NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings on the city of Miami, Florida:
--$19.5 million general obligation (GO) bonds, series 2002A and 2003B at 'A-';
--$198.5 million limited ad valorem tax bonds at 'BBB+';
--$137.4 million special obligation non-ad valorem revenue bonds (street and sidewalk improvement program), series 2007 and 2009 at 'A-';
--$70.6 million special obligation revenue bonds, series 2011A at 'BBB+';
--$44.7 million special obligation non-ad valorem revenue refunding bonds (Port of Miami tunnel project), series 2012;
--$101.3 million special obligation parking revenue bonds (Marlins Stadium project), series 2010A and 2010B at 'BBB+'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by a pledge of the city's full faith and credit and unlimited taxing power.
The limited ad valorem bonds are secured by a pledge of an ad valorem tax, whose rate, when debt service on all GO bonds issued prior to November 2001 or issued to refund such bonds is considered, cannot exceed 1.218 mills. The bonds are additionally secured by the city's covenant to budget and appropriate its non-ad valorem revenue in an amount not to exceed 10% of MADS.
The special obligation street and sidewalk improvement bonds are secured in the first instance by the city's portion of the county's sixth cent and third cent local option fuel taxes, the city's portion of the county's transportation surtax (sales tax), and a portion of certain city parking surcharges.
The special obligation parking revenue bonds are secured in the first instance by the city's portion of the county's 3% transient rental accommodations tax (the convention development tax, or CDT), a percentage of city parking surcharges on baseball stadium garages, and certain other parking revenues related to Marlins Park.
All special obligation revenue bonds are additionally backed by the city's covenant to budget and appropriate legally available non-ad valorem revenues with the exception of the street and sidewalk improvement bonds which have no such secondary pledge. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on such revenue. The city's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid.
KEY RATING DRIVERS
IMPROVED FINANCIAL STABILITY: Preliminary financial results for fiscal 2013 show a third consecutive year of surplus operations. The reversal in operating performance and build-up of reserves reflects a recently improved revenue environment and efforts to limit spending growth largely through labor related savings.
SOUND ECONOMIC FUNDAMENTALS: Miami retains favorable long-term prospects that will leverage its role as a premier international trade center and tourist destination.
WEAK DEBT POSITION: Key debt metrics are on the high side and the city's pension funded ratios are considered somewhat low; however, future capital needs have been scaled back, additional issuance plans are manageable.
RECURRENT MANAGEMENT AND LEGAL CHALLENGES: Frequent turnover in key city management and a history of varied legal challenges create a degree of operational and fiscal uncertainty.
NARROW AD VALOREM COVERAGE: The maximum millage rate pledged to bondholders produces fairly limited debt service coverage. Risk to tax base instability has tapered but the additional bonds test is permissive.
STREETS AND SIDEWALK BONDS: The 'A-' rating for the special obligation streets and sidewalks revenue bonds reflects the solid coverage from pledged revenue and absence of additional leveraging plans. The rating on these bonds is capped at the city's GO rating.
NON-AD VALOREM RATINGS: The 'BBB+' rating on the other special obligation revenue bonds reflects the city's non-ad valorem covenant. The rating is notched down from the GO rating on the city, which reflects risk to the absence of a specific lien on revenue, and inability to compel the city to generate sufficient non-ad valorem revenue to pay bondholders.
RATING SENSITIVITIES
All ratings are ultimately sensitive to changes in the city's general credit profile.
The ratings on the limited ad valorem bonds and special obligation streets and sidewalks revenue bonds are sensitive to levels of debt service coverage, driven by changes in taxable assessed value (TAV) in the first instance, and the collection of pledged fuel tax and sales tax in the latter. Both securities are subject to potential additional leveraging although none is expected.
CREDIT PROFILE
MIAMI CONTINUES DOWN PATH OF FISCAL IMPROVEMENT
General fund results for fiscal 2013 are expected to yield another solid addition to fund balance. City officials anticipate a $13.7 million operating surplus after transfers, which follow a $37.9 million increase in reserves in fiscal 2012. The majority of the fiscal 2013 surplus is expected to increase the unrestricted fund balance, to approximately $63-64 million or the equivalent of 12-13% of budgeted fiscal 2013 spending.
The improvement in fund balance is notable, as the city's unreserved fund balance had been eroded to an extremely thin $4 million or 0.8% of spending in fiscal 2010 from $125.4 million or 25.4% in fiscal 2006. Though improved, the city's reserves remain below its financial integrity policies, which call for an unassigned balance equal to 10% of the prior 3-years' average general fund revenue, and an additional 10% to fund long-term liabilities.
The city's fiscal 2014 budget is balanced without reliance on existing fund balance or other one-time revenue measures. The budget appropriates $9.2 million as a revenue contingency, and an additional $5 million is set aside to fund unanticipated expenses as required by city ordinance.
HEALTHIER REVENUE BALANCED AGAINST SPENDING PRESSURES
Forecasts for population, employment, retail sales, and TAV growth from the state and IHS Global Insight with respect to Miami-Dade County and the greater Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area point to continued revenue expansion over the intermediate term.
Budgeted fiscal 2014 general fund revenues are up a reasonable 3.4% over the prior year budget, largely due to a 4.4% increase in TAV to $32.7 billion. Property taxes are the leading revenue generator for the general fund, accounting for 43% of all sources. The operating tax rate increased very modestly to 7.61 mills, which provides for an adequate cushion under the statutory 10 mill cap (the overall tax rate, including debt service, was lowered 0.5% from fiscal 2013).
The city adopted the fiscal 2014 budget without layoffs, service changes, or the need to impose or negotiate reforms with labor, at the same time funding an additional 35 police officers. However, certain spending pressures exist, mostly around the rate of increase for pension payments ($80 million in fiscal 2014, up from $60 million in fiscal 2008) and the degree of spending flexibility remaining after the city closed budget gaps exceeding $210 million the prior three years. City officials believe the growth rate of pension costs will soon moderate, reflecting recent pension plan changes and improved investment returns.
The city annually updates a five-year financial forecast which shows modest operating surpluses of $2.3 million to $10.7 million per year through fiscal 2018. The forecast is based on only 2.5% revenue growth per year, but does not include the impact of labor negotiation which, in Fitch's view, has the potential to consume a good portion of the surplus depicted therein.
ADEQUATE COVERAGE ON LIMITED AD VALOREM BONDS
The limited ad valorem bonds millage is set at 0.8162 mills for fiscal 2014 or 67% of the 1.218 mill cap securing the bonds. A levy of 1.218 mills would generate approximately 1.35x coverage of MADS based fiscal 2014 TAV and the prior 5-year average total collection rate of 94.3%. Fitch estimates TAV can decline by 25% before MADS coverage would fall below 1.0x. TAV declined by less than 20% in aggregate from its peak value in fiscal 2009 through fiscal 2012, and has improved by 3.2% in fiscal 2013 and 4.5% in fiscal 2014.
STRONG COVERAGE ON STREETS AND SIDEWALKS BONDS
The combination of pledged gas tax, sales tax, and parking surcharge revenues offer good diversity and have increased at a compounded rate of 4.6% per year since fiscal year 2003 to $21.8 million in fiscal 2013 (unaudited). Coverage of MADS from fiscal 2013 revenue is a solid 2.3x. Fitch estimates that fiscal 2013 revenues could decline by 57% before MADS coverage would fall below 1.0x. The city does not plan to issue additional parity debt. Additional bonds are permissible based on compliance with a fairly lenient 1.35x coverage requirement.
PARKING REVENUE BONDS RATING BASED ON NON-AD VALOREM COVENANT
Coverage of MADS on the parking revenue bonds remains less than 1x. As such the rating on these bonds reflects the city's non-ad valorem covenant. The parking revenue bonds are currently self-supporting but annual debt service requirements rise notably through final maturity.
BROAD NON-AD VALOREM BASE
Non-ad valorem revenues securing all special obligation revenue bonds are sizeable in absolute terms and diverse. Budgeted at $297.9 million in fiscal 2014 non-ad valorem revenues include $99.2 million in franchise fees and utility taxes, $37.7 million from license and permits, $98.6 million in service charges, and $27 million in local government half-cent sales tax receipts. Coverage of special obligation bond MADS ($41.7 million) remains ample after taking into account the funding of essential governmental services.
ELEVATED DEBT TEMPERED BY LIMITED CAPITAL AND BORROWING NEEDS
The city's overall debt metrics are above average at 4.1% of market value and $4,270 per capita. Perhaps more important, the cost of servicing the city's long-term debt, when combined with its contributions for pension and other post-employment benefits (OPEB), represent a moderate 21% of governmental fund spending in fiscal 2012.
Somewhat offsetting this concern is the manageable scale of the capital improvement plan. Capital projects totaling approximately $448 million through 2018 (about 1% of market value) are fully funded largely from current revenues, grants, and prior issued debt. No additional new money debt is expected.
The city administers single-employer pension plans for police and fire (FIPO), and for general employees and sanitation (GESE) with reported funded ratios of 72.3% and 65.4%, respectively (as of Oct. 1, 2012). The funded ratios decline moderately adjusting for a 7% rate of return (FIPO assumes 7.5%, GESE 8%). The city fully funds the actuarial required contribution (ARC) for pension.
DIVERSE ECONOMIC BASE FEATURING SOUND GROWTH PROSPECTS
The area economy is diverse with a large international component, and the presence of healthcare, higher education, and professional and business services balance the tourism component of the city's economy for which it is so well known. The housing market has shown a strong resurgence, with home prices up 15-25% as suggested by data presented by the city and obtained from Zillow and Trulia.
The city's July 2013 unemployment rate of 9.2% remains higher than that of the state (7.4%) and U.S. (7.7%) as has been the case for a least the past decade, as the city's favorable track record of job growth has largely been matched by labor force gains. A high incidence of poverty and below average wealth counter the city's other economic strengths, although recent income growth has been strong.
UNCERTAIN FISCAL IMPACT FROM LEGAL CHALLENGES
Miami is engaged in several court cases that warrant close attention. One case centers on the city's use of Florida's financial urgency laws that enabled it to unilaterally impose $76.9 million in general fund contract reductions for fiscal 2011. The police and fire unions are seeking reinstatement of the modifications. To date the city has successfully defended its ability to declare financial urgency before both the Florida courts and the Public Employees Relations Commission (PERC).
The Securities and Exchange Commission (SEC) has filed civil securities fraud charges and other disclosure violations against the city. In October the city filed a motion to dismiss the case; a trial is scheduled for September 2014 if denied. The SEC is seeking unspecified financial penalties from the city. Fitch maintains the potential outcomes of the case remain very broad and it is not possible to gauge its impact at this time.
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 and IHS Global Insight.
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=808223
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