEVELS ARE HIGH; INCLUDE SPECIAL ASSESSMENT DEBT
City debt levels ($4,450 per capita and 8.3% of market value) are high. FY 2012 governmental funds debt service was 38.2% of governmental expenditures. The city issued extensively during the past decade to accommodate its rapid population growth. About 45% of the city's direct debt consists of special assessment bonds secondarily backed by the city's covenant to budget and appropriate from NAV revenues. The special assessment bonds were used to fund basic infrastructure needs across the city. Excluding special assessment bonds not needing NAV support, debt service as percentage of revenues decreases, though remains high at about 30%. Principal amortization, about 50% repaid within 10 years, is average.
The city plans on issuing about $36 million in voter-approved GO bonds in November 2013, to fund a bridge project. In addition, the city plans on issuing $24 million in public service tax (general fund utility tax revenue) bonds in December. Proceeds of these bonds together with asset sale proceeds will refund the $37 million in digital production studio lease revenue bonds.
The city provides pension benefits to its retired employees through three defined contribution plans and one single-employer defined benefit plan for police. The funding ratio of the defined benefit plan is 69.7%, or an estimated 59.9% under Fitch's more conservative 7% discount rate assumptions. However, the unfunded actuarial accrued liability (UAAL) of $19.6 million represents only .022% of market values. Total FY 2012 city pension costs were a low 4.1% of fiscal 2012 governmental fund expenditures. Retired employees also receive health care and life insurance benefits (other post-employment benefit or OPEB) from the city. OPEB benefit payments were a modest 1.1% of governmental fund expenditures. Total debt service, pension required contributions and OPEB payments are high as a percentage of governmental expenditures at 43.7%, or 36.3% excluding the special assessment bonds.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial
Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805902
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